Wednesday, December 23, 2015

Simplifying the tax code is not so simple

I just read an interesting article in the WSJ regarding simplifying the tax code.  The policy proposals are sensible enough and the author makes a push to separate efficient tax policy from government redistribution but I think his efforts are wasted.

The first thing to realize is that the tax code is complex on purpose and the main motivation behind it is to hide the amount of taxes that each person actually pays.  If you knew how much you actually paid in taxes, you would have a different perspective on things.  The goal of tax policy is to tax you as much as possible without you knowing you're being taxed as much as possible.

Why does your employer collect taxes on your behalf.  Well, it's kind of like the idea of paying yourself first for retirement. To recapitulate, the idea is that if you pay yourself first, you won't see the money and won't miss it as much. It makes savings easier. Well, your taxes are withheld for the same reason. Does anybody question the legality of the government going to your employer and demanding that they pay them the taxes you owe?  Anyway, it's just one of the ways to minimize the pain of paying taxes.

Other ways that you don't know you're being taxed are that your employer pays social security taxes for you. Actually, they don't, they just pay you less than you would otherwise be paid. Another method of hiding taxes is to cause inflation. Another is to tax a company who then raises prices to pay for the tax. There are countless ways you are being taxed which aren't explicit.

The bigger picture is that simplifying the tax code is a political loser for the right. Why? Well, there are basically two types of taxes, implicit and explicit.  Explicit is what you pay today when you file you're return.  Implicit are all the hidden taxes that you're not aware of.  If you simplify the tax code and reduce the implicit taxes, then explicit taxes must go up. So, in an effort to improve tax efficiency and therefore the economy, the right will be accused of wanting to raise taxes on the average American.

The right way approach the argument on the right is not to simplify but to expose. Our policy should focus on making the implicit explicit which will drive people to demand changes in taxes. The reality is that even in our highly progressive tax system, the poor still pay a large percentage of their income in taxes, they just don't know it. If we are able to help them figure this out, they will no longer be immune to the siren song of higher taxes by the left.