NCPA - National Center for Policy Analysis

How Taxes Affect The Way We Live

February 24, 1999

Although we only file tax returns once a year, the tax code has a continual impact on us in ways we may not be fully aware of. In The Greedy Hand (Random House), Amity Shlaes, an editorial writer for the Wall Street Journal, discusses some of the many ways in which taxation affects our lives.

Until World War II, taxpayers sent their taxes to the IRS in one lump sum. This engendered a hostility toward taxation that was a serious impediment to the expansion of government. The advent of withholding was so important that the government forgave one year's lump-sum payment as an incentive for people to support withholding.

While withholding may have reduced the pain of paying taxes, it has been offset by growing frustration over the myriad ways in which taxes influence our behavior. Shlaes catalogues 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 affect the decision as to where to live. Moreover, the tax code steers us toward owning homes, because mortgage interest is deductible, when many people would be far better off putting their downpayments into a mutual fund and renting.

Taxes affect decisions to marry and have children. The tax code interferes with this most intimate choice by taxing two-earner couples more heavily than single-earner couples with the same income -- the so-called marriage penalty. 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.

Shlaes concludes with a strong argument for a neutral tax system. 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.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, February 24, 1999.


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