Taxes as Incentives

Okay, it's still tax season. And the tax code is still just as long as it was last time I wrote on this. Here are some more thoughts I've had. (Lots of tax paperwork this year.)

I think one of the reasons we have such a large number of "loopholes" in the tax code is because the government uses taxation as an incentive. After all, you can make a convincing argument that an eight thousand-dollar rebate on taxes is useful for propping up the falling house market. And offering a tax break to anyone living in the wake of hurricane Katrina, while providing a measure of "relief" to those that survived it, might even push people to more seriously consider moving back there, repopulating the area.

Taxes are also used as an incentive in the "sin taxes" on alcohol and tobacco—tacking on taxes raises their prices and makes these substances consumed less, at least in theory. Some view gasoline taxes the same way.

Basically, if you have a large number of people that something is wrong, you can tax it without complaint—after all, people who pay extra for alcohol shouldn't be buying it anyway, so if they complain about the taxes, they don't have a leg to stand on, right?

What about the income tax? Are we trying to curb people from working? And capital gains tax—it seems that we're trying to make investing less palatable by taxing it. But don't we want people to be more productive? Don't we want money to be invested for further economic growth?

What's going on here is that a large number of people are convinced that being wealthy is not a virtue. (At least, being more wealthy than they themselves are.) Since all those wealthy (wealthier) people have too much money anyway, who's going to complain if they have a little less due to taxation?

The problem with this kind of thinking is that, in some measure, it prevents the resources of the rich (which are a lot of resources) from being used for productive (but taxable) purposes. As tax brackets get higher, people are less inclined to invest a million dollars, only to see the return eaten away by taxes—buying a new yacht starts to look pretty good.

Anyway, I'm all in favor of using taxation as an incentive, but why not put it on the other end? Taxing based on how much we spend seems a great way to bring our consumer spending under control. It makes saving and investing much more attractive options than consuming. Taxing spending and not earning might make the whole country more wealthy (at an individual level), instead of penalizing those in the top brackets.

Then again, maybe I just think consuming needs a "sin tax" of its own.