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Monday, April 6, 2015

How Complex Taxes Pick Your Pocket

Messy tax codes trick voters about what they're paying — and who is benefiting

In 2008, in a remarkably candid admission, the IRS told Congress, “The most serious problem facing taxpayers is the complexity of the Internal Revenue Code.” Apparently, Pennsylvania Governor Tom Wolf hasn’t read that report, because he just can’t wait to muddle and obscure his state’s own tax code even further.

Politicians like Governor Wolf would have you believe that taxes are complicated. And they have gone to great lengths to make them so. Pennsylvania taxes people’s income, property, profits, and purchases. It charges licensing fees for drivers, boaters, hunters, and business owners. It levies special taxes on cigarettes, gambling, and gasoline.

But here’s the thing politicians don’t want you to know: taxes don’t have to be complicated. This year, Pennsylvanians will earn a total of about $600 billion in income, and the state will collect about $50 billion from all sources (excluding federal funding). If Pennsylvania collected all of its revenue from a flat income tax and eliminated all other taxes — including sales taxes, profit taxes, lottery revenues, motor vehicle licensing fees, cigarette taxes, and on, and on — the state would have to tax everyone’s income at about 8%. That’s it. An across-the-board, no deduction, no exemption 8% income tax could replace every single tax, fee, surcharge, levy, and fine the state collects — as well as all the bureaucracy and paperwork that they generate. And it would have the benefit of being honest and transparent.

While 8% is a lot higher than the 3.1% income tax Pennsylvanians currently pay, we’d no longer be paying the 6% sales tax or the 50 cent per gallon gasoline tax. But the big win of a flat income tax is that we’d blow away the dense clouds of smoke protecting the politicians and special interests.

The tax code isn’t complicated because it needs to be — it’s complicated because politicians and special interests like it that way. Like a magician who catches your eye with his left hand while his right hand reaches into your jacket, a complex tax code is misdirection, meant to distract voters with mind-numbing details while politicians reach into voters’ pockets (and split the proceeds with powerful interest groups).

The simple fact is that all taxes are ultimately paid by people. Even when the state taxes businesses, they simply pass the tax on to people, leaving them poorer without ever realizing that they are the ones paying for it. But when the tax code is simple, people know exactly how much they are paying. And when they know exactly how much they are paying, they tend to hold politicians accountable.

What kind of mischief does Governor Wolf have in mind with his proposed tweaks to our already over-tweaked tax code? He has proposed extending the sales tax to cover some 45 previously exempt categories of products and services including day care, over-the-counter drugs, and cable TV to name but a few. He has also proposed increasing the sales tax itself from 6% to 6.6%.

In addition to overhauling the sales tax, Governor Wolf is proposing reducing homeowner property taxes (which benefits homeowners at the expense of renters); eliminating school property taxes for seniors (which benefits the elderly at the expense of the non-elderly); enhancing renter rebates (which benefits landlords, who will respond by raising their rents to capture the rebates); and instituting a manufacturing tax credit (which benefits manufacturers at the expense of non-manufacturing businesses).

This entire game needs to be scrapped, and it needs to be scrapped in favor of transparency and simplicity. When taxpayers finally know what they are actually paying, they will rally to hold politicians accountable. Then taxpayers can start a frank conversation about whether they are getting what they pay for. And at an effective tax rate of 8%, you can already sense why the politicians want to keep things complicated.

Antony Davies is associate professor of economics at Duquesne University. James R. Harrigan is director of academic programs at Strata in Logan, Utah. A version of this op-ed was published in TribLIVE.

  • Dr. Antony Davies is an Associate professor of Economics at Duquesne University, and co-host of the podcast, Words & Numbers.

  • James R. Harrigan is a Senior Editor at the American Institute for Economic Research. He is also co-host of the Words & Numbers podcast.