All the Hidden Taxes

As we head into the last laps of the Presidential election,  it seem appropriate to consider how our tax system is structured.  The people who argue that the tax system is too complex are correct, but not for the reason that they think.  The marginal tax on income is higher than we think because of the large number of other taxes that we pay.  Pigouvian taxes, like the taxes on cigarettes and liquor, raise a surprisingly small amount of revenue, yet they are the ones that people feel most strongly (and feel most strongly about ) because they are rapidly passed through to the customer.  I like to joke that the truest market basket that we can use for the cost of living is ten gallons of gas, a carton of Marlboros, and a case of Bud or bottle of Jack Daniels. 

One tax that I dislike is tax on unemployment compensation. I’ve never qualified for unemployment compensation, but taxing it seems to be mean-spirited at best, and it doesn’t raise that much money. If I buy insurance against nearly any loss, I am not taxed when the insurance company pays me for my car being totalled or my house being damaged.  At the same time, I also believe that the amount that is charged for unemployment insurance should be much higher, and that people should be able to opt out.  It should be self-funding, not something that is largely dependent on federal funding.  Unfortunately, this means that unemployment insurance rates would either have to go up or people would need to work longer to qualify for it, and the amount of time that they would receive benefits would be reduced.

Another hidden tax is the increasing reliance that towns have on various fees, like the $150 ticket for that red-light camera.  What most people don’t know is that the revenue is split between the camera operator and the town, and that’s a lot of the reason that the ticket is so expensive.  If you have a good volume of traffic, as Washington DC does, the ticket is fairly cheap because most people won’t fight it and a lot of people will run the light or speed.

Another interesting tax is the ability to buy a deferred verdict for your first misdemeanor or traffic violation conviction in some jurisdictions.  One pleads guilty, pays the fees and fine, and if you keep a clean record for six months, the guilty verdict is not entered and it is effectively suspended until then, unless you get picked up on another charge.  The people who would benefit most from this are the least able to pay the fines, and if you need a payment plan, it costs you $35 extra.  There are opportunities to work off one’s fines at $10 an hour, but that doesn’t do you any good unless you have a day or days off during the week.  Work crews do not go out on weekends.  If you are booked into the county jail, it costs you $30 to be booked, though that fee is refunded if you are found not guilty on the charge.  A lot of arrests in my town are actually just the issuance of a summons. The county jail has about three times the number of inmates that it was built to accommodate. 

I don’t expect the reduction in FICA taxes from 6.2% of income up to $106,500 to 4.2% will survive into 2013, and we’ve already seen a reduction in the maximum contribution to health savings accounts from $5000 to $2500 to health savings accounts effective in 2013.  I believe that 2010 saw the removal of over-the-counter drugs from the list of items that you could use the account to reimburse your costs.

I liked the “Making Work Pay” tax credit that was available in 2009 and 2010 more than the FICA tax holiday because it was a lot cheaper and the greatest amount of the tax cut went to people who made $60K or less if you were single.  It phased out above that level. You needed to make something like half-time minimum wage to get the maximum amount, which I think was $800, and everyone would get $800 ($1600 for married filing jointly) until they hit the phase-out amount for their filing status.  I had the pleasant surprise of the IRS telling me that I qualified for a couple of hundred dollars for the “Making Work Pay” tax credit with my 2009 return.  I had figured that I wouldn’t be eligible for it, so I didn’t bother to research it.

One thing that people often don’t understand is that tax deductions aren’t worth what they think that they are.  Suppose that I have $10K in itemized deductions. I’d get $5950 for the standard deduction in any case, so I save only about a thousand dollars on my federal taxes compared to not having the deductions.

The coming thing will be to broaden the tax base.  Rates won’t change, but taxes will increase.  

3 thoughts on “All the Hidden Taxes”

  1. Many of the items you cite are state and local taxes and fees. I can’t really get upset about Pigouvian (had to look it up to understand what you meant) taxes, except when politicians crank up the tax (let’s charge, say, $8 on a pack of cigarettes to pay for health care) and then wonder where the revenue went.

