Tax me baby one more time

The folks at Blue Oregon love love love paying taxes. “It’s an honor and a privilege to do so,” wrote Carla Axtman on Monday. Today Steve Novick goes even farther and willingly pays more than he is required to:

In completing my tax forms, I decided to make a symbolic statement of concern about what’s going to happen to our state: I didn’t take the $50 tax credit for political contributions, even though I made several times that amount in political contributions. I’m not exactly rolling in dough these days – I made a little over $40,000 last year – but I figured the state needs the $50 more than I need to be subsidized for making political contributions I would have made anyway.

As a libertarian I’m glad to see Steve spending his income however he sees fit. I’ll also give him credit for putting his money where is mouth is and voluntarily raising his own tax bill; I wish other tax advocates were equally consistent.

But that said, this is a very weird thing to do. Steve wants to see children educated, the elderly cared for, addicts treated, and the sick provided with health care. These are all noble goals. They’re not, however, goals that only the government can achieve. Charities address these needs too, and by contributing $50 to them Steve could ensure that his donation is directed to the right ends.

Instead he donates to politicians who share some, but perhaps not all of his views, who might get elected and who might succeed in putting his agenda into action. Then he gives them even more money that might or might not get spent wisely. At the end of this process, I wonder how much of his political contributions actually end up benefiting the people he wants to help?

Steve gets near the truth when he says that the Oregon tax credit for campaign contributions is “subsidizing the political contributions of the relatively wealthy.” It’s a subsidy for the politicians too, transferring money from the state treasury to their own campaigns. It’s a neat trick: the relatively wealthy get to feel good about donating to their favored politicians and the politicians get more money to crow about the good things they’ll accomplish in office.

The downside of having such an active government is that we tend to forget about civil society’s private solutions to public problems; the importance of people wielding the levers of power looms too large in our view. Steve’s extra $50 in taxes is, as he says, a “small symbolic gesture.” I’d humbly suggest that a more effective gesture would be cutting out the political middlemen and donating that money to a cause that directly addresses his concerns.

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The big government cheeseburger

If you’re looking for some relevant reading on this Tax Day, you could do much worse than Charlotte Twight’s essay on the history of income tax withholding in the United States. The topic is featured prominently in her excellent book Dependent on D.C. and I’m glad to see her work is now online as well.

She reports that prior to World War II income taxes were generally paid in quarterly installments in the year following the earnings to which they applied. For example, at the end of 1938 a person would calculate what he owed for the year and pay it gradually throughout 1939. This left taxpayers fully aware of what they were paying and allowed them to plan their payments in advance.

In 1943 the law was changed to implement withholding. This greatly advantaged the Treasury by obscuring the true magnitude of taxation:

We have seen that, on many levels, income tax withholding increases transaction costs to the public of understanding the magnitude of the income tax and of opposing it politically. Government officials always have regarded withholding as a seemingly “painless alternative” (U.S. House Hearings 1980: 35). Lacking an understanding of the concept of present value, many taxpayers do not perceive that withholding causes the real burden of their tax liability to be greater. Indeed, the common practice of overwithholding associates the payment of taxes with an apparent financial benefit rather than cost, distorting taxpayers’ assessments of the actual costs and benefits of government activity. Consistent with a transaction-cost-manipulation model, the expected return of such overpayments makes people feel “happier'” about sending in their tax returns on April 15. The very mechanism of withholding deflects blame from the government by requiring employers to initiate and bear the cost of the forcible extraction of people’s income. Piecemeal collection each payday from income the taxpayer never sees obscures the magnitude of the annual tax. And, because it is a forcible extraction, it raises the transaction costs to the public of expressing political resistance to taxes by not paying them. […]

After 50 years of comprehensive withholding at the source of American workers’ salaries, people are used to wage withholding; most no longer question it. The relevant institutional machinery is entrenched, both through its administrative apparatus and through its acceptance in the minds of most taxpayers.

Many readers of this blog favor mandatory disclosure of things like nutritional information. You don’t think that it’s enough for the number of calories in a fast food cheeseburger to be merely available to consumers. You say the information must be placed prominently on the menu, forcing diners into the frame of mind to consider the health consequences of their actions. Should not the same be true of government? When citizens are tempted by the big government cheeseburger, shouldn’t they be reminded of its true cost?

It’s true that they could look it up on their pay stubs or tax returns, but that’s not the same as having it forcefully presented in a quarterly payment. By taking their money before they ever receive it, withholding obscures the link between bigger government and higher taxes. Throw in the exciting possibility of an annual refund and it’s no wonder voters say, “Super size me.”

So here’s the question for left-leaning readers: Do you think it’s legitimate for the government to distort voter preferences via income tax withholding? Or should withholding be abolished at the risk of decreased support for government spending you favor?

Update: Barzelay makes an excellent point in the comments:

… there is no reason why the government should handle withholding. This is an area that I think the private sector would unquestionably be better at.

Imagine going to H&R Block and sitting down for a brief meeting to describe your financial situation. The tax experts there estimate how much your taxes will be for the following year, considering such factors as other anticipated income, anticipated life changes, etc., and recommend a particular withholding percentage. You then have your workplace automatically deposit that percentage of your paycheck into a special H&R Block account. H&R Block then invests your funds for you (conservatively), guaranteeing that they will pay you back at least what you have put in. At the end of the year, they pay you back your withheld money, plus interest, having taken out a cut (say, .25%) for H&R Block. You then pay your taxes. As long as H&R Block can make more than .25% interest, they make money and you make money.

