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Tax Riddle, or Not?

I have read dozens of times, and have even espoused the view myself, that the American electorate gets ill at the idea of the government directly taxing THEM. Sure, when taxes are proposed on “other people” like “the rich” the electorate does not seem to have a problem with it, but when we are talking about anything other than redistributive policy, people turn green at the thought that higher taxes to us are a potential solution to a problem like global warming. As a result, the political process responds to this in a very sensible way – when it needs to enact policies that are required to raise the costs of some action, the politicians design a program that masks the tax increase. This is bad first because it will be more costly politically and economically to structure policy this way, and of course secondly because it undermines faith in the transparency and legitimacy of democratic political institutions. A simple illustration is that if there is ever going to be movement on climate change, then it would have to be something like a carbon permit system, or the executive using his authority to simply regulate on his own.

But if this is the case, and I really do think it is true, then how come we really do not see the opposite? If people are so, so, so, so sick of taxes, then how come politicians are not falling all over themselves to shower tax breaks and tax rate cuts and tax credits and tax deductions all over the American voter? One possible theory is that they have already exhausted all possible ways of doing this … which you might actually believe if you look at the distribution of who pays taxes. The “rich” pay the lions’ share of taxes already and the rest of us pay little. I happen to not think this resolves the paradox and that there are simpler answers. Let’s see your thoughts down in the comments.

4 Responses to “Tax Riddle, or Not?”

  1. Harry says:

    I’m not so sure it’s a riddle, WC, but it is a great question.

    In general politicians apply the boiling frog principle, which, coupled with a desire to accumulate power, leads to indirect taxation wherever possible. Carbon credits are a good example of this method.

    First, since the Animal Kingdom is based on combustion of carbon and the Plant Kingdom is its reciprocal, you start with the broadest possible tax base, and if one adds dominion over the watershed, that covers the rest. Second, “carbon credits” are a term of art that apply to big consumers of energy, like power companies, airlines, steel mills, and oil companies, all of which are hated. Third, they have in varying degrees a lot of money and borrowing power.

    Cap and trade programs, whether California’s or the UN’s, never seriously contemplated shutting down power companies and turning off the lights and Tesla chargers. Rather, they are a way to extract money from consumers of power indirectly in gradual increments. When the power bill arrives and one sees a rate of $.26 per KWH, only the most cynical of us would blame Jerry Brown or the experts at the IPCC, especially if one drives a Tesla. One might even feel good about the bill, knowing one is doing one’s part to keep the seas from rising, or to save Buffalo from another storm.

  2. Harry says:

    I know I tread on shaky ground here, writing on a blog entitled TUW run by an economics professor, but the question WC has raised here is nothing new. Trying to convince consumers that government action is in their interest when it is not has been done before. Fortunately, good ideas cannot be killed, even if the bad ones win a Pyrric victory from time to time.

  3. Doug M says:

    “…..how come politicians are not falling all over themselves to shower tax breaks and tax rate cuts and tax credits and tax deductions all over the American voter?”

    Aren’t they? It sure seems like there is a new targeted tax cut offered every day by some politician. More, perhaps, when the R’s ran the zoo.

    I am smart enough to know that they can’t give tax breaks to everybody, but they can give tax breaks to me. So, it is all about paying off the right constituency.

    • Harry says:

      Doug, you are correct in your observations. While some Republicans are as guilty as Democrats in enacting tax breaks, Democrats gravitate toward regarding gross income as the property of the state, whereas some Republicans concede that net income is a fairer basis for taxation of income, assuming one is going to tax income. I do not want to get into the fine points here, like accelerated depreciation, depletion, or three martini lunches, but there are sometimes good reason to deduct business expenses, following FASB’s rules.

      The earned income tax credit, the credit for buying a heat pump or solar panels, credits for tuition, they all missed me. But deducting accrued interest paid from interest received I did, and I think that is a fair break, despite what Chuck Schumer might think.

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