Economic Report of the President

taxpayers’ time and adding the $19 billion spent on tax preparers, computersoftware, and similar expenses results in a total estimated individual compliancecost between $67 billion and $99 billion. Burdens vary substantiallyamong taxpayers. For example, taxpayers with self-employment income spentalmost 60 hours preparing returns. Other taxpayers spent an average of13.8 hours, but 10.9 more hours if they filed the Alternative Minimum Tax(AMT) form.Effects on Behavior and Excess BurdenThe third type of burden imposed by the tax system, called excess burden,arises when high tax rates reduce incentives for work, saving, and investment,distort economic decisions, and divert resources from productive activity intotax avoidance. Excess burden means that it costs the economy more than onedollar to raise one dollar in revenue. High excess burden ultimately reduceseconomic growth and lowers living standards. This section examines theevidence of the effects of high tax rates on economic behavior and how theseeffects translate into measures of excess burden.Tax Effects on Individual BehaviorAn individual’s after-tax return from increased work effort, saving, orinvestment depends on the individual’s marginal tax rate, the tax rate thatapplies to the last dollar of the individual’s income. For example, the after-taxreturn from earning one additional dollar is $0.75 for a taxpayer in the25 percent tax bracket. By reducing after-tax returns, high marginal tax ratesreduce incentives for additional work effort. The same principle applies tosaving and other economic activities.A variety of statistical studies have found that high income tax ratesadversely affect labor supply, particularly for certain segments of the population.The income tax rate reductions in the 1980s significantly increased thelabor force participation and hours of work of high-income married women,with a total increase in labor supply of as much as 12-15 percent. The effectswere much smaller for men (up to 2-3 percent) and for female heads of households(up to 4 percent). Some economists argue that these studies understatethe effects of taxes on labor supply because they do not include tax effects onthe intensity of work effort, career choice, and investments in human capital(such as education), which are more difficult to measure.In addition to reducing the numbers of hours they work, taxpayers respondin many other ways to avoid the effects of high tax rates. For example,taxpayers take their compensation in nontaxable forms such as health insuranceand alter their portfolios to focus on tax-favored investments. The totaleffect of such responses is summarized by the responsiveness of taxableincome to changes in marginal tax rates. While the results vary among studies,74 | Economic Report of the President