The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It

Overview

Ever since Colonial times, Americans have been bedeviled by high taxes that seem to return little of material value to citizens. Taking a page from Thomas Paine's "Greedy Hand" manifesto, Amity Shlaes has written a provocative and fascinating book exposing the inequities of our present tax system, and offers concrete, coherent solutions to simplify our lives. Today, taxes make up more than a third of our economy, the highest level in peacetime history. We truly live in the land Paine foresaw when he warned of ...

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Overview

Ever since Colonial times, Americans have been bedeviled by high taxes that seem to return little of material value to citizens. Taking a page from Thomas Paine's "Greedy Hand" manifesto, Amity Shlaes has written a provocative and fascinating book exposing the inequities of our present tax system, and offers concrete, coherent solutions to simplify our lives. Today, taxes make up more than a third of our economy, the highest level in peacetime history. We truly live in the land Paine foresaw when he warned of government "thrusting itself into every corner and crevice of industry." This book is a cultural examination of the way taxes influence our behavior, and how they force us into an arbitrary system that punishes families and individual enterprise. Shlaes shows how so-called tax breaks do little to help families and how married women are unfairly taxed more. She uncovers the problems that engage and enrage us, proving that Social Security issues and school inadequacies are at heart tax problems. And she charts a course out of the madness of tax oppression, offering a number of solutions that will give each of us a fairer, simpler system. With compassion for Americans and their dreams, Shlaes makes the best case yet for rethinking our tax code.

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Editorial Reviews

From the Publisher
“Ms. Shlaes has provided a thoughtful overview of the system's many contradictions and inequities. She defines the debate over what we ought to do and gets you thinking constructively about the problems she identifies."-The New York Times
“In far less time than the IRS says it takes to file the short form, you can read The Greedy Hand and finally understand just why taxes drive you crazy, or should. . . . You won't find a better tour of our country's arcane tax system."-USA Today
“Succeeds brilliantly at showing how our present approach just doesn't cut it."-San Francisco Chronicle
“Succinctly describes a bad situation. Let's hope our politicians read it."-The Financial Times
From the Publisher
“Ms. Shlaes has provided a thoughtful overview of the system's many contradictions and inequities. She defines the debate over what we ought to do and gets you thinking constructively about the problems she identifies."-The New York Times
“In far less time than the IRS says it takes to file the short form, you can read The Greedy Hand and finally understand just why taxes drive you crazy, or should. . . . You won't find a better tour of our country's arcane tax system."-USA Today
“Succeeds brilliantly at showing how our present approach just doesn't cut it."-San Francisco Chronicle
“Succinctly describes a bad situation. Let's hope our politicians read it."-The Financial Times
New York Times Book Review
Ms. Shlaes has provided a thoughtful overview of the system's many contradictions and inequities. She defines the debate over what we ought to do and gets you thinking constructively about the problems she identifies.
Christopher Lehmann-Haupt
...Ms Schlaes...is talking about estate taxes, real-estate taxes and social-security taxes, and...that the present American tax system is greedy, intrusive, unpredictable and meddling....Even if you don't always agree with her conclusions, she defines the debate over what we ought to do and gets you thinking constructively about the problems... —The New York Times
USA Today
In far less time than the IRS says it takes to file the short form, you can read The Greedy Hand and finally understand just why taxes drive you crazy, or should...You won't find a better tour of our country's arcane tax system.
San Francisco Chronicle
Succeeds brilliantly at showing how our present approach just doesn't cut it.
Publishers Weekly - Publisher's Weekly
In a furious and furiously argued look at the effects of taxation on American life, Shlaes (Germany:The Empire Within), a Wall Street Journal editorial writer on tax policy, argues that a progressive tax structure merely acts as a brake on those who are moving up the ladder of success. She notes that American taxes--overt, hidden, intrusive, ubiquitous--once touched only a 12th of the average person's annual income but now bite into close to 40%. In place of today's byzantine tax code, Shlaes suggests either a flat tax or a simplified tax structure with lower rates and no home mortgage deduction (the latter change, she surmises, would very likely bring down interest rates for mortgages). She also calls for privatizing Social Security and favors abolition of the estate tax (arguing that the latter is a major killer of family businesses and that the rich find loopholes to avoid paying it anyway). Shlaes has nothing good to say about Medicare and, indeed, relates some awful horror stories about its shortcomings. In a chapter on school funding, she contends that the move by states to centralize school financing (as opposed to the old system whereby local property taxes funded local schools) has not brought equitable spending or improved academic performance. Whether or not readers agree with Shlaes's reform proposals, her informal, colorful report elucidates the often subtle ways taxes affect citizens' lives, from child rearing to the decision to marry, women's careers, the quality of day care, consumers' shopping habits and retirement.
Library Journal
Shlaes, an editorialist on tax policy for the Wall Street Journal, has produced a short polemic against taxes. She devotes her chapters to 10 types of taxation, including job, marriage, house, baby, and death taxes, and how they affect our lives. As a fiscal (though not social) conservative, she decries taxes as taking an ever-increasing percentage of our income, as an agent of social engineering (or wealth transfer), and as unpredictable--and she's surprised that there has not been a general tax revolt owing to these problems. Shlaes saves her short list of recommendations for her summary chapter, though her case against progressive tax rates is unconvincing. Like most good Journal reporting, this book is nonscholarly and understandable to the general reader, and Shlaes has liberally interspersed interesting examples and insights throughout. -- Patrick J. Brunet, Western Wisconsin Technical College Library, La Crosse
Christopher Lehmann-Haupt
...Ms Schlaes...is talking about estate taxes, real-estate taxes and social-security taxes, and...that the present American tax system is greedy, intrusive, unpredictable and meddling....Even if you don't always agree with her conclusions, she defines the debate over what we ought to do and gets you thinking constructively about the problems... -- The New York Times
Peter G. Gosselin
...[M]ost usefully read not...as a measure of how far [the antitax position] has fallen from its heyday...a fall that could spell trouble for Republicans trying to regroup....[M]any Americans...have moved on to other issues. The question is why haven't Shlaes and, perhaps more important, the Republican party. -- The New York Times Book Review
Kirkus Reviews
Taxation is the function of government that everyone loves to hate. And here The Wall Street Journal's editorialist on tax matters adds to the hallowed and estimable tradition of grousing about it. Shlaes (Germany: The Empire Within) doesn't assail the Internal Revenue Service. She realizes instead that the IRS only does its assigned job. Rather, it's the legislators and lobbyists who create the tax monster that scares us all. The author despairs that the power to tax is bandied about in the name of sporadic public policy. Her text demonstrates the tangled result by revisiting the histories of representative tax law changes. Wage withholding, instituted during WWII, was just an insidious trap, she says. She rightly describes Social Security as a Ponzi scheme. Shlaes also thinks the estate tax stinks. The well-publicized marriage penalty is no laughing matter, either, she contends. Fueled by outrage, her exegesis of some parts of the Internal Revenue Code tends to become a tad muddled. (For example, though legally separated taxpayers may, under certain circumstances, file as separate taxpayers, there is simply no tax law concept of "married, but unmarried for tax purposes.") She decries change for rules she approves of (like the treatment of sales of residences). Then she calls for more change. Not confining herself to federal tax law, she complains about local school taxes and activist courts. And indeed, Shlaes offers a clutch of cures: Simplify and reduce taxes, forget about progressive taxation, and privatize Social Security. Such targeted fixes may have a nice ring, but they surely would bring unintended and problematic results if actually enacted. Cleverlycrafted, exasperated invective on a popular theme.
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Product Details

