The Corner

Capital Matters

Putting a Proper Price on Spending

President Joe Biden departs the White House in Washington, D.C., October 5, 2021. (Kevin Lamarque/Reuters)

President Biden has hit the road in an attempt to peddle the Democrats’ mega spending package — a package that originally carried an eye-popping price tag of $3.5 trillion. It now appears that haggling amongst the Democrats has dialed the advertised price tag down to $2.3 trillion or less. Or, at least, that’s what the president is claiming. Don’t believe a word of it.

In whatever spending splurge the Democrats come up with, there will be hidden costs and excess burdens associated with the taxes to finance it. Just what are these costs and burdens?

There are burdens placed on taxpayers that go well beyond the visible tax payments they make. These include myriad compliance costs: record-keeping, studying tax laws, making calculations, filling out forms, grappling with enforcement actions, and so on.

These administrative and compliance costs are relatively easy to comprehend. A more difficult concept is the excess burden of additional taxes — the disincentives and distortions they impose on the economy. Without those taxes, the economy would generate more income and do it more efficiently.

The hidden costs associated with IRS administration and taxpayer compliance are estimated to be in the range of ten cents to 25 cents for each additional dollar of tax revenue collected. The late Martin Feldstein, in a 1999 article for the Review of Economics and Statistics, estimated the excess burden of federal taxes to be $3 for each additional dollar of revenue. The late William A. Niskanen, in an article published by the Federal Reserve Bank of Dallas, put the figure at $2.65.

So, the hidden costs plus excess burdens amount to roughly $3 per additional tax dollar collected. Therefore, to determine the real cost of the big-government proposals put forward by the Democrats, you need to multiply the advertised price by three. Accordingly, the original advertised price of $3.5 trillion will yield a true burden (read: cost) on taxpayers of $10.5 trillion. Even with the trimmed-down package and new “low” advertised price of $1.9 to $2.3 trillion, a true cost of $5.7 to $6.9 trillion will be realized.

Whatever numbers President Biden advertises on his road trip, you can be assured that it won’t reflect the real cost of any proposed spending package.

Steve H. Hanke is a professor of applied economics at the Johns Hopkins University in Baltimore. He is a senior fellow and the director of the Troubled Currencies Project at the Cato Institute in Washington, D.C.

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