Learning to live in a Taxocracy

“Taxes,” former Tax Foundation President Scott Hodge tells us in his new book, Taxocracy, “rule nearly every aspect of our daily lives.” In the course of 335 pages, Hodge backs up that statement, showing how the tax code can explain everything from the size and shape of buildings to why songwriters all suddenly started selling their catalogs to corporations. 

Almost all these efforts to control human behavior through the tax code, Hodge argues, have ended up being a net negative for taxpayers. The ever-rising cost of healthcare, for example, can be traced back to a World War II-era tax break for employer-sponsored insurance designed to get around wage controls. Unaffordable college tuition costs can also be partly blamed on the deduction for student loan interest, tax-advantaged savings plans, and the tax exclusion for scholarships and fellowships.

Even housing unaffordability can be partly blamed on the mortgage interest deduction, although the damage from this tax code loophole was recently lessened by the Tax Cuts and Jobs Act of 2017.

President Joe Biden has, of course, made our tax code much worse by riddling it with hundreds of new credits and loopholes that not only make the tax code far more complex, but also channel money to unproductive investments while also enriching the wealthiest among us.

Much of the spending in Biden’s signature domestic accomplishment, the ill-named Inflation Reduction Act, comes in the form of tax benefits that can only be finally enjoyed by wealthy investors. Most startup ventures have no tax liability, so tax credits are worthless to them. So Democrats have created secondary markets where wealthy investors and corporations can buy those credits from startup firms in exchange for cash. One analysis highlighted by Hodge shows that 50% of the tax equity supplied in the past decade from these markets came from just two banks: J.P. Morgan and Bank of America. So much for the argument that Biden’s tax plan only benefits the little guy.

Not that all of Hodge’s critiques draw blood. He spends seven pages going after the nonprofit status of credit unions who he complains now serve consumers far past their original mandate, but he never really explains what’s so bad about credit unions taking customers from for-profit banks. How many credit unions had to be bailed out by Congress because they made bad loans during the 2008 financial crisis? Zero. Maybe we aren’t subsidizing credit unions enough!

Hodge also missteps when attacking the child tax credit, a policy he used to support. Hodge now complains that the CTC is not targeted narrowly enough to low-income families, is prone to abuse, has little impact on economic growth, and encourages people to leave the workforce, thus shrinking the economy. 

But public policy isn’t all about economic growth, which is specifically designed to ignore economic benefits provided by families. If a mother uses the CTC to work part time, and she uses her extra time to care for her children and cook for her family, that is currently counted as a loss of economic activity. But if that same mother doesn’t get the CTC, works full time, and then uses her earnings to pay someone else to care for her children and cook her family meals, all of a sudden those same activities that were once invisible now count as economic growth.

So when families take care of themselves, Hodge says that’s bad for economic growth. But when they pay someone else to do it, that’s good for economic growth. That is a fundamentally inhuman way of looking at economic activity that undervalues all the good families do for civil society and the nation.

Hodge does include a number of “Roadmaps to Reform,” including detailed analysis of the “Fair Tax,” the value-added tax, the inflow-outflow tax, and the progressive consumption tax. But all these plans seem just too big of a change to realistically have a chance of becoming law.

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An understated theme throughout the book, however, is how the previously mentioned Tax Cuts and Jobs Act, while imperfect, took the tax code in the right direction in a number of areas. In addition to undercutting the harm done by the mortgage interest deduction, the TCJA also weakened the state and local tax deduction and moved us closer to a territorial tax system which would encourage more companies to invest their foreign profits here in the United States.

Hodges’s “four principles of sound tax policy,” including neutrality, simplicity, transparency, and stability, are well taken and should guide any tax reform effort. It just might take a dozen small steps like the TCJA to get there, as opposed to one giant legislative act.

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