  • ISBN-13: 9780156011525
  • Publisher: Houghton Mifflin Harcourt
  • Publication date: 3/15/2000
  • Edition description: 1 HARVEST
  • Pages: 288
  • Product dimensions: 5.31 (w) x 8.00 (h) x 0.69 (d)

Meet the Author

Amity Shlaes is the youngest member of the Wall Street Journal's editorial board, where she is an editorialist on tax policy. Her writing has also been published in  Commentary and The New Yorker.  She is the author of Germany: The Empire Within.  A magna cum laude graduate of Yale University, she lives in New York City with her husband, Seth Lipsky, and their three children.
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Read an Excerpt

Chapter One


THE GREEDY HAND


The father of the modern American state was a pipe-puffing executive at R. H. Macy & Co. named Beardsley Ruml. Ruml, the department store's treasurer, also served as chairman of the board of directors of the Federal Reserve Bank of New York and advisor to President Franklin Roosevelt during World War II. In those years Washington was busy marshaling the forces of the American economy to halt Japan and Germany. In 1942, not long after Pearl Harbor, lawmakers raised income taxes radically, with rates that aimed to capture twice as much revenue as in the previous year. They also imposed the income tax on tens of millions of Americans who had never been acquainted with the levy before. The change was so dramatic that the chroniclers of that period have coined a phrase to describe it. They say that the "class tax" became a "mass tax."

