Think back to the time you were a young student in school. Maybe even try to reflect as far back as elementary school. For me that memory conjures images of transoms over doors, high ceilings, no conditioned air, none of the modern conveniences. Wait! In the interest of full disclosure, I should acknowledge that we did have indoor plumbing. But I also remember that we cleaned chalkboard erasers by beating them against the oak trees in the school yard. Nonetheless, consider your own experiences. Get that picture in your mind.
Do you see him yet? Do you remember her now? You know of whom I speak: the teacher’s pet. As an aside, the students picked to clean the erasers in my classes were almost always the teacher’s favorite. Those selected were allowed to go outside at the end of the day. It was fun. It was a break from the routine, from the monotony. The chore offered a chance to screw off for fifteen minutes or so.
Returning to that mental imagery, how did you feel about that person, assuming that she was not he, or you were not him? You probably felt some animosity toward that student. Clearly that person did not deserve the special dispensation given. But is that the whole truth? Was it really anger you felt or might it have been jealousy?
And so it is with our tax code. In an earlier post, I commented that we are the real barrier to tax reform. Who are we? We are us, all of us. Maybe not all in the sense of each and every single American citizen, but as a general definition, American taxpayers comprise the “we.” To paraphrase Commodore Oliver Perry and cartoonist Walt Kelly, ‘We have met our enemy and he is us.’
Almost everyone decries one or another tax preference. In general, many argue that our tax code offers too many ways for taxpayers to dodge their civic responsibility. If we don’t currently have children in college, especially if they have already completed higher studies, we bemoan education credits. If we rent, we ridicule the deduction for home mortgage interest. If we are fortunate enough to have totally subsidized health care, whether in the military, certain government positions or under a very select few union agreements, we look askance at health care deductions. And the list goes on.
But flip the coin. As homeowners how do we feel about removing or reducing the deduction for mortgage interest? What do we think about the myriad deductions, preferences, or credits for which we are able to avail ourselves? Children moved out. Who cares about the child tax credit? Own your home but don’t itemize. Then we ask why Congress removed the ability to add part of the property taxes paid to the standard deduction as existed for tax year 2009. We flip back and forth with no rhyme or reason. And we wonder why Congress vacillates.
Most Americans are usually unaware of the slop that is poured into the feeding trough from the feed bag of Congressional largesse in the constantly changing world of tax preferences. But if we become aware, we almost always want our share.
For taxpayers who itemize, don’t you wish you had bought that new car in 2009 instead of 2010 so that you could deduct the sales tax paid? How do you feel now about buying that house on April 8, 2008? All else being equal, failure to wait one day made you ineligible for an interest free $7,500 government loan. Worse, how does a taxpayer feel, having closed the purchase of her house on December 30, 2008. She was smart and got that $7,500 interest free loan. But she has since learned that her neighbor closed on January 2, 2009 and got an $8,000 gift? Are we mad, or are we just jealous. Do we want all of this nonsense to go away or do we just want our share?
There is an oft told story about a goose that lays the golden egg. As the familiar fable goes, an individual, typically a farmer or some other rural folk, has a goose, sometimes a hen, who favors him by laying a golden egg every day. The story continues and we learn that the farmer, in his desire to accelerate his riches, ends up killing the goose, thereby ending his good fortune.
I will come back to this parable in a moment.
In The Political Economy of the Origin and Development of the Federal Income Tax, Ben Baack and Edward J. Ray wrote,
“…the federal government had the wherewithal to provide something for everybody…”
This statement described their view of the federal budget after passage of the 16th Amendment, making income tax constitutional. They believed this tax would increase government coffers substantially. That much is true!
Although imposition of a tax on income has dramatically increased federal revenues, I am not sure I agree with their overall assessment. I might say something more akin to “…we have granted the federal government the authority to take from everyone including ourselves to provide something for everybody including ourselves…”
If we closely examine their hypothesis, do we think that conclusion is even possible? Doesn't the government have to take away before it can give? Unlike the biblical expression frequently cited that it is better to give than receive, Congress believes it better to receive and give in great abundance, although not necessarily in equal installments. And we also now know that this predilection is not limited to taking and giving identical sums. Can we say deficit spending?
Regardless, the reality seems to be that we just want ours. We like our favorite spot at the trough. In short, we want to be the teacher’s pet. In this instance, the United States Congress is the one standing at the front of the classroom. We bring an apple every day; we raise our hand at every opportunity; we are always smiling and attentive. We curry favor in the hope that we will one day be asked to clean the erasers. We do not question assertions our teacher makes.
More to the point, we don’t care whether or not the teacher likes other students just as long as she likes us.
Consider again that oddly natured goose. What is the moral of that parable? Aren't we admonished not to kill the goose that lays the golden egg? If we kill the goose, what happens next? Maybe tax reform is a zero sum game, maybe it isn't. While I intend to comment on that specific topic in a future post, suffice it for now that, whether or not tax reform is a zero sum game, if the stadium collapses around us during the contest, do any of us win?
For any meaningful tax reform to be realized, Americans must change our collective mindset. We have to ask whether we want the golden eggs we receive as Americans, primarily the various freedoms we enjoy, or whether we just want to take our turn wringing the goose’s neck to squeeze out that one additional egg.
Finally, when these tax perks are considered and discussed, we tend to view them in isolation. We act as if one particular burden or benefit only affects some among us. If we are not getting a particular benefit, we condemn those who do as freeloaders. We raise the fairness card and bitterly complain that we are compelled to support others by the fruit of our labor. It may just be that I am obtuse, but it is never clear to me who they and we, or them and us, are in these arguments.
Conversely, when it is our turn at the trough, we act as if this cornucopia is a birthright. We assert that this credit or that deduction is fair, reasonable and appropriate. We do not know, and likely do not care what the cost to others may be. But largesse to any, even if it that population includes us, must necessarily be a cost to others. A benefit to one carries a price to be paid by all. Thinking about the goose, it can be inferred that a gratuitous benefit to someone is also a cost to that very same person. We might be hurting ourselves.
I am reminded of a comment attributed to Dr. Martin Luther King Jr.
“Whatever affects one directly, affects all indirectly.”
I’ll be back in a few days to get into the heart of the matter – tax preferences.