The 'embedded' costs of the income tax is the part of the equation that you missing...
The 'embedded' costs of the current tax system amount to 20-30%? That sounds like alot, but you may be correct. Whether it's 20 or 30 or whatever percent, doesn't that money go to pay the salary of someone in gov't? There is certainly alot of waste in the system but most of the waste goes to pay someone's salary in the fed. gov't, which is what I'm saying about downsizing.
One of the features of the Reagan tax cuts of the 80's was that it was revenue-neutral. That was the only way they could get it passed in Congress.