Opinion Editorial | |
| Wednesday, February 24, 1999 | |
How Taxes Affect The Way We Live |
Tax policy is a central political battleground today because for many Americans our annual encounter with the Internal Revenue Service is the most significant contact we have with government. Although we only file tax returns once a year, the tax code impacts us continually in ways we may not be fully aware of. In a brilliant new book, "The Greedy Hand" (Random House), Amity Shlaes, an editorial writer for the Wall Street Journal, dissects some of the many aspects in which taxation affects our lives.
Shlaes starts by pointing out an obvious but underappreciated fact: we don't just pay our federal taxes once a year, we pay them every day. That is because of withholding, which deducts taxes from our wages every hour that we work. But this wasn't always the case. Until World War II, taxpayers sent their taxes to the IRS in one lump sum. This clearly engendered a hostility toward taxation among taxpayers that was a serious impediment to the expansion of government. Hence the advent of withholding is one of the seminal events in American tax history. Indeed, it was so important that the government forgave one year's lump sum payment as an incentive for people to support withholding.
Withholding changed Americans' perspective on taxes in a massively important way. Instead of being painfully aware of the size and burden of their annual tax bill, they began to look upon their annual filing exercise as an opportunity for a refund. Indeed, despite the fact that they are only getting back taxes that had been overpaid, many Americans view their refunds as found money, windfalls akin to winning the lottery.
Although withholding may have reduced the pain of paying taxes to a significant degree, it has been offset by growing frustration over the myriad of ways in which taxes influence our behavior. The bulk of Shlaes' book is a catalogue of some of these intrusions. For example:
Taxes affect where and how we live. Taxes vary enormously from one state or locality to another and the decision as to live one place or another is very much affected by taxation. Moreover, the tax code steers us toward owning homes, because mortgage interest is deductible, when for many people renting would be a better option. Ms. Shales points out that with housing prices flat and stocks soaring, many people would have been far better off putting their downpayments into a mutual fund and renting rather than buying their homes.
Taxes affect our decisions to marry and have children. Surely there is no more personal decision anyone makes than to marry and have children. Yet the tax code interferes with this most intimate choice by taxing two-earner couples more heavily than single-earner couples with the same income. This is the so-called marriage penalty we hear so much about. But Shlaes points out that other features of the tax code, such as the Earned Income Tax Credit and the tax treatment of child care expenses, have an even more fundamental impact on the family.
Shales concludes with a strong defense of a neutral tax system, one that impacts on our lives as little as possible. This involves lowering the overall burden of taxation by cutting tax rates, and eliminating as much of the tax code's social engineering as possible by repealing tax preferences. Unfortunately, many Republicans today seem to think that the key to political success is by adding new deductions and credits to an already complicated and intrusive tax code. For them, "The Greedy Hand" should be required reading.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, February 24, 1999.
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