How the Tax Code Manipulates Us

Every time tax rules nudge us in a chosen direction, they preempt the market's signals.



It's tax time. I'm too scared to do my own taxes. I'm sure I'll get something wrong and my enemies in government will persecute—no, I mean prosecute—me. So I hired Bob. 

Bob's my accountant. I like Bob, but I don't like that I have to have an accountant. I don't want to spend time keeping records and talking to Bob about boring things I don't understand, and I really don't want to pay Bob. But I have to.

What a waste. Once, I calculated what I could do with the money I give Bob. I could have a fancy dinner out 200 times. I could buy a motorcycle. I could take a cruise ship all the way from New York to Venice, Italy, and back. Better yet, I could do some good for the world. For the same money I waste on Bob, I could pay four kids' tuition at a Catholic high school.

The tax code is now complex enough that most Americans now hire Bob, or his equivalent. Instead of inventing things, doing charity work or just having fun, we waste weeks (and billions of dollars) on tax preparation. And we change our lives to suit the wishes of politicians.

"What the tax code is doing is trying to choose our values for us," complains Yaron Brook from the Ayn Rand Institute.

I think I choose my own values, but it's true that politicians use taxes to manipulate us. Million-dollar mortgage deductions steer us to buy bigger houses, and solar tax credits persuaded me to put solar panels on my roof.

Brook objects to every manipulation in the code: "It's telling us charity is good!" On my TV show, I respond: But charity is good! Brook retorts, "If you want to give to charity, great, (but) I might invest in a business that's more important." 

That's possible, but since a charity will probably spend the money better than government will, isn't it good that the code encourages people to give? Steve Forbes argues that if taxes were flat and simple, Americans would give more.

"Americans don't need to be bribed to give … In the 1980s, when the top rate got cut from 70 down to 28 percent … charitable giving went up. When people have more, they give more."

While freedom lovers complain about the byzantine complexity of the tax code, the politically connected tout their special breaks. The National Association of Realtors runs TV ads showing Uncle Sam offering first-time homebuyers an $8,000 tax break, while sleazily winking at the viewer. 

The tax code oddity that may have the most destructive influence on America might be the fact that if you buy private health insurance, you pay more tax than if your employer buys you a plan.

It's why we ended up with a sluggish health care market unresponsive to individual desires—leading to the insistence that we need a government-managed alternative like Obamacare. 

The code is incomprehensible. You can get a deduction for feeding feral cats but not for having a watchdog, for clarinet lessons if your orthodontist thinks it'll cure your overbite but not for piano lessons a psychotherapist prescribes for relaxation. It seems so arbitrary. 

In the marketplace, individuals shop around for the most efficient, low-cost way of getting services they really want. Every time tax rules nudge us in a chosen direction, they preempt the market's signals. 

Government gets moralistic about it, too, placing "sin taxes" on items like cigarettes and fat, plus luxury items like yachts that some find decadent. It's gone on for centuries. American colonists seem libertarian by today's standards, but they put extra taxes on snuff and "conspicuous displays of clothing." 

That's one thing the Founders did that we shouldn't copy—but their otherwise rebellious attitude toward taxation is one that we should emulate. America suffers when government turns taxes into a manipulative maze. 

NEXT: Support the Free Market? The American Federation of Teachers Wants You to Bugger Off

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  1. There’s a tax deduction for feeding feral cats? Does it expire when they’re not feral anymore?

    1. How else do you expect the crazy cat lady to afford the cat food?

      1. Feed the cats orphans and homeless people?

  2. conspicuous displays of clothing

    All clothing should be kept out of sight.

  3. Let’s manipulate the tax code to get people to do what we want. At the same time, let’s not worry about how high the rates are because people don’t respond to tax disincentives.

  4. This is why any tax reform will fail unless it starts by repealing the entire Internal Revenue Code.

    Sure, we’ll just start climbing this hill again, because people are stupid, but at least we can start over at the bottom.

  5. They always say, “you can give just a little more”, but they never say “we can cut just a little more”. For them “theres’ nothing left to cut!”

    Maybe the French had the right idea after all. They found something to cut.

    1. Vive Le Roi! (swoosh, chop!)

  6. The tax code also steers us toward certain forms of giving back,

    The word “back” is superfluous and misleading, unless you’ve taken from those same charities.

    Plus my eyes are sore from burning old, dry brush all morning. There’s very little wind and the smoke kept coming my way. Between that and lunch not being ready yet, I’m grumpy.

  7. Government gets moralistic about it, too, placing “sin taxes” on items like cigarettes and fat,

    I find no tax on fat.

  8. my neighbor’s step-mother makes $61 every hour on the internet . She has been out of work for seven months but last month her check was $13035 just workig on the internet for a few hours. pop over here…..

  9. The tax code was not over complicated by a bunch of liberals or labor unions or bleeding hearts as conservatives/libertarians claim.

    It was over-complicated by people that didn’t want to pay taxes. I wonder who that is.

    Well, those people will do EVERYTHING in their power to stop the FLAT TAX.