This would address two problems. By making people write a check from their own private account it would help raise awareness of the actual tax burden. And if people withhold excessively, they keep the extra funds and any interest that is earned on them. The difficulty is in transitioning to this idea from our current pay-as-you go system; I don’t know how to get there from here without causing significant cash flow problems for the government.

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Maryland may snuff out its smoke shops

Maryland is considering a bill to raise its cigarette tax from $2 to $2.75 per pack, but legislators are worried that the price increase will cause teenagers to start smoking cigars instead. Luckily they’ve come up with an easy solution to the problem: Raise taxes on cigars too! Under the proposal, the tax on cigars will jump from 15% of the manufacturer’s price to an extremely punitive 90%. Combined with the statewide smoking ban, the new SCHIP taxes, and the recession, retailers are understandably fearing for their livelihoods. This could potentially defeat the revenue-raising purpose of the taxes. As a retailer friend of mine once said, “90% of nothing is nothing.”

Though no politician could get away with saying it, I’m not convinced that teenage smokers switching from cigarettes to cigars is something to be discouraged (assuming they are going to continue smoking something). Cigars aren’t inhaled directly and are less habit-forming,* and they could become a rewarding hobby into adulthood. If I were the parent of a teenager I would much rather see him smoking a few cigars per week than taking constant cigarette breaks throughout the day.

This is not the first anti-cigar proposal to come out of Maryland recently. Maryland cities and counties have been banning sales of low-cost, individual cigars to keep them out of reach of the poor and of teens who might strip out the tobacco and replace it with an even more illicit leaf.

*Update: To clarify, by “non-habit forming” I’m referring to their general usage, not to their chemical properties.

[Hat tip to the ever-vigilant Stogie Guys.]

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My goodness my Guinness!

“Guinness needs your help!” reads the subject line on an email I received from the company today. I went to one of their “Guinness Believer” promotional events a few years ago — totally worth it for the free beer — so I get occasional mail from them. I assumed this was another message about their campaign urging people to petition Congress for official recognition of St. Patrick’s Day. Clever, but I’ve always hated its pernicious message that for an institution to be valuable it must be legitimized by government (cf. debate over same-sex marriage).

Happily, that’s not what the email was about. Here’s what it said:

As someone who enjoys great brands such as Smirnoff, Crown Royal, Captain Morgan, Johnnie Walker, Ketel One, Jose Cuervo, Tanqueray, Guinness, Beaulieu Vineyard or Sterling Vineyards wines, you are a member of the Diageo family. As a member of our family, you need to be aware that in the coming months, lawmakers will be proposing tax increases that will put jobs in your community at risk and raise the cost of your favorite drink.

There’s a real price to pay when elected officials misguidedly try to replenish state budgets with regressive taxes that will hit us at a time when we are already being hit hard enough economically. These taxes will cause people like bartenders, waiters, waitresses and other folks who work hard every day in our community restaurants and hotels to lose their jobs. In fact, the last time they raised taxes on alcohol, $1.3 billion in wages were lost, while 98,000 people found themselves out of work.

Hardly sounds fair, does it? […]

Together, we can protect our jobs, our livelihoods, and the right to responsibly enjoy a drink.

It’s ballsy, I like it. The link takes you to their handy site where you can find the latest news about tax proposals in your state and contact your representatives to oppose them.

I don’t always approve of Diageo’s lobbying and I can’t vouch for the numbers on their main page, but this is an admirable campaign. For this I’ll lift a Guinness some time soon.

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Don’t tax me, tax them!

The Oregonian ran a couple of good op/eds recently on proposed state tax hikes on beer and tobacco. The Pigouvian case for higher taxes on alcohol is arguably stronger than that for additional taxes on cigarettes, but opposition to the former tax is much more vocal. Elizabeth Hovde notes the hypocrisy:

[…] when it comes to cigarettes, a lot of Oregonians — perhaps many of the same Oregonians fighting a beer tax increase — insist on hefty taxation. They rail on about how smokers’ unhealthy choices need to be charged (paying no attention to the cost savings associated with smokers dying younger than the healthy population). The nonsmoking majority has gone so far as supporting a law that forbids smoking in private businesses, even if people never have to frequent a smoky joint and even if no wait staff ever has to serve a smoke-filled area.

While beer fans have organized vanpools to public hearings in Salem using Facebook and Twitter (the group No New Oregon Beer Tax on Facebook boasted 3,117 members as of Wednesday), Gov. Ted Kulongoski’s idea to put a sizable increase on a pack of cigarettes is sitting pretty well with the public.

Right now the tax on a pack of smokes is $1.18. Kulongoski and other lawmakers want to add on another 60 cents per pack and levy a 25 percent increase in other tobacco taxes. Where is the outrage? Those who belly up to smoke-free bars ought to think about the double standard.

Oregon has a lot more beer drinkers than it does smokers. For that reason alone, piling onto the unpopular smoking minority is more likely to succeed than increasing the state’s beer tax, which is one of the lowest in the nation (not that I’m supporting that tax either, mind you).

The second column is a guest piece by Steve Buckstein, making an additional case against the tobacco tax hike. Read it here.

Cato’s Tom Firey and I wrote about similar tax proposals in 2007 for the Journal-Sentinel.

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