Tax Gimmicks

October 23, 2012

Tax increases are inevitable as the need for government to generate more revenue becomes greater. Politicians, however, are aware of the fact that tax increases are unpopular and therefore run a campaign stressing how they aim to cut taxes. But to minimize the effect of the increased taxes on their elec­tion prospects, politicians employ gimmicks to hide the taxes, say Anthony Davies and Devin Bowen of the Mercatus Center.

There are four types of gimmicks that politicians use to hide tax increases from the voting public.

  • Legislative gimmicks: using the wording of tax law to hide who is being taxed and by how much.
  • Economic gimmicks: the use of economic forces to hide who is being taxed and by how much.
  • Communication gimmicks: ways to communicate tax legislation to voters to hide the effect or circumstances of a tax.
  • Perpetual gimmicks: the use of voters' psychologies to discourage awareness of the tax.

Temporary taxes are a form of perpetual gimmick. For instance, politicians may convince the population that a tax is necessary to deal with a crisis. However, when there is no longer a crisis, the politicians allow the tax to continue by extending the sunset provision or not putting forth legislation to end the tax.

Taxes that employers pay on behalf of their employees, such as Social Security and Medicare, are forms of economic gimmicks. Despite the fact that it seems employees are benefitting, the money for the tax comes straight out of the pockets of workers. The businesses, in order to pay for the tax, have to take action by either reducing wages or increasing prices, both of which shift the burden of the tax to the employee.

Complex taxes are a form of legislative gimmick to prevent the taxpayer from understanding the effects or changes of a tax law. Some examples of these are deductions, exemptions and credits, which allow Congress to alter the definitions of what is being taxed to change the amount that is collected.

One example of a communication gimmick comes from the distinction of marginal and average tax rates. When politicians discuss decreasing or increasing the marginal tax rate, voters conflate the two and assume that taxes will either increase or decrease in general. However, the marginal tax rate deals with a fraction of an additional dollar of income earned by a person whereas average tax rates look to how much a person has already earned. People that make money in investments typically have lower marginal rates already because they are not subject to payroll taxes.

Source: Anthony Davies and Devin Bowen, "Tax Gimmicks," Mercatus Center, October 11, 2012.

 

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