    The new rates were law. But Americans were ill-prepared to face a new and giant tax bill. A Gallup poll from the period showed that only some 5 million of the 34 million people who were subject to the tax for the first time were saving to make their payment. In those days, March 15, not April 15, was the nation's annual tax deadline.

    The Treasury nervously launched a huge public relations campaign to remind Americans of their new duties. A Treasury Department poster exhorted citizens: "You are one of 50,000,000 Americans who must fill out an income tax form by March 15. DO IT NOW!" For wartime theatergoers, Disney had prepared an animated short film featuring citizen Donald Duck laboring over his tax return beside a bottle of aspirin. Donald claimed exemptions and dependent credits for Huey, Dewey, and Louie.

    As March 15, 1943 neared, though, it became clear that many citizens still were not filing returns. Henry Morgenthau, the Treasury secretary, confronted colleagues about the nightmarish prospect of mass tax evasion: "Suppose we have to go out and try to arrest five million people?"


The Macy's Model


Enter Ruml, man of ideas. At Macy's, he had observed that customers didn't like big bills. They preferred making payments bit by bit, in the installment plan, even if they had to pay for the pleasure with interest. So Ruml devised a plan, which he unfolded to his colleagues at the Federal Reserve and to anyone in Washington who would listen. The government would get business to do its work, collecting taxes for it. Employers would retain a percentage of taxes from workers every week — say, 20 percent — and forward it directly to Washington's war chest. This would hide the size of the new taxes from the worker. No longer would the worker ever have to look his tax bill square in the eye. Workers need never even see the money they were forgoing. Withholding as we know it today was born.

    This was more than change, it was transformation. Government would put its hand into the taxpayer's pocket and grab its share of tax — without asking.

    Ruml hadn't invented withholding. His genius was to make its introduction palatable by adding a powerful sweetener: the federal government would offer a tax amnesty for the previous year, allowing confused and indebted citizens to start on new footing. It was the most ambitious bait-and-switch plan in America's history.

    Ruml advertised his project as a humane effort to smooth life in the disruption of the war. He noted it was a way to help taxpayers out of the habit of carrying income tax debt, debt that he characterized as "a pernicious fungus permeating the structure of things." The move was also patriotic. At Macy's, executives had found that a "young man in the comptroller's office who was making $75 or $100 [a week was] called into the navy at a salary of $2,600 and we had to get together and take care of his income tax for him." The young man, Ruml saw, would face a tax bill for a higher income at a time when he was earning less money in the service of his country. This Ruml deemed "an impossible situation."

    Ruml had several reasons for wagering that his project would work. One was that Americans, smarting from the Japanese assault, were now willing to sacrifice more than at any other point in memory. The second was that the federal government would be able to administer withholding — six successful years of Social Security showed that the government, for the first time ever, was able to handle such a mass program of revenue collection. The third was packaging. He called his program not "collection at source" or "withholding," two technical terms for what he was doing. Instead he chose a zippier name: "pay as you go." And most important of all, there was the lure of the tax amnesty.

    The policy thinkers of the day embraced the Ruml arrangement. This was an era in which John Maynard Keynes dominated the world of economics. The Keynesians placed enormous faith in government. The one thing they liked about the war was that it demonstrated to the world all the miracles that Big Government could work. The Ruml plan would give them the wherewithal to have their projects even, they sensed, after the war ended. Keynesianism also said high taxes were crucial to controlling inflation. The Keynesians saw withholding as the right tool for getting those necessary high taxes.

    Conservatives played their part in the drama. Among withholding's backers was the man who was later to become the world's leading free-market economist, Milton Friedman. Decades after the war, Friedman called for the abolition of the withholding system. In his memoirs he wrote that "we concentrated single-mindedly on promoting the war effort. We gave next to no consideration to any longer-run consequences. It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too instrusive, too destructive of freedom. Yet, that was precisely what I was doing." With an almost audible sigh, Friedman added: "There is an important lesson here. It is far easier to introduce a government program than to get rid of it."

    Such questions, though, had no place in the mind of a nation under attack. At the moment what seemed most important was that voters accepted the Ruml plan. Randolph Paul, a Treasury Department official and Ruml critic, wrote resignedly that "his plan had political appeal. Though he conceived the plan as getting people out of debt to the government, the public thought that Ruml had found a very white rabbit"—a magic trick—"which would somehow lighten their tax load."


The Amnesty Ruse


Congress got to work. Ruml followers joined hands. The Rumlites, as they were known, succeeded in passing a version of the Ruml plan. "The Current Tax Payment Act of 1943" included the only full-fledged federal amnesty on personal income taxes to take place this century, granting taxpayers forgiveness of 75 percent of the lower of a taxpayer's 1942 or 1943 liabilities. The ruse was on.

