 Voices For Freedom Read Columns
|
|
|---|---|
|
|
© 2006 Daniel J. McLaughlin Counting Apples and Oranges If I had 10 apples yesterday and have 20 oranges today, am I better of now than I was yesterday? You can’t say unless you know how many oranges I had yesterday and how many apples I have today. That is the problem with using inconsistent bases for measurement over time and between categories. A policy analysis by the Cato Institute looked at the use of Internal Revenue Service data to study income distribution trends over time, data which some highly visible and frequently quoted studies have used to build a case for rising income inequality. Tax law in the United States has been anything but constant. Tax law, rightly or wrongly, has unquestionably been used for social and economic policy initiatives. In the last 30 years, there have been massive changes in the taxable base, tax rates, exclusions from income, tax credits and deductions. From one year to the next, the same basic economic data entered on tax returns will yield significant variations in reported amounts, due only to rule changes. By the same token, two families with identical economic circumstances in the same year can end up with significantly different tax return results, depending on what hoops they jump through and what arcane criteria they meet. One significant example is investment. Both families may invest several thousand dollars, but one may put it in a tax deferred account. The other may, for very valid economic reasons, decide to invest a different way. Because of this one choice, the same economic situations show very different taxable income on the return. In subsequent years, the income from that investment will also be reported differently. We observe that people adjust to incentives. High tax rates are a big motivation to hide income. When rates are lowered, more income is reported because the cost of not reporting increases in relation to the cost of reporting. Business people have a choice in the type of organization they use for their business. Some entities are taxed at the business level and others pass the income through to the personal tax return. The different types present different incentives and handicaps. When personal rates are lowered in relation to corporate rates, there is an incentive to convert to business entities where the income is passed through to the personal return, such as S-corporations. More income get reported personally even though no more income was earned personally. Most transfer payments from government, such as welfare, are not reported at all on the tax return. As transfer payments increase, a larger portion of income of lower income brackets goes unreported. That unreported income doesn’t mean that those people are any worse off or better off. It only makes the data that excludes it invalid.
|
|
Daniel Mclaughlin
|
|