Why Taxes Matter?

Beyond giving everybody a collective headache when April rolls around, taxes have a tremendous influence on the American way of life. From daily decisions like where to shop to life’s major decisions – where to buy property, where to establish a business, when and where to retire, and how to plan for death – taxes are there to push you one way or the other, often practically dictating what you can do.

Progressively higher income tax rates – "taxing the rich" – cause many productive people to work less and retire earlier, draining the economy and destroying jobs. These stair-step tax rates also bump married couples into higher tax brackets, take an unfairly large chunk out of a one-time spike in income, and increase tax evasion. It has been said that democracy is two wolves and a lamb voting on what to have for dinner, and many sages have warned that the majority in a democracy may oppress the minority.

We have seen this scenario play out in tax policy many times. Some of the most foolish taxes have been enacted by the many on the few. This was true of the income tax in 1913, it was true of the Alternative Minimum Tax in 1969, and it will be true of the tax increases that Congress is proposing right now. For a century now, it has always been just a handful of “the rich” or “greedy corporations” that will supposedly bear a new tax, but over time we learn that almost everyone is paying those taxes and that we should have defended the rights of the few more vigorously.

The estate tax is another such tax, and one of the cruelest, forcing people to make colossally complex tax-imposed decisions when facing the death of a loved one. Even the recent effort to give relief has backfired, giving us a complex phase-out and just one year’s repeal in 2010. It’s easy to see the stress this 12-month window puts on families with elderly or unhealthy estate holders. Similar tax provisions abroad caused a wave of falsified death certificates, and they raise truly disturbing ethical dilemmas for families and doctors, simply because of poorly designed federal tax policy.

At every level of government, cigarette smokers have become the unpopular minority that politicians love to tax. New York and New Jersey have taken the lead, enacting taxes of about $3 per pack over the past five years. The resulting boom of smuggling has spawned a wave of violent crime that includes murder and has diverted millions of dollars from honest businesses and government coffers into the pockets of criminals. It is no joking matter that counterfeit cigarette stamps were found in the apartment of the first World Trade Center bombers in 1993.

Even “good taxes” affect behavior, but our current tax system does far more damage than it has to while extracting revenue. “The mode of taxation is, in fact, quite as important as the amount,” American economist Henry George once wrote. “As a small burden badly placed may distress a horse that could carry with ease a much larger one properly adjusted, so a people may be impoverished and their power of producing wealth destroyed by taxation, which, if levied in any other way, could be borne with ease.”

The Tax Foundation knows that every tax matters. This is why we fight for a tax system with moderate rates that apply evenly to everyone, and with enforcement that is comparatively easy. In short, taxes should interfere as little as possible with the decisions of free people in the marketplace.

In the rest of this booklet, we examine taxes from a variety of angles, often highlighting how dramatically different the state-local tax climate is around the country. We hope you find it useful, and as always, please check our website at www.TaxFoundation.org for the latest tax data.

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