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Tuesday, January 10, 2017

Obama Admin Hypocritically Attacks Hidden Fees

Hidden fees can indeed mislead consumers, but the worst violator is the government itself.

President Obama’s National Economic Council has just issued its final report, which attacks hotels, airlines, and other companies for having hidden fees which make it very difficult for consumers to make informed choices when they buy. As Susan Grant of the Consumer Federation of America put it, “consumers are being deliberately fooled by advertised prices that fail to include the full amount they’ll have to pay.”  

Hidden fees can indeed mislead consumers. But the worst violator is not any business, but the government itself.

As public finance scholar Edgar Browning stated over two decades ago, it is “no accident that nearly 50 percent of all federal expenditures” are financed by hidden taxes.

The employer half of Social Security comes out of employees’ pockets.

Unveiling the Hidden Taxes

The corporate income tax, perhaps the most inefficient and distorted tax, is one example. Lulled by the fiction that businesses pay taxes–in fact, only people pay taxes–customers blame corporations for resulting price increases, and employees blame them for reduced wages. But the government gets the money and claims credit for where it’s spent. The same misappropriated blame holds for import duties and restrictions, excise taxes, and business property taxes.

Compared to paying a single check at tax time, withholding income tax over time blinds employees to the burden. Also common is taxing those unable to vote on an issue or who make up voting minorities (e.g., high hotel taxes in tourist meccas that are primarily borne by visitors and rent controls which force landlords to accept lower rents). Regulatory burdens also act as massive taxes, but they escape the same level of scrutiny. There is pressure to impose value-added taxes, which are incorporated at each stage of production, because they disguise the true burden on consumers.

With the employer half of Social Security and Medicare, Uncle Sam conceals his hand as it slips into workers’ pockets. Since employers are on the hook for 7.65% of the FICA tax, they compensate by offering lower wages. So the employer half of Social Security really comes out of employees’ pockets, as does workman’s compensation and unemployment insurance premiums. Instead of pointing their finger at the government for cutting their take-home pay, workers blame their employers.

A Tax by Any Other Name

Hidden taxes obscure who really pays and how much they pay.

Mandated benefits also impose massive hidden taxes because they come out of workers’ overall compensation. Mandating the provision of employee health insurance, for instance, lets the government claim credit for delivering the benefit, but companies get the blame when they offer lower wages or charge higher prices to cover the costs. Further, Obamacare was crafted with a multitude of hidden taxes, such as the medical device tax and the tax on “Cadillac” plans designed to hit everyone in the future.

Deficits are also hidden taxes because, at present, it’s hard to clearly identify who is going to be stuck with the bill. The same is true for the trillions of dollars of unfunded promises to Social Security, Medicare, and government pension participants. That’s also why these issues are so hard to address. No politician wants to take blame for breaking promises to any group, even when the promises cannot possibly be kept, when they can hide the issue from view by simply ignoring it.

These examples are far from exhaustive.

At every level, government spending is financed with hidden taxes that obscure who really pays and how much they pay. Because of economic ignorance, Americans simultaneously underestimate costs and overestimate what the government can do to advance our general welfare. The result is that people support government programs that they would oppose if more accurately informed.

The Joint Economic Council has made a last effort to burnish the Obama administration’s “consumer protection” reputation with their criticism of hidden fees. But the same administration that purports to protect us from the harm of hidden fees dishonestly imposes far greater abuse on Americans through hidden taxes. This shows the poor deal that government offers as a protector.

The ruse of reining in hidden fees might offer a useful avenue for reform. Unfortunately, the government seems unwilling to apply its warnings to itself. We are left with one more illustration of Adam Smith’s observation that “there is no art which one government sooner learns… than that of draining money from the pockets of the people.”  

  • Gary M. Galles is a Professor of Economics at Pepperdine University and a member of the Foundation for Economic Education faculty network.

    In addition to his new book, Pathways to Policy Failures (2020), his books include Lines of Liberty (2016), Faulty Premises, Faulty Policies (2014), and Apostle of Peace (2013).