The Simple Case for Tax Neutrality

May 13, 2014

At their best, taxes are broad-based and neutral, meaning that they do not favor certain kinds of economic activity over others. But in practice, taxes often end up being non-neutral. Well-meaning legislators decide, for example, that essential needs should have lower taxes in order to make them just a little bit less of a burden on the poor.

Adjustments to a small tax don’t really make poverty much less burdensome. Raising incomes through general prosperity or reduced taxes is a much more effective way to fight poverty than arbitrarily adjusting the after-tax prices of some goods by five percent and others by zero percent.

The most tangible result of these well-meaning ideas is this sort of madness, where everyone gets befuddled over the precise definition of a candy bar, and wonders whether serving rolls with napkins makes them taxable or not.

Candies are less healthful than a balanced nutritious diet. Dining at restaurants may be a luxury. But the tax code is not an efficient way to express these sorts of sentiments.

When states give preferential rates of sales tax to certain goods, the most visible result is the legal bonanza that follows from trying to re-categorize goods into the preferred groupings. This is drama we could do without.

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