    I’m a big fan of the flat tax.

    I propose

    1. FLAT Federal Income Tax with no deductions, exemptions, or exclusions for all including the poor on ALL income regardless of earned income, capital gains, gifts, and willed.

    2. FLAT State Income Tax with no deductions, exemptions, or exclusions for all including the poor on ALL income regardless of earned income, capital gains, gifts, and willed.

    3. Abolish all sales taxes, property taxes, and any tax that is not Income.

    4. FLAT safety net tax for pensions (Social Security) and healthcare (medicare for all)

    4. ZERO (0) Corporate Income Tax at all levels. Corporations only have the burden on withholding the taxes stated above.

    There you go. It can’t get any simpler and fairer than that. The rich, middle class, and poor pay the same % as everyone else. NO progressive tax, no special considerations, no nothing. FLAT.

    1. Alice Bowie:

      There you go. It can’t get any simpler and fairer than that. The rich, middle class, and poor pay the same % as everyone else.

      Actually, you probably just eliminated most of the taxes that really rich people pay.

      Since item 3 abolishes all capital gains tax, then a person sitting around making money by investing a large inheritance pays no taxes.

      In fact, since your flat safety net tax for pensions and healthcare must be an income tax (see item 3), then this implies that they don’t even pay for that.

      In other scenarios, rich politicians like John Kerry would get to pay whatever you want to set their flat tax to on their small government income, while they kick back and enjoy all their investments with 0% tax liability.

      In other words, you’ve established a regressive tax policy that makes poor and middle class people more responsible for funding the government than rich people, on a person-by-person basis.

      Is that the intended effect?

      1. You missed where I said

        2. FLAT State Income Tax with no deductions, exemptions, or exclusions for all including the poor on ALL income regardless of earned income, capital gains, gifts, and willed.

        1. Oh, I thought you just meant that people wouldn’t be able to deduct capital losses from income tax.

          So, you want to tax capital gains at the same rate as everything else.

          OK, what is this rate? How much of a person’s income are they allowed to keep?

          1. Good Question. I, like all of those that profess flat rates, don’t know.

            I would propose that we look at the Federal budget and divide it by the number of people over 18 that are not disabled. But that my be simple-simon-ish

            1. Alice Bowie:

              I would propose that we look at the Federal budget and divide it by the number of people over 18 that are not disabled. But that my be simple-simon-ish

              OK, so this implies you want to balance the budget every year.

              Should I assume that this implies you want to avoid deficit spending to stimulate the economy? Or other Keynesianesque moves?

              1. Also, this result would be equal to dollars/person. Not a rate. The result is greater than 1.

                1. It can’t be done the way I said before.
                  The number is in fact SCARY !!!

                  The 2013 Budget was $3.8 trillion.
                  There are over 14million people making over $100,000 per year. Unfortunately, I could not find the breakdown of what people made over $100,000. All I know is there are 14mm of them. So I made assumptions and capped at $5mm. So, I hope i am understating.

                  I came up with 50% Federal Taxes to pay the $3.8 Trillion. And, that’s only taxing individuals and not corporations.

                  Keep in mind that the Census numbers don’t have the Capital Gains, which would be included as income in my proposal.

                  So, 50% includes Fed, FICA, Medicare

          2. And yes. NO DEDUCTION for Capital Losses.

            Although I may need to negotiate that one.

      2. ALSO, FICA and Medicare would continue as FLAT Taxes but would be applied to ALL income including earned income, capital gains, gifts, and willed.

        1. Do you want the benefits they could receive from these programs to go up proportionately, based on their additional taxation?

          After all, if the story is that Social Security is something we all pay into and earn, then we get it all back in the end, right?

          1. No. I actually want FICA and Medicare to be safety nets. Not a National Pension or Healthcare plan.

            One that makes, let’s say, 5 times the median income should not collect FICA.

            FICA should be no higher than maybe 60% of the median income for anyone.

          2. SO yes, there’s the potential for a rich person to pay X amount of FICA benefits in FICA taxes. I want that feature.

            1. OK, so, basically, you want to means test Social Security.

              Should we means test medicare for all?

              1. Yes. Definitely.

                People that are rich enough (whatever you want to choose, let’s say 6 times the median) don’t need the safety nets. This way, we can keep the rate down for everyone, including the rich.

                We can save the existing Social Security System overnight by merely removing the FICA Cap.

  10. I have been researching for quite some time and I have to agree with Stossel.. Market distortions are enormous, and what is worse, difficult to track, easy picking for political manipulations. There’s a Nobel Economics prize in there somewhere.

    1. Well there would be if the Nobel committee was results based and apolitical

  11. Ok guys what does it take to repeal the Income tax and abolish the IRS?

    1. A Congress willing to do it, and a President willing to sign it

  12. Gees, and I think the $225/hr my accountant gets is a lot.

  13. I am convinced that the only way to change the tax code is to repeal the 16th amendment, and because the big government progressives running our country would never do it on their own, it will take an Article 5 Convention of the several states.

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