Friday, March 23, 2012

Why do taxes get such a bad rap?

Neil H. Buchanan asks, "Why do we simply accept on faith that taxes are always harmful?"  His answer: because economists and tax scholars--i.e., those who know better, or should know better--don't speak up enough in defiance of the conventional wisdom that holds that taxes are inherently bad.  This conventional wisdom represents a "mass delusion about the effects of taxes":

Although economists and other tax scholars occasionally acknowledge the so-called “income effect”—the possibility that people will need to engage in more of an activity, rather than less, in response to a tax increase—the basic story always begins with “Taxes reduce incentives.”
From there, it is a rather straight path to condemning all taxes.  Because of the particular (and, to be honest, quite peculiar) set of assumptions that have now become standard in most economic analyses, tax scholars will typically assume that the effects of a tax increase are bad—that is, that it would have been better to have allowed people to do what they would have done in the absence of the tax.

The column then goes through a number of assumptions and misconceptions about how taxes impact behavior and the economy, as well as recent work that is pushing against the "tax is bad" meme, and concludes:
To economists’ credit, some among us have finally begun to speak up about the weak empirical case against taxes.  It might be too much to hope that we might also begin to challenge the idea that it is always bad to “distort” behavior, but at the very least, we should certainly insist on describing the big-picture consequences of cutting taxes. 

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