Peter,
Another point. For some reason I have a different conception of the cost of raising tax revenue from most of you. While I can and do think about the direct out-of-pocket monitoring costs to the government, and can be easily reminded that I’m not attending to them carefully, I also think of the tax-avoidance costs–people and businesses spending real resources to hide the activity.
In many economies, including developed economies, vast resources are spent evading taxes by hiding profits, wages and so forth. This is a double cost because (a) real resources are flushed down the toilet by the evasion activity, and (b) potential tax revenue is lost in the process.
Take an economy like that of the US and guess that 3% of economic activity is grey market (to avoid labor taxation). Multiply the reported GNP of the US by .03, and then by .15 for the social security tax. That is your estimate of lost tax revenue due to grey market activity. Also, some proportion or the .03 times GNP is going to be real resource expenditures toward remaining grey, that is, outside the view of the taxman. This is going to be a large number.