Should the Tax Code Promote Moral Values?

January 9, 2006

The practice of implementing social policy through the tax code—as opposed to raising revenue for necessary programs—received top billing in this Sunday’s Washington Post. From columnist George Will:

“The taxing power of government must be used to provide revenues for legitimate government purposes. It must not be used to regulate the economy or bring about social change.” —President Ronald Reagan, State of the Union Message (Feb. 18, 1981)…

…[President Ronald Reagan] disliked government’s using the code to conduct industrial policy, picking commercial winners and losers, which is a recipe for what is called “lemon socialism” — tax subsidies for failing businesses that the market says should fail. Regarding the second part of Reagan’s statement, any tax code is going to shape society. But he opposed manipulating the tax code to stigmatize this or that consumer preference. Which is what the code’s anti-hot-tub provision does.

One wonders: Why did the social improvers who used the code to put the government, in its majesty, on record against hot tubs and tanning facilities not extend their list of disapproved choices? Their list looks morally lax.

Really stern social conservatives probably favor explicitly proscribing government assistance to lots of things, most of them somehow involving sex. Government could preen about being too moral to subsidize, with tax-preferred bonds, economic projects that include bookstores that sell Judy Blume novels, or hotels that offer in-room pornography. And wouldn’t it be fun to find the words “lap dance” in the nation’s tax code?

As strongly as social conservatives deplore commercialized sex, liberals deplore cigarettes, Big Macs, firearms, fur coats, SUVs, pornography not printed on recycled paper, pornographic movies produced by nonunion studios, holiday trees provocatively labeled “Christmas trees” and much more.

But do we really want to march down this road paved with moral pronouncements?

When government uses subsidies to moralize, as with tax preferences for bonds that can be used to finance this but not that, government is speaking. It is expressing opinions about what is and is not wholesome. And once government starts venting such opinions, how does it stop? (Read the full piece here.)

As we’ve written before, probably the single most important source of poorly designed tax policy is the idea that the tax system should serve as a system of penalties and benefits to guide markets toward policymakers’ goals, rather than a system to raise revenue for necessary government programs while interfering with markets as little as possible.

From our own Ten Principles of Sound Tax Policy: “The fundamental purpose of taxes is to raise necessary revenue for programs, not micromanage a complex market economy with subsidies and penalties. The tax system’s central aim should be to minimize distortions in the economy, and to interfere as little as possible with the decisions of free people in the marketplace.”


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