    "Pay as you go" became the rule nationwide in July of 1943, or in the same weeks as Allied Forces landed on Sicily. Workers suddenly began receiving 20 percent less in their paychecks. "This amount is not a new tax," assured the Treasury in a breathless letter distributed to forestall panic. "[It is] in payment of your regular Federal Income and Victory Tax." The Treasury chose the same moment to inform Americans of a new piece of paper that would now enter their lives, the ancestor of today's W-2's: "After the close of the year your employer will give you a receipt showing exactly how much of your money has gone to the United States Treasury toward the payment of your taxes. Keep that receipt. It is your evidence of taxes paid."

    At the time the whole arrangement was presented as just another contingency step taken in the extraordinary fight against the Nazis. But even in the mêlée of those war years it became clear that a new page was being written in the annals of public finance. America was a nation born of a tax revolt. For the first century of the country's history, its people and courts had rejected the income tax altogether. Yet here, after withholding, the planners' hopes were being borne out. It seemed that the average citizen really was willing to accept high taxes, as long as they were buried in a program like "pay as you go."

    Now the big thinkers began to dream. Withholding would indeed do more than fund the occupation of Germany or victory over Japan. As 1943 and 1944 passed, with taxpayers obediently accepting their smaller checks, they got to work on the blueprints of their postwar projects. These were years in which everyone feared a return of the Depression. With the Ruml plan in service, they believed, they could spend their way out of future economic trouble. Emboldened by his own successes, Ruml himself compiled lists of new uses for federal taxes, among them to control inflation and "to express public policy in the distribution of wealth and income, as in the case of the progressive income and estate taxes."

    Not many said it too loudly, but everyone came to recognize it. "Pay as you go" was the fiscal equivalent of the war's wonder weapons. It was a wonder weapon that would be deployed in peacetime, and that would change the way Americans felt about their government forever.


The Grandest Sticker Shock


Most Americans come face-to-face with Beardsley Ruml and his pipe at the moment that they get their first paycheck. First they look at the bottom number, rather less than they thought it was going to be. Then, and only then, do they start to puzzle over the items. "Gross," "income tax," "disability," "state," "F.I.C.A." Then, again, they look to the disappointing bit Mr. Ruml has left them. The name they give that amount reflects the fresh cynicism of people beginning to understand the way life works: "take-home."

    That first-paycheck moment — call it the grandest of all life's sticker shocks — is something many Americans recall well. In fact most of us remember the sight of that check in our hands in much the same way we remember the dashboard of our first car. So this is adulthood, we said to ourselves. We like the car memory. We don't like the withholding memory, so we try to ignore it. Why remind ourselves of something that we cannot change? It is hard to imagine saving the amount we pay in tax each year, and then sending the money in one giant check come April 15. Confronted with the idea of sending $10,000 or $20,000 to the government all at once, some of us would surely revolt. But taxpayers no longer have a chance to do even that. The Internal Revenue Service calls our tax system "voluntary," but the IRS doesn't ask. It just takes.

    This book seeks to capture the American experience with our tax structure, the strange and powerful machine Beardsley Ruml set in motion. Withholding does not describe the whole of our tax lives. Indeed, many of our taxes — sales taxes, property taxes — are not even collected through withholding. But in the half century since Ruml acted, withholding has become a valuable symbol of our tax experience, an experience we have come to question. Today, voters consistently name the income tax when asked what things they would like to see politicians change. They also name Social Security, another form of tax. And, very often, they name schools and property taxes, yet a third problem with an enormous tax component. Indeed, a Washington Post/ABC poll published in the summer of 1998 showed that education, Social Security, and overhauling the tax system — all three items matters of tax — were more on voters' minds than anything else.

    When we stop to consider, this is not surprising. Today, taxes touch, edit, even limit our lives at every stage. Taxes tie down young workers from their very first day on the job. The rate of payroll taxes confronting an eighteen-year-old starting out at McDonald's today — 7.65 percent — is higher than the income tax rate Congress reserved for millionaires — 7 percent — in 1913, the year the income tax was born. Sales taxes punish our purchases. Property taxes rise, yet we find ourselves more and more dissatisfied with our schools. Income taxes pull down families: married couples pay more than two single earners with the same combined income. Married women who want to work pay a special surcharge to Uncle Sam for doing so, the so-called marriage penalty. Taxes punish midcareer Americans at the moment they are straining hardest to achieve — indeed, at the moment of their first successes. Professionals find themselves moving from cities — to avoid New York's unincorporated business tax, for example — or becoming avid conservationists to obtain one of the greatest modern tax bonuses, a formerly obscure advantage known as the conservation easement. Complicated tax rules often cast senior citizens in their sixties into a sort of purgatory, a purgatory where they have to be careful not to "earn too much." Sometimes, taxes even turn senior citizens into refugees — we euphemistically call them "snow birds" — who depart their homes rather than confront tax bills.

