Some Simple Ideas on Taxes

If you're a tax crusader who stands ready to fight at the sound of phrases like "flat tax," or "tax cuts for the rich," then read this column no further.  When it comes to tax issues, we've got plenty enough advocacy to go around, thank you very much.  What's lacking in the tax debate are thoughtful analysis, insight, and effective leadership.

Those things require a larger investment in time and attention than many of us, apparently, are willing to make.  Thus tax discussions have too often degenerated into empty and even tawdry appeals to voters' selfish interests, using catchy slogans and slanted statistics as ammunition in the fight.

At the risk of coming across as yet another lecturing academic, I'd like to put all of that aside and go back to basic principles for a moment.  In actual practice things do get complicated, but the essence of what we are, or should be, trying to do with taxes is really quite simple.

Firstly, we should understand that taxes are a necessary evil.  Taxes are necessary for the support of government, and they will always be compulsory.  People will not voluntarily cough up their hard-earned money to support government because --

as long as everyone else pays up -- there really is no benefit to them of doing so.  Government is a vital part of our society, so being "against" taxes, in the extreme at least, is a nonsensical position.

To say that taxes should be "fair" is an empty statement, until we fill in what we think fairness means.  The field of public finance in economics has put forth two simple principles.  Horizontal equity in taxation says that equally situated people, or similar activities, should be taxed equally.  Two families, say, who earn $50,000 a year should pay the same income tax, regardless of whether or not both spouses work.  The tax we pay on an Internet purchase should be the same as the one we pay at the corner store.

Vertical equity is just as simple.  People in different circumstances should be taxed differently.  We shouldn't expect a rich person to pay the same amount of taxes, or maybe even the same percent in taxes, as a less affluent person.  How much different?  That's a more difficult question.

Sadly, those simple principles have largely been turned into road kill by the political process that shapes tax policy.  Far from

the economist's dream of a world where taxes are unavoidable, and thus do not influence our decisions, the real world is one where some behaviors are smiled on by the tax collector and others are not.  And we waste a lot of time and money, not only in trying to figure out which is which, but in lobbying and bribing our politicians to include what we do in the list of favorites.

You are encouraged by our tax code to not only do such sensible-sounding things as own your own home, stop using tobacco, and support your church, but also things like growing peanuts, insulating your home, and putting your money in a blind trust.  We don't use the tax code in this country so much to support government as we do to try to control our citizens' behavior.  In the extreme, the tax code becomes a vehicle for enforcing a kind of social justice, waiting at the end of the economic race to re-distribute the rewards.

That's a pretty tall order.  But it's easy to see that the fuzzy goals of our tax system are what really lie behind its stubborn complexity and needless cost.  And if we are to reduce either, we'll have to be a whole lot clearer about what we're trying to accomplish.

Patrick M. Barkey