April 15, 2000

Lifting the Lid on Hidden Taxes

There is an old saying about buying luxuries, “If you have to ask the price, you can’t afford it.”

Most people are not in that situation. When they go to buy a house, a car, a computer or a new refrigerator, most people not only have to ask the price but must base a large part of their buying decision on the answer.

But when we ask ourselves whether we pay too much for government, how are we to know? One of the great faults of our tax systems is that so much of the tax burden is hidden from us. The only taxes we can be relatively sure about are our personal federal and state income taxes. Who can say how much federal gasoline excise tax they will pay this year? And at no time does the government send us an annual bill for our total federal, state, and local taxes. Tax Freedom Day attempts to overcome these failings, at least for the nation as a whole.

Tax Freedom Day for 2000 is estimated to be May 3. This is the latest day ever and marks the fifth new high in the last five years. What this clearly tells us is that, by one measure at least, the direct and immediate price of government is rising. What we must each ask ourselves is whether we are getting good value for our money.

When you look at your pay stub, you see the amount of federal income tax withheld and the amount of state income tax withheld (assuming you live in one of the 41 states that tax wages). You also see your share of the payroll tax burden.

Hidden from you, however, is the amount of payroll tax paid on your behalf by your employer. This amount was subtracted from your salary at the outset. When you receive a dividend check or you see the dividend earnings in your mutual fund or pension fund, nowhere listed is the amount of corporate income tax that was subtracted from the value of your investments. When you tally your consumption expenditures at the end of the year, how can you figure the amount of state and local sales taxes paid on your purchases? Do you know how much federal and state beer and wine excise tax you paid, or how much federal telephone excise tax you paid?

Of course, if you worked very hard at it you could estimate each of these tax payments and tally them up to estimate your total tax bill for the year. But you should not have to. Just as you would not buy a car without knowing its price, you would not tolerate not knowing the total price of government, if you had a choice.

The hidden nature of so many of our taxes serves to hide the true cost and size of government. It is not difficult to read cynical and sinister motivations into such a result. But even casting such insinuations aside, clearly the lack of transparency in many elements of the overall tax system and the lack of a tallying of the total tax bill are failings that should be remedied immediately, if not sooner.

With taxes rising at all levels of government, politicians and pundits often ask why efforts at reducing taxes are apparently met with public apathy. Clearly, one reason is that very few people see the full extent of their rising tax burden because much of the increase is hidden. No one protests what they do not know.

Another reason for the lack of protest is that incomes are rising almost as fast as the tax burden. The amount of tax take under most taxes is related in one way or another to the economy’s performance. Payroll taxes rise with wages for most workers. Personal income taxes rise even faster than wages. Consumption rises with incomes and so consumption taxes such as sales and excises rise as well. Even property tax collections tend to rise with the economy. Economic growth may partially mute tax protests today, but this just means the anti-tax reaction may be all the greater when–not if–the economy slows down to a level below what people have come to expect.

One often-neglected reason for the lack of tax protest is that tax cuts have been promised by so many for so long with nothing material coming of it. This is particularly true at the Federal level. Republicans have tried in vain to push through significant tax reductions, each time to be stymied by President Clinton. They finally passed a tax cut bill in 1997 but the bill was too small to do more than temporarily slow the rise in the tax take. It may be that tax cuts will be more popular if they are sensible, fair, well-reasoned, championed by someone who believes in them, and by someone who can carry through and enact them if given the chance. Well-founded hope is a powerful motivator.

As long as so much of the tax burden remains hidden, the American people will continue to be denied a fair presentation of their individual total tax burdens. Tax Freedom Day is a great remedy, filling the gap in a general way. But as long as many of the actual taxes we pay remain hidden, it is impossible to have a truly fair and open debate about how to employ the forecasted federal budget surpluses. What is clear, however, is that without some fundamental shift in tax policy, Tax Freedom Day will continue to climb year after year, representing the ever-larger share of the nation’s resources claimed by government.