How Much Does it Cost the
Private Sector to Provide Government with $1 in Tax Revenue?
By Gary Robbins
about the idea that the cost of paying $1 in tax is $1. Even
academics on the left now acknowledge that taxes do have some
dynamic effect on economic performance. When taxes go up by
$1, it is not just the private sector's after-tax income that
goes down; its pre-tax income goes down as well. Thus, when
the question is, "How much does it cost the private sector
to provide government with $1 in tax revenue?" -- the
answer is $1 plus the amount by which taxpayers' incomes go
down because of the negative effect the tax has on the economy.
Because of that negative effect, there is general agreement
that an attempt by the government to increase tax collections
by $1 will, in the long run, net only $0.68 -- but the effect
on government tax receipts is only part of the story and the
least important part at that. The important story is that
the government "lost" the $0.32 in anticipated extra
tax revenue and ended up with only $0.68 because the taxpayers
"lost" $1.07 in income that otherwise would have
been produced and would have been taxed at an assumed average
rate of 30 percent ($1.07 x 30% = $0.32).
Up to this point in the story, the private sector has lost
$1.07 in income and paid $1 in tax for a total cost to it
of $2.07 -- but the government has on net collected only $0.68.
For the government to actually receive a full $1 net addition
to tax revenue, the total cost to the private sector would
Here for Dollar of Revenue Tables