    A world ordinarily as away from tax as one can get — the world of sports — saw an example of this in the summer of 1998. In the beginning of September, it became clear that Mark McGwire of the St. Louis Cardinals stood a good chance of breaking Roger Maris's season record of 61 home runs. When McGwire tied that record, speculators began calculating the worth of the historic sixty-second ball, which some sports experts put at $1 million. Before the game, the consensus in this, the best-hearted of sports, became clear: any fan who caught the million-dollar prize ought to nonetheless give it to McGwire, the man who earned it.

    In stepped the tax experts. It emerged that receiving, and then giving, such a ball might mean that the bleacher fan would be subject to a $145,000 odd bill for "gift taxes." In the mini-firestorm of outrage that ensued, Congress moved to pass a special dispensation for the lucky fielder, and the IRS backed off. It issued a statement assuring that it would not dun any fan who instantly gave the ball back to McGwire. And indeed, the stadium staffer who retrieved the ball instantly returned it, telling reporters: "I just don't want to be taxed." A bright moment of summer serendipity dimmed as fans across the nation pondered this heretofore unimaginable thing: a tax on joy.

    People are marvelously adaptable. Forced as we are to live in a world of tax, we have found ways to ensure that not all our tax experiences are unpleasant. Under the conservation easement arrangement, for example, wealthy property owners trade some of the rights to their property — principally the right to build new structures on that space — for a good-sized tax break. In this exchange, they are winners, for most of them never intended to develop their tranquil summer refuges anyway. Indeed, the fact that their property remains pristine actually adds to its value on the real estate market. At the middle of the income scale, taxpayers take a kind of vengeful joy in the credits that the tax man makes available to them. In 1998, 48 million taxpayers leveled their income tax bills — but not their social security bill — all the way down to zero by using such breaks.

    Still, there is a sense this is a loser's game. It is not that Americans don't want to pay taxes; they do. It is that they feel that taxes have moved out of proportion to what is fair, or appropriate. Even if we approve of certain government-spending projects, we sense that the whole affair has moved out of control. We all say we want a smaller government, yet each year Americans are compelled to hand over to our treasury $1.48 trillion, or a sum of money equal to the size of the economy of Great Britain. Nobody who is working today signed on for this.

    Long ago, the philosophers who inspired our country's founding and early years anticipated this dilemma. They laid out powerful images that depict the forces affecting our pocketbooks to this day. Adam Smith described the "invisible hand," the hand of free commerce that brings magic order and harmony to our lives. Thomas Paine wrote of another hand, all too visible and intrusive: "the greedy hand of government, thrusting itself into every corner and crevice of industry." Today the invisible hand is a very busy one. Markets are wider and freer than ever, and we profit from that by living better than before. But the "greedy hand of government" is also at work. Indeed, in relative terms, the greedy hand has grown faster than the invisible hand. In the late 1990s, economists noted with astonishment that federal taxes made up one-fifth of the economy, a rate higher than at any time in American history outside of war. We can not assign the blame for changes of such magnitude to Beardsley Ruml, who was, after all, not much more than a New Deal package man. The real force here is not even withholding, whatever its power. Behind Ruml's withholding lurks Paine's greedy hand.

    The modern thinker who dedicated himself to the study of the greedy hand's expansion is the Nobel Prize winner James Buchanan, the father of a school of economics called public choice theory. Public choice theory says that government is like any other industry: it wants to survive, and it wants to compete. Like a business in the market, it will work hard to damage challengers, even other parts of government. Government offices compete with private businesses. The IRS competes with individuals for their livelihood. Government grows reflexively, often in spite of the best efforts of reform-minded government officials. When it happens upon a tool like withholding, and marshals that tool in its service, it begins to grow very fast. The shift frightens people — it is what leads them to refer to Government, with a capital G. It is what transforms a reasonable public sector in a reasonable society — ours — into Paine's flamboyant greedy hand.

