Sunday, October 23, 2011

'9-9-9' would shine light on true tax burden

Published in The Tennessean, Sunday, October 23, 2011

by Richard J. Grant

Decades ago, while riding an overnight train through Italy, a fellow passenger offered a warning. He had heard that organized criminals would wait until passengers fell asleep and then spray anesthetic into the compartment to deepen that sleep. With the passengers now safely oblivious, the thieves could help themselves to unguarded valuables.

Although almost certainly untrue, this story does serve as a neat allegory for the real-life relationship between taxpayers and tax legislators. It is much easier to get voters’ support for a tax-rate increase when taxpayers are unaware of their true position in the political food chain.

We know that, all else equal, income earners and property owners are happier the more of their income and property that they are allowed to keep. The higher the tax rate on each additional dollar earned, the less likely it is that a worker will put in the extra effort to earn one more dollar. Other activities become relatively more attractive. These might include leisure or the pursuit of some other less-taxed income opportunity.

When taxpayers perceive their own tax rates to be rising, they are likely to offer resistance in their role as voters. But if they believe that someone else is paying those taxes, they are more likely to be neutral or even supportive – especially if those perceived to be bearing the burden are seen as rich or undeserving.

Few people are aware of the difference between the “incidence” and the “burden” of a tax. Although one person is seen to be paying the tax to the government, this does not mean that no one else bears the burden.

Even children are affected. When I was a young teen, an old man once remarked that I did not pay taxes. When I insisted that I did, he laughed. That was until I pointed out that, if my parents did not pay such high taxes, my life would undoubtedly be different.

Many people believe that their Social Security payouts are half free because their employer pays half the tax. They are unaware that the portion of the tax paid by the employer adds to the cost of hiring that employee. This draws away resources that could be used to bid against other employers for the services of that worker. The employer would be just as happy to give the money to the employee as it would be to give it to the government. The employee might, if aware of the trade-off, have a stronger bias in the matter.

Government programs are easier to sell to voters when the full costs are hidden from view. It is well known that the bottom 40 percent of income earners pay no federal income tax. But they would be fools to believe that they bear no burden from the taxes paid by others. The tax disincentives facing investors and the resources taxed away from employers render employees less productive and therefore less valuable. The tax burden is borne as lower wages or, for some, as unemployment.

One of the criticisms of presidential candidate Herman Cain's 9-9-9 tax plan is that it would create a federal sales tax that might later be increased by Congress. But the plan eliminates an array of currently hidden taxes and replaces them with simple taxes that voters can see. Congress would have to operate without anesthetic.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com .

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011