    Unemployment insurance was originally paid for by employers. In normal times, it should be self-sustaining. But no reasonable tax on employers will support 99 weeks of benefits for millions. Raising taxes on employers for hiring actual employees will only further encourage workarounds like hiring people as contractors. Taxing unemployment benefits didn’t seem outlandish when people collected for only a few weeks on average: now, of course, it’s different.

    Health savings accounts don’t fit into the government model of health care reform. You’re supposed to carry a standard insurance plan. I’d expect health savings accounts to be further reduced in the future, even though they’re practical, (‘Practical’ never stopped a real bureaucrat.)

    As for tax deductions, if you’re doing reasonably well in New York City, the state and local income taxes alone are already more than the Federal standard deduction. So you get full value for any further deductions. If you’re running a business, expenses are deductible from the first dollar. So, yes, deductions matter.

    Ultimately, all of these discussions about taxes seem to be like rearranging the deck chairs on the Titanic. Rearranging the rates in a revenue-neutral manner, or tweaking rates up or down 10-15%, won’t bring back productive activity or real economic growth.

    The question then becomes: what will?

  2. When I lost my job I got unemployment and figured I wouldn’t take out the taxes because after all I would find a job soon. Of course I didn’t and the following year I owed $800 in taxes, though unemployment paid me a total of $19,000 that year. I couldn’t figure out why I had to pay taxes while several people I knew on welfare didn’t (and they were long term welfare). I was able to arrange a payment plan with the IRS and the woman even said she agreed with me it was wrong to tax me when those on welfare weren’t taxed (and unlike me may not have had a job to begin with).

    Taxes here in Illinois are out of control and we are taxed for everything. Meanwhile the spending is out of control.

  3. I’m interested by the cheapening of goods that has occurred over the last 40 years or so. Everything is disposable, including the workforce. One of my tasks at work is figuring out how to use people from another agency. This task would be easier if I had some guidance from my boss, but he has not made up his mind yet. These people will be located across country, so most of my contact with them will be by teleconference, phone, and e-mail, all of which are mediums where it is very easy to lie.

    I believe that the best use for a contingent workforce is to have clearly defined, somewhat repetitive tasks, but that requires advance planning on my part and the part of management. Unfortunately, these jobs tend not to pay very much because the skill level often is low. I my case, I’d like to use the “help” that we are being offered by another agency to review documents being prepared by the plant’s contractor, which takes up a lot of my time.

    A problem related to wage levels is the perceived value of the work done as well as the frequency that the work will need to be done. I am willing to pay less for work that I can do myself and that is repetitive in nature, even if I don’t have the time to do the work. I was quite willing to pay a mason $50 to drill a hole through the side of my house so that I could install a vent for my clothes dryer, a task that took about half an hour, but I’m not willing to spend the same $50 on having my lawn mowed, a task that takes about the same length of time.

    I would also argue that work that can be put off will be put off, particularly if someone new has to be hired to do the work. In many cases, work that is postponed turns out not to need to be done or what needs to be done changes while the work is delayed. A reason that I got into tax rates and deductions is that at higher tax rates, the after-tax cost of hiring someone is less. Were I to rent my house, I would be a lot more willing to pay somone to do repairs on the house for two reasons: I would be likely to be far enough away that it would be impractical to make the repairs myself, and the cost of the repairs could be deducted from the rent that I collected. I have said before that service economies work only under full employment. Getting something done has to be worth more to us than the money that it costs.

    We can argue about how long unemployment insurance should last. I thought that it started out at about 13 weeks originally and was steadily extended over a period of a couple of years. Was funding for extended unemployment benefits renewed under the continuing resolution? It should have been, but it would be limited to the fiscal year 2012 funding level. Be interested in the farm bill, because that’s where funding for food stamps hides.

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