There’s an old joke about a proposal for a new short-short U. S. Form 1040:
- Write down your total wages, interest, dividends, and any other form of income.
- Send it in!
Silly as that might be IMO any income tax scheme that is much more complicated than that will lend itself towards gaming, manipulation, and other forms of avoidance. Human beings are purposeful actors if not always fully rational or intelligent and they will respond to any strategy that policy-makers can devise with strategies of their own, sometimes startling strategies with unforeseen and disastrous consequences. That any system of taxation that is as convoluted, obtuse, and lengthy as ours is lends itself so handily to gaming, manipulation, and other forms of avoidance that if I didn’t know better I might think that was the intention all along is a topic for another post.
That’s the essential message of Arthur Laffer’s op-ed in the Wall Street Journal:
The composition of wealth also responds to incentives. And it’s also simple enough for most people to understand that if the government taxes people who work and pays people not to work, fewer people will work. Incentives matter.
People can also change the timing of when they earn and receive their income in response to government policies. According to a 2004 U.S. Treasury report, “high income taxpayers accelerated the receipt of wages and year-end bonuses from 1993 to 1992—over $15 billion—in order to avoid the effects of the anticipated increase in the top rate from 31% to 39.6%. At the end of 1993, taxpayers shifted wages and bonuses yet again to avoid the increase in Medicare taxes that went into effect beginning 1994.”
Just remember what happened to auto sales when the cash for clunkers program ended. Or how about new housing sales when the $8,000 tax credit ended? It isn’t rocket surgery, as the Ivy League professor said.
He also predicts unforeseen and potentially disastrous consequences:
Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.
Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe “double dip” recession.
The emphasis is mine. Other than that employment is a lagging indicator does anyone else have a better explanation for the mystifying proposition that by the numbers the economy is in recovery but unemployment is virtually unchanged, retail sales remain sluggish, and new construction is pretty flat?
BTW, the number of bank failures is larger right now than it was last year at this time. See also here. Are increasing bank failures the sign of a recovering economy?