    There are several things Americans know about the way the greedy hand works today. One is that the greedy hand is, indeed, greedy. Every year the Tax Foundation, a Washington-based think tank, does math that confirms the impression of a growing burden. The Foundation starts by calculating the "Tax Freedom Day" for that year. It adds up the total tax burden on Americans, federal, state, and local, and then tabulates the number of days that the average American must work to pay all those taxes. In 1902, the average American had to work to January 31 before his annual tax obligation, something like one-twelfth of his income, was met. By 1940, the date was March 8. In 1974, or a year when the nation was feeling the full pain of bracket creep, Tax Freedom Day was May 2. In 1997, it was May 9. In 1998, it was May 10, the latest day in history. Americans must work more than a third of their year before Paine's apparition stops taking and they begin to keep what they earn. The Tax Foundation found another troubling fact: each year Tax Freedom Day is set to move up the calendar — as long as we keep the current system.

    Then there is another problem: the degree to which taxes intrude on the average American family. The Tax Foundation's charts show that in 1957, a family with two earners paid something like a quarter of their budget in taxes — well under the amount the family spent for food and housing. In 1998, that same two-earner family gave back nearly 40 percent to local, state, and federal authorities in taxes. That means the family pays more in taxes than it spends for food, clothing, and housing combined.

    Often, we are not aware of the full extent of the tax take. The average cost of a restaurant meal today is $40. Eleven of those dollars go directly to taxes. Twenty-nine dollars go to making the meal and serving it. Americans for Tax Reform, a conservative Washington tax group, compiled a list of all the taxes that make up that $11. That list was longer than many a menu. There were federal income taxes, federal payroll taxes, state income taxes, state sales taxes, and state use taxes. There were unemployment insurance taxes, workers' comp taxes, state property taxes, business license taxes, local property and income taxes, telephone taxes, utility taxes, and liquor taxes.

    Indeed, the burden is even bigger than the better-known numbers suggest. In 1997, Americans spent just a tad over 20 percent of the gross domestic product on federal taxes, indeed the highest level since the United States was striking back at the Japanese and Hitler. Widen that to include all the other levies we pay and the figure rises to 30 percent of the gross domestic product, another peacetime record.

     So the greedy hand takes more than before. But, as important, it also takes in a different way than it used to. The American tax system has changed, changed while most Americans were not looking. In the 1960s, for example, the tax treatment of business was a principal preoccupation. So too were the high marginal tax rates on individuals and the outlandish tax deductions available to them. The word loophole was associated with top earners. As recently as 1990, one economics textbook instructed students that complications like tax loopholes were largely upper-crust affairs: "because of our progressive tax system, many tax loopholes are beneficial only to taxpayers in higher income tax brackets."

    Taxes still slow businesses' growth today. Shareholders, a group that now includes many tens of millions of citizens, lose out because of double and triple taxation on their stock. Income taxes still punish the very wealthy, although not at quite the same rates as before. Indexing the bracket in our tax schedule to inflation has stopped many of the hidden tax increases that were the rule in the 1970s and 1980s. The 1986 tax reform pruned back many of the older, more picturesque deductions — tales of incorporated yachts and three-martini lunches come to mind.

    These days, though, the middle class is the one mired in tax troubles. Social Security, once a marginal levy, is now a giant one. If you count our employers' share of our Social Security tax, as most economists do, the burden looks particularly heavy: Social Security is the greatest tax for a full 70 percent of Americans. If private school enrollment is any measure, our schools, one of the more important tax purchases, disappoint us more now than ever before. Income taxes also punish us in a new way. We no longer have the inflationary bracket creep that punished us in the 1970s. But we have what economists call "real bracket creep" — as we earn more, we move into tax brackets we never expected would apply to us. Even the lofty loophole has become a middle-class project. One of the Book-of-the-Month Club choices in 1998 was even titled 101 Tax Loopholes for the Middle Class. The jacket copy stressed carefully that the book was "geared specifically to MIDDLE INCOME taxpayers." And these loopholes often prove to be snares, particularly for the harder workers among us.

    The third thing we dislike about taxes is that they are unpredictable. Today our tax code is so large that no one, certainly not the civil servants at the IRS, can consistently apply it. The internal revenue code has a total of 1.3 million words, or over twice the length of War and Peace. The tax-code regulations that are the sibling to the code number 5.75 million words, or just about eight times as many as the Bible. Citizens doubt, legitimately, that such a voluminous body of law can be consistently applied.

    For the wealthiest of Americans, people long accustomed to complicated rules, this costly and time-consuming paperwork may not matter so much. They have their tax attorneys and their accountants, with whom they may work in sometimes cynical symbiosis: "It's a game," as one attorney in the Paramount film of John Grisham's The Firm told another. "We teach the rich how to play it so they can stay rich — and the IRS keeps changing the rules so we can keep getting rich teaching them." Even the wealthiest have lost track of why the taxes are being exacted.

