The Unseen Hand of Federal Income Tax Laws
The federal government needs money to operate. However, if the goal is simply to raise money, the current federal income tax system is far from the most efficient way to achieve it. The Internal Revenue Code, Regulations, Revenue Procedures, etc., present a labyrinth of rules, exceptions to the rules, and exceptions to the exceptions. That does not even count the time and money spent in interpreting and complying with those rules. The principal reason for this system is that the federal income tax laws present a way to effectuate public policy, religious beliefs, and economic policy. The laws encourage certain behaviors and as a consequence discourage other behaviors.
Here are just a few of the many examples:
Home Ownership: Why does one get a tax deduction from paying mortgage interest and real estate taxes for the home that they own but no tax benefits if they rent their home (and why did the federal income tax laws passed at the end of 2017 significantly limit those tax benefits)?
Charitable Donations: Why does one get a tax deduction for contributing to their church, their synagogue, their mosque, the Salvation Army, or other “qualified” charitable organizations but get no tax benefit from providing food or clothing directly to people who are truly in need?
Electric Cars: Why does one get a tax benefit from buying a new electric car for their personal use but get no tax benefit for buying a gas-powered car or a used electric car?
Children: Why does one get tax deductions and credits if they have children and even more tax benefits if they adopt a child?
Capital Gains: Why does one get a more favorable tax rate from a gain on the sale of a stock than they do for the wages that they earn?
The Economic Incentive
The tax benefits result in an economic benefit. That is, the less tax you pay, the more money you have left over.
All things being equal,
Home Ownership: If one gets a tax/economic benefit for owning a home, more people will choose to own vs. rent than would be the case if there was no tax benefit associated with paying real estate taxes and mortgage interest. (Likewise, if there are limits placed upon how much real estate taxes and mortgage interest one can deduct, fewer people will choose to own homes with higher real estate taxes or for which they have a larger mortgage.)
Charitable Donations: If one gets a tax/economic benefit for donating to a “qualified” charity, more people will choose to donate to “qualified” charities than would do so if there was no tax benefit associated with that type of donation.
Electric Cars: If one gets a tax/economic benefit for buying a new electric car, more people will buy a new electric car than would do so if there was no tax benefit associated with that buying a new electric car.
Children: If one gets a tax/economic benefit for having or adopting children, more people will have or adopt children.
Capital Gains: If one gets more of a tax/economic benefit for a gain on the sale of a stock than they do for the wages that they earn, they are more likely to invest in securities that they believe will appreciate.
The Bottom Line
From a more basic human level,
Home Ownership: If one pays less tax and thus has more money left over, more people will be able to afford owning a home (or a more expensive home).
Charitable Donations: If one pays less tax and thus has more money left over, more people will feel able to donate to “qualified” charities.
Electric Cars: If one pays less tax and thus has more money left over, more people will buy new electric cars.
Children: If one pays less tax and thus has more money left over, more people will be able to afford having or adopting children.
Capital Gains: If one pays less tax and thus has more money left over, more people will invest more money.
Reasons for the Law
Here are some of the many possible reasons behind the laws and incentives:
Home Ownership: People who own a home will not want to push for a communist form of government that will take their home from them.
Charitable Donations: While there are some separations of “church and state,” the government supports certain organized religions in many ways. Separately, many charities perform social benefits to people, which thereby relieves a burden on the government for which it would otherwise have to pay.
Electric Cars: Electric cars are more environmentally friendly and reduce our dependence on oil (and thus also reduce some dependence on foreign producers of oil).
Children: We need children to get into the pipeline to continue to grow our economy, perform certain jobs, and fulfil certain religious mandates (e.g., “be fruitful and multiply”).
Capital Gains: The more that is invested in businesses, the more likely the economy will grow, people will have good jobs, research will be done, etc.
There is no federal income tax law that is inherently good or bad. One would hope that most of the incentives are passed into law for a constructive and positive reason. In some cases, a tax benefit is generally good for everyone but in other cases provides a benefit to one group resulting in more of a tax burden on others.
Of course, many people will want to own homes, donate to charities, buy electric cars, have or adopt children, and invest in appreciating securities whether or not there was some tax/economic incentive to do so. However, all things being equal . . .
For more information on Tax Law, see State and Local Taxation — 2017 Edition. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.