Do taxes matter? A review of the effect of taxation on economic behavior and output

Economists have stressed that the efficiency costs of taxation are not the obvious costs to taxpayers of handing over payments to the government. Instead, the efficiency costs stem from the efforts of taxpayers to avoid paying money to the government, whether it is consuming less of the taxed good, producing less of the taxed good, smuggling, or just evading taxes. The purpose of this paper is to illustrate with historical examples the efficiency costs of taxation. Each type of tax (labor, capital, property) is shown to have particular disincentive effects, which, if the tax rates are sufficiently high, could be dramatic. The report concludes that the efficiency cost of taxation is often difficult to detect, and often takes a back seat to political considerations in tax policy.