    For most citizens, though, the complexity is unnerving. Americans make their best effort to pay their tax bills. For many years, they were so good about it that American public finance was the envy of European and Asian tax collectors. But the system has become so complex that it is hard to tell if we are doing the right thing, no matter how industriously we try. Will Rogers, a humorist who regaled the nation earlier in the century, put it this way: when we Americans fill out a tax return, we don't know whether we are a crook or a martyr.

    This uncertainty damages our lives in a subtle way. It makes honest people live in fear that the government may one day tell them they are something that they never intended to be — scofflaws, cheats. This is why so many Americans follow hearings featuring IRS horror stories with fascination. It is why ordinarily sedate citizens are moved to empathize with tax protestors or even outright tax-evading kooks.

    In the 1960s, IRS audit rates were relatively high. In 1968, for example, the IRS announced that one in twenty-five taxpayers could expect to be questioned on exemptions they had claimed, their charitable deductions or medical costs. Today the IRS conducts audits at half that rate. Yet more Americans, particularly lower earners, know they have legitimate reason to fear they might be audited. Their fear magnifies the might of the IRS.

    Indeed, there is concrete evidence of how Americans fear the tax man. In 1997, individuals across the country paid about $100 billion more in taxes than they needed to. That meant they forsook several billion in interest their money could have earned had they kept it — the price of security. Self-employed citizens who are not subject to withholding and must calculate their own tax bills quarterly are particularly frightened. Indeed many complain that they would rather have the security of withholding than the fear of being audited that comes with their freedom. The game has turned so treacherous that the withholding cage has come to feel like a safe place. At some firms, employees even ask management to begin withholding. In other words, in America today, people beg to be taxed.

    This is a modern version of a phenomenon Adam Smith described precisely in his Wealth of Nations. When there are no fixed rules, the philosopher wrote, we are all "more or less in the power of the tax gatherer." In a society with a tax code like ours, a code even accountants cannot decipher, people are no longer sure that they are safe on theirs, the legal side of the society's great divide. The moment you sense that you yourself may one day have to do battle with authorities is the moment you find yourself beginning to empathize with the fugitive.

    Still, there is something else troubling Americans. The issue is not merely the scale of the taxes, however extraordinary that scale. It is not merely the changes, however unintended their result. It is not merely the unpredictability, although that unpredictability is infuriating. There is a specific cause for this new detachment and anger. It is that, in modern America, the greedy hand isn't merely greedy, or different than before, or unpredictable. It is also meddling, bossy, intrusive. Today our tax code doesn't stop at merely taking its share. It also wants to tell people how to live.

    This last change has been, in large part, intentional. In this half-century, the era of our modern tax life, lawmakers have not contented themselves with writing tax laws with the aim of capturing revenue. They have indeed absorbed New Deal-era lessons and used Ruml's tool to try to change behavior and lives. And in recent decades, as welfare has fallen from favor, their tax-meddling habit has become stronger. Republicans and and Democrats agreed that social engineering through entitlements wasn't yielding the results they sought. So they began pouring all their energy, energy that used to go into constructing welfare projects, into the tax code. The fussier and more specific the project, the more attractive it seems. The tobacco tax legislation of 1998, legislation that did not, in the end, become law, is a classic example. Lawmakers sought to use taxes to punish one group — smokers — so they could reward another group: married couples. The Earned Income Credit is another example. This tiny program, a tax rebate designed to hearten low-income workers and keep them from dropping out of the workforce, has morphed into a $30 billion project that shapes millions of Americans' lives.

    Such projects are well intended. But it is important to stop to consider how the taxpayer views them. In Ruml's days, the exigencies of the war made us want to give to the government. Even after the war — in the Eisenhower administration, say — well over half of tax revenues were going to outlays the average citizens understood and approved of: building a military capable of facing down the Russians, laying the interstate highway system. The national tax commitment stretched into the 1960s, when voters felt that their tax money might work to justify great social wrongs — urban poverty, or racism.

    A 1953 episode of Jackie Gleason's The Honeymooners dramatizes the commitment to taxes Americans once felt. Ralph Kramden, the down-at-the-heels bus driver, is at first angry at discovering he owes the government $15 in extra taxes — he had saved that money toward a new bowling ball. But when he considers the matter, he decides he is glad to pay the tax. "We're living in a great country," he tells Alice, in a display of lachrymose remorse one is hard put to imagine finding in our modern post-Seinfeld sitcoms. "I didn't mean that before what I said about the income tax. Boy, we should give everything to the government. Especially this government."

