A BPF View: Tax Code Overreach and Market Deformation

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Taxes are defined as revenue collected from citizens to fund essential services of government.  There are those who believe that the tax code should be used to reward some behaviors and punish others.

Tax Code OverreachOne example is the state’s cigarette tax, which there are several proposals to increase it by $1.50 per pack.  Supporters say that amount would be in a “sweet spot” that would reduce smoking and blunt tobacco companies’ ability to get around the tax by reducing their prices in the state.

Another example on the federal level is the electric car credit of $2,500 to $7,500 for each electric car sold. When automakers were confronted by the possibility of the tax credit going away, they claimed that if the credit disappeared, so would the adoption of EVs by a skeptical car-buying public, which bought more than 199,000 last year.  In comparison, Ford sold more than 898,000 F-150 trucks in 2017, so even a big tax break still has consumers leery of buying a vehicle with less range and utility than an equivalent gasoline-powered model.

At the state level, there is a vast array of different tax breaks for businesses.  One example was the infamous and now expired “cultural retail attraction” incentive that allowed developers to finance the building of shopping malls on the backs of taxpayers with the fig leaf of a “tourist attraction.”

When the tax code is used as a carrot and a stick by policymakers to reward what they consider to be proper behavior and punish bad, markets are deformed.  Corruption increases as companies become obsessed with getting financial privileges rather than producing better products and services at a cheaper price.  A whole industry of accountants and insiders are required to navigate the swirling waters of the tax incentive patchwork, thus adding ultimate costs to consumers.

The tax code should be greatly simplified to only fund essential government services while eliminating the market-distorting incentives that favor the connected.  Anything further is costlier to taxpayers in the end.

 

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