The Corner

The Cost of Taxation

Paul Krugman’s column on the nature of America’s debt problems has an interesting formulation in it. He writes:

Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion.

The distortions and lost productivity caused by tax-compliance are real problems, of course. But I think it’s funny that this is the only cost to the economy Krugman is willing to concede. It’s almost as if he’s saying that if taxpayers would stop greedily devoting so much time and money to avoiding and evading taxes (the latter being a crime) then there would be no downside to taxation. After all, the normal critique of (excessive) taxation is that it causes a diversion of resources away from productive activities into less productive uses determined by politicians. But that’s a concession Krugman can’t bring himself to make, even hypothetically. So in an effort to sound reasonable about the inherent costs of taxation, he pins the problem on the miserly taxpayers who create wealth but are too tightfisted when it comes to handing it over to government.

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