Taxation Chicanary

The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. — James Madison

Tax policy has everything a politician could want in an issue: it affects everyone, it’s easy to differentiate your position from your opponent’s, and it’s complex enough that you can spin the subject six ways to Sunday without ever telling a bald-faced lie. With the presidential campaign ramping up and the California gubernatorial campaign in full swing I’m starting to see a few standard tricks get used. I’m no Penn and Teller of the political world, but I thought I’d list some of the spin tricks I’ve seen so far. (Kids, play at home — how many misleading tax claims can you find this campaign season?)

  1. Bringing down the (income) tax. In 2001, President Bush said that under his first tax cut “a family of four making $35,000 [would] receive a one hundred percent tax cut.” What he forgot to mention that this was only income tax he was talking about, not payroll tax.

    Everyone gets mad about income tax because it’s the one we see every April, but 74% of Americans actually pay more in federal payroll tax than federal income tax. For poor to moderate-income workers, it’s a lot more. And because income taxes are a relatively small percentage of these worker’s total tax burden, any small reduction can look like a huge percentage of the income tax without reducing the total tax burden by a large amount. It’s a classic use of misdirection. Penn and Teller would be proud.

    This trick hasn’t been retired in the past two years, either. Back in June of this year, Tim Russert quoted statistics provided by the Department of Treasury in his Meet The Press interview with Howard Dean:

    The Department of Treasury, we consulted and asked them: What effect would [repealing Bush’s entire package of tax cuts] have across America? And this is what they said. A married couple with two children making $40,000 a year, under the Bush plan, would pay $45 in taxes. Repealing them, under the Dean plan, if you will, would pay $1,978, a tax increase of over 4,000 percent. A married couple over 65 making $40,000 and claiming their Social Security, under Bush would pay $675 in taxes. You’re suggesting close to $1,400, a 107 percent tax increase. Can you honestly go across the country and say, “I’m going to raise your taxes 4,000 percent or 107 percent,” and be elected?

    Dean responded “I don’t believe [those figures]. This administration has not been candid about the impacts of this tax cut.”

    John Kerry continues to cite these numbers, saying in an August 31st Meet The Press that “If you’re a $40,000 income earner, Howard Dean’s going to raise your taxes more than 20 times.”

    As you might have guessed, the numbers provided to NBC for the Dean interview are only for income tax, not the full tax burden. Martin Sullivan, an economist and writer for Tax Notes, discussed the figures in a recent article:

    And in a new application of the “income tax only” approach to distribution analysis, the Treasury Department is providing the press with case studies of the combined effects of the 2002 and 2003 tax cuts on middle-income families. But in what can only be characterized as egregious use of misinformation, the Treasury Department frequently omits from its explanation that it is looking only at income taxes.

    He then discusses the Treasury Department report that was quoted in the Dean interview, noting that the words “income tax” appear only in the detailed write-up and an accompanying report, but nowhere in the main executive summary. “If this continues,” writes Sullivan, “the Treasury’s Office of Tax Policy (OTP) may have to change its name to the Office of Tax Propaganda.”

  2. Just your average family. The most common way to compute an average tax-cut is to take the total tax cut and divide by the number of tax-payers (also known as the mean). So when Bush says “ninety-two million Americans will keep, this year, an average of almost $1,000 more of their own money” in his State of the Union address, that’s the average of my tax cut, your tax cut, and Bill Gates’ tax cut. Unfortunately, Bill Gates got a bigger cut than you or I did, so that skews the numbers. It also doesn’t average in the fifty million tax-paying Americans who got no tax cut, which brings the average up even further. In fact, according to the Urban-Brookings Tax Policy Center, fewer than 20% of tax-payers would receive a tax cut of $1000 or more. A less misleading average would be the median tax cut (a little less than $100) or the mode tax cut (zero dollars) but those don’t sound nearly as exciting.

  3. The Specter of Double Taxation. The dividend tax has been loudly criticized as being an “unfair double taxation.” To quote the Republican Study Committee:

    No dollar should be taxed twice — especially not a dollar created by citizen productivity. Just imagine if taxes were taken out of your constituents’ weekly paychecks before they were mailed and then again after they were mailed. Wouldn’t that be unfair? The double taxation of dividends is equally unjust. No income should be taxed more than once. If the federal government taxes a dollar of corporate profit, it has no right to tax that same dollar again just because it is distributed to shareholders.

    There are sound economic arguments for reducing the dividend tax, the strongest being that it encourages companies to issue stock instead of borrow money. However, the double-taxation argument is complete chicanery — all money is double-taxed (and triple-taxed, and quadruple-taxed). When I receive my paycheck (created with my citizen productivity), I pay income tax. I then spend that money and pay sales tax, a double-tax. If I purchase gasoline I’ll also pay a gas tax, a triple-tax on my dollar. But it doesn’t stop there! The gas station uses that dollar to pay the attendant, and charge him income tax, and then he goes to a restaurant… you get the idea. There’s a nice Tom The Dancing Bug cartoon that illustrates the problems with this dodge quite effectively.

  4. What goes around comes around. During the first California Gubernatorial recall debate, Arianna Huffington (Independent) and Peter Camejo (Green) both suggested raising corporate taxes. On the surface this sounds like a way to raise revenue without causing pain to working-class voters, but it ignores the fact that everything is interconnected in an economy. Republican State Senator Tom McClintock had this response:

    I’ll let you in on a secret about business taxes. Businesses do not pay taxes, they pay taxes through you as a consumer in higher prices, through you as an employee through lower wages or through you as an investor in lower earnings. Investors are not fat cats, that is Mom and Dad’s retirement fund we’re talking about.

    McClintock is correct as far as he goes: at some point that tax burden has to be paid by real humans, be they consumers, employees or investors. But he only describes half the cycle. The other half is that taxes on individual people will come back to be paid by businesses, through lower sales to consumers, higher wages of employees, or through lower stock prices as investors have less savings to invest. That’s the whole point of both trickle-down and trickle-up economics: to get business moving, you give a tax break to consumers and investors. In economics, everything is connected. You can’t just look at the burden on one group without looking at how it affects the whole.

  5. Math class is hard. Let’s go shopping. One of the arguments that gets used to promote flat taxes and consumption taxes goes something like this: “Boy, tax forms are complicated, aren’t they? If you’d just throw out the entire income tax system and replace it with our proposal you wouldn’t have to do all that math every April.” To quote the main tagline of Americans for Fair Taxation, “It’s simple.”

    I’m amazed that anyone falls for this argument. First of all, the tax code isn’t complex because we have a graduated (that is, non-flat) income tax, it’s complicated because of all the exemptions, deductions, and special cases. (Such exemptions are used, for example, to encourage home ownership by allowing mortgage interest to be deducted from one’s income.) Second, both flat-taxes and consumption-taxes are extremely regressive, which is to say they tax the poor a larger percentage of their income than they do the rich. I guess the idea is to distract middle-class voters with the simplicity argument so they don’t realize they’ll be taking on a larger tax burden. Pay no attention to the man behind the curtain.

In the end, tax policy boils down to just three things: fairly distributing the tax burden, creating incentives for useful behavior, and making sure there’s enough revenue to keep the government running. Between these three parameters there’s a whole world of complex, intelligent argument. We need advocates who can argue about whether a tax is more fair when it burdens everyone equally, burdens each according to his means, or burdens each according to the benefit he receives. We need economists who can argue whether trickle-up or trickle-down will jump-start an economy faster. We need political representatives who can argue about what services the government should provide. These are good, honest, and necessary arguments. We have no need for deceivers, dissemblers and charlatans who hope to pull a fast one.