Wednesday, April 14, 2010

The Upside of an Impenetrable Tax Code

Copyright, The New York Times Company

The personal income tax is an administrative and economic burden. But those burdens have an overlooked, and potentially beneficial, side effect.

Millions of Americans are spending hours of their time this week completing their personal income tax returns. Economists believe a simpler tax code would eliminate such burdens, not to mention the burdens to the economy created by various kinds of tax-sheltering behavior that would make little economic sense with a simpler tax code.

But it’s easy to overlook an important side-effect of tax complexity burdens — and the taxpayer anger created by them. Such aggravation helps sustain the sizable and energetic group of Americans who want their government to get by with less.

As President Obama’s head of the National Economic Council, Lawrence Summers, once wrote, “A better tax system may lead to more wasteful spending.” Even Professors Robert E. Hall and Alvin Rabushka, longtime advocates of simpler tax code, concede that a simpler tax makes it much easier for advocates of larger government spending programs to be successful. (See p. 48 of their book.)

By comparison with the income tax, the payroll tax is quite simple, and readily confirms the claims that a simple tax is a tax that will be used as a government revenue machine.

The payroll tax has absolutely no deductions — not for charitable contributions, mortgage interest, college tuition and the dozens of other activities favored by the income tax — and collects almost as much revenue as the personal income tax, despite the fact that the payroll tax rate is less than 15 percent.

For years, taxpayers have been frustrated by the personal income tax, and politicians from John F. Kennedy to Ronald Reagan to George W. Bush tried to pacify them with cuts in the personal income tax rates.

But the payroll tax generates much less complaining, and it’s no accident that the payroll tax rate has been increased 19 times (20, if you count the health care overhaul that was just passed), and cut exactly zero times. There is no real political fervor for cutting the payroll tax, or energetically resisting payroll tax increases.

So we could eliminate some of your perennial mid-April frustration by replacing the income tax with a simpler and more efficient tax code, but in that case be prepared to send a greater fraction of your income to the United States Treasury.

1 comment:

dWj said...

I wonder whether the impenetrability of the tax code also reduces the harm it does to economic incentives. I kind of imagine that if everyone actually understood the tax consequences of all the possible actions available to them, much current economic activity would grind to a halt.