One of the many problems with our tax system in the United States is that we are schizophrenic on the question of whether or not taxes affect decision-making.
Many of our tax policies clearly assume that taxes affect decision-making. For instance, why does the government place high excise “sin taxes” on things like tobacco and alcohol? The answer is obvious—the government places sin taxes on activities that it finds objectionable and harmful, under the assumption that higher taxes will discourage those activities.
Conversely, the government offers a myriad of tax breaks to behaviors that it chooses to favor—tax breaks for the purchase of a home, deductions for mortgage interest, charitable contributions, and any number of other activities the government seeks to encourage.
We’re not wild about government using tax policy to try to manipulate our behavior, but we agree that people and businesses generally make rational decisions based on tax policy, certainly so when they have access to good information about their tax burden.
The Obama administration in particular has been a champion of using tax incentives to push their agenda, insisting on tax breaks for “green” home improvements and punitive taxes on consumption of carbon-based energy sources. And the Obama administration has suggested higher taxes on sugared beverages and fatty foods as a way of manipulating our consumer decisions.
So if the Obama administration and Congress believe they can use tax incentives to get you to put a “green” attic fan in your house or to eat better, why not try using tax policy to get the economy going?
Just this morning CBO Director Douglas Elmendorf, a Democrat appointee, admitted in a hearing that “higher marginal tax rates do reduce economic activity.” Yet the Obama administration is pushing for those higher taxes.
If we need more domestic investment, why not lower the tax rate on investment through capital gains taxes, dividend taxes, and estate taxes? If we desperately need to create jobs and compete globally, why not cut the highest tax rate in the developed world on our domestic corporations? If we want businesses to invest in new plant and equipment, why not simply let them expense their investments?
Our economy is in a prolonged period of recession and substandard economic growth, and far too many Americans today are without adequate employment. It’s time to avail ourselves of tax policy incentives that have been proven to stimulate investment and job creation.
Or is economic growth a sin?