Study Calculates Economic Cost Of US Health Surtax

by Mike Godfrey, Tax-News.com, Washington

20 August 2009

The actual economic costs of the proposed health care surtax and the expiration of the 2001 and 2003 tax cuts will be twice the amount of revenue the government intends to collect, according to a new study.

The Tax Foundation report concludes that while the higher tax rates are estimated to raise USD88bn in 2011, the economy will incur an additional burden of USD76bn, or "deadweight loss," as a result, which raises the total cost of the tax increases to USD164bn, roughly double what lawmakers intend to raise.

The latest Tax Foundation study attempts to put a price tag on the cost of pending rollbacks of the Bush tax cuts (which would raise the top tax rate to 39.6%) as well as the proposed health care surtax (ranging from 1% to 5.4%). This loss in economic efficiency is also known as the "excess burden" or "deadweight loss" of taxes – in other words, the income that would need to be given to people to compensate them for the resources that are lost due to the distorting effect of taxes.

"The notion that the total burden is nearly twice the revenue collected should give lawmakers some pause when considering these higher tax rates," said Tax Foundation Senior Fellow Robert Carroll, who authored the paper.

"Lawmakers need to understand that the current income tax system already costs the economy between USD110bn and USD150bn above and beyond the USD1 trillion the government actually collects in taxes," Carroll said. "This means the actual economic cost of our income tax system is at least USD1.10 for every dollar the government collects. The proposed higher tax rates could boost those deadweight costs to more than USD1.20 for every dollar of tax revenues collects."

"The burden is particularly high for the higher income tax rates being considered by the Congress," said Carroll. "With every dollar in additional revenue, these tax increases impose an extra burden of 86 cents."

According to the study, in 2011 a couple earning USD500,000 will pay USD112,437 in income taxes. But the excess burden to them of that tax payment is USD16,664, about 15% of their tax burden. The increase in the top two tax rates plus the health care surtax would boost their income tax payment an additional USD7,719 to USD120,156. However, that tax hike would also increase their excess burden by USD8,748, larger than the tax increase itself.

"When totaled over all taxpayers, this means," said Carroll, "that the total economic cost of the higher tax rates will be close to twice the amount lawmakers hope to collect."

"Lawmakers should be wary of policies that are purported to make higher-income taxpayers 'pay their fair share' but that impose very substantial burdens on all taxpayers –nearly twice the revenue that is raised – and waste substantial economic resources," Carroll concluded.

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