The Compliance Cost "Load"

In order for any government spending to be accretive to GDP it must produce a higher economic return than what those resources would have produced if left in the private sector. This in and of itself is a major hurdle, since government's track record on investment is dubious. But on top of that there is an additional hurdle which is seldom recognized, and that is the cost of collecting the taxes from which government spends.

Compliance costs -- that is what it costs the payer to actually pay the tax plus what it costs the government to collect it -- vary depending on the type of tax. Payroll taxes, for instance, have low compliance costs. The amounts are simple to calculate, the law is pretty straightforward and the government doesn't have to spend a lot of money auditing and enforcing the payment of taxes. Not so with the income tax. Both personal and corporate taxes are incredibly complex, which means that the payers have to spend a lot of money figuring out what they owe and making sure that they are not overpaying. The IRS, of course, spends huge sums of money auditing, enforcing and disputing tax payments. The Tax Foundation estimates that these costs top 20% of the revenue collected,  making the income tax a very inefficient revenue source (though not as inefficient as some such as the estate tax, where compliance costs are estimated to be nearly 100% of revenue collected).

This means that the real tax on the economy is more than $1.20 for every dollar that the government derives from the income tax. It's akin to a mutual fund with a very high load -- you give them a dollar, but only 80 cents gets invested. No mutual fund could overcome starting that far in the hole, and neither can the government.

Once you understand that, it becomes pretty obvious why government's investment performance is so poor. And why the more government takes out of the private sector, the lower will be overall economic growth.