We’re all familiar with filling out tax returns – choosing deductions and organizing earned income in a way that won’t (fingers crossed) get us audited. But what do those boxes we check reflect about our societal structure and values? More than you might think.
The tax code affects more than just our pocketbooks. It’s well known that taxes shift incentives; that’s their purpose and why they (usually) work well. But careful consideration should be paid to these incentives, as they affect everyday decisions and what we, as a society, value.
Some tax provisions, like the Earned Income Tax Credit (EITC), are undoubtedly good for society. The EITC is a tax credit for low-income households with children, and the beauty of it is that it actually incentivizes work. Up to a certain income level, it subsidizes working more: the greater income a family receives, the greater their tax credit from the government. While this is only true up to a point, it’s hard to argue with a tax provision for low-income families that helps to decrease unemployment. Likewise, the ability to deduct charitable donations provides added incentive to support our favorite charities.
On the other hand, the United States’ treatment of earned foreign income is depressing – by which I mean depressing our economy. Americans are taxed on their worldwide incomes, regardless of where that income was earned. Most countries exempt foreign income from taxation, but not us. Instead, the government provides tax credits for taxes paid to other governments (because if you earn money in Germany, the German government wants a part of it). This does not completely erase companies' desire to locate outside of the United States; many countries have cheaper labor costs or other incentives to locate there, which offset the tax trouble.
Most troublingly, our taxation of foreign income discourages companies from being American. Since other countries do not treat foreign income the way the U.S. does, corporations and companies that do a lot of business overseas have an incentive to either start out as a non-American company or sell their operations to their overseas affiliate, thus reducing their overall tax burden.
Then there are the areas where the effects of our tax code are more ambiguous. For instance, depending on the dynamics of a relationship (meaning income dynamics, not which side of the bed you prefer), the tax system can either incentivize or discourage marriage. If one partner earns significantly more than the other, then after marriage when both partners split the income, they will likely be in a lower tax bracket. Conversely, if two partners both earn moderate to high incomes, combining their income after marriage can penalize them by pushing them into a higher tax bracket. As noted in William Statsky's Family Law, some couples divorce on December 31 and remarry on January 1 in an effort to dodge the marriage penalty, since your marital status at the turn of the New Year determines how you can file. But don’t get any ideas – most of these couples are stopped from breaking up and getting back together for tax reasons (and it’s usually pretty evident).
It’s clear the tax code affects our lives more than inducing stress during the month of April. It can encourage or discourage labor, marriage, and philanthropy. We make decisions in part because of how the tax structure incentivizes us to act. But is the government promoting the right values?
America needs a tax system that doesn’t cater to special interests or current holders of wealth. Our tax laws and provisions need to reflect our belief in equity, equality, non-discrimination, prosperity for all, and economic growth. Unfair tax practices that push corporations’ business overseas or penalize marriage should be reconsidered or done away with, while efficient taxes that work should be promoted.
Preferential treatment should not be given to capital income over labor income, as is currently the case, and while the current income tax code is outdated and convoluted, any revision needs to bear in mind our commitment to a progressive tax structure. If the income tax were scrapped and a consumption tax implemented instead, assurances would need to be made that this system would be tempered by progressive laws, so the heaviest burden does not fall on low and middle-income earners.
A closer look at our tax system is warranted for anyone who cares about the future of this country. What seem like mundane decisions regarding money in fact have enormous social consequences. Though many find discussing taxes dull, they have important consequences on our societal value system – and our actions.
Lydia Austin is a junior at the University of Michigan Gerald R. Ford School of Public Policy, where she is studying tax policy and international economics.