    Today though, very few Americans feel the sort of connection that Ralph spoke of. And little wonder — the cold war has ended, and they have become skeptical of the efficiency of Great Society outlays. Today, more than half of the budget goes to social transfers mandated by expensive programs whose value many Americans question. Working citizens sense that someone is getting something, but that someone is often not they.

    The avid tax haters who pop up occasionally in the news are the expression of this national unease. Their froth-mouthed manifestos strike us as extreme — how many of us truly want to "kill the IRS"? — but they reflect something that all Americans feel to some degree. Even the most moderate of us often feel a tick of sympathy when we hear the shouts of the tax haters. We think of our forefathers who felt compelled to rebel against the Crown for "imposing Taxes on us without our consent." We know we live in a democracy, and so must have chosen this arrangement. Yet nowadays we too find ourselves feeling that taxes are imposed on us "without our consent."

    Washington doesn't necessarily recognize the totality of this tax frustration. The purview of the House Ways and Means Committee is limited to federal taxes, and so the committee writes tax law as if the federal income tax were the only tax in the country. The commissions that monitor Social Security concern themselves only with the solvency of Social Security, and so ignore the consequences of raising payroll taxes, or taxing pensions, at a time when income taxes are already high. Old programs with outdated aims stay in place. Newer ones, added piecemeal, often conflict with the old.

    "Rube Goldberg machine," "unstoppable contraption" — none of the stock phrases adequately captures the complication that is our tax structure. As William E. Simon, a former Treasury secretary, once said, "The nation should have a tax system which looks like someone designed it on purpose."

    A good share of the blame for the current situation lies with the nation's powerful lobbies, which often operate in a predatory mode that seems to confirm their reptilian reputation. Each of many dozens of tax loopholes in our code — tax "expenditures" in budget language — has its own representation office on Washington's Dupont Circle, or in Virginia. Their colorful battles have preoccupied journalists who covered Washington for the past twenty years. Today Washington boasts some 80,000 lobbyists, double the number from the mid-1970s. Senator Tim Hutchinson's staff calculated that with each 10,000 additional lobbyists, we have added 100,000 new words to the tax code.

    Over the years, there have been various efforts to right this situation. There have been attacks on withholding. After war's end — after the emergency that was supposed to justify it ended with peace — withholding again faced its challenges. Some of those came from regular citizens, who were shocked that the process continued after the war. In the late 1940s, a Connecticut cable-grip maker named Vivien Kellems actually tried to create a movement to protest the withholding. She refused to withhold for the hundred-odd employees of her company, and challenged the IRS collectors in federal court. She even wrote a fiery volume of protest titled Toil, Taxes and Trouble.

    "Under the hypnosis of war hysteria, with a pusillanimous Congress rubber-stamping every whim of the White House, we passed the withholding tax. We appointed ourselves so many policemen and with this club in our hands, we set out to collect a tax from every hapless individual who received wages from us." Kellems supporters packed tea bags, their emblems of tax protest, into envelopes to send to Wilbur Mills, then the powerful chairman of the House Ways and Means. Her protest even earned her respect in serious quarters: Harry Reasoner compared her battle to that of Gandhi and Martin Luther King. Most people, though, depicted her as a kook: Kellems spent her waning years holding forth at the soirees of the far-right fringe.

    The Adolph Coors family also tried to protest. The papers reported Coors wanted to show workers the scope of the government take. It gave them their full pay — without withholding — for two months. In the third month it took out three months' worth of withholding. Yet soon Coors abandoned its no-withholding experiment. Years later Coors's executives recall the event as an artifact from ancient history.

    In recent decades, at different points, politicians have also tried to challenge withholding. Ronald Reagan talked about challenging state withholding in his campaign for California governor — but did not follow through while in office. In the mid-1990s, House majority leader Dick Armey pushed through a plan to end withholding with his flat-tax proposal. Instead of the annual 1040 reconciliation, Americans would make monthly payments in their tax bill — "rather like a monthly car payment."

    Alarmed at Americans' anger and goaded by IRS horror stories, Congress in 1998 raced to pass an IRS reform law. But the 1998 IRS reform, like other IRS reforms that preceded it, merely addressed the symptoms. In the summer of 1998, after the law's passage, taxpayers were still naming an overhaul of the tax code as a change they heartily desired.

    From time to time our leaders have even launched attacks on the tax beast itself. In the 1960s, the Kennedy administration led a historic and successful effort to pull down rates. In the 1980s and 1990s our federal deficit — a deficit that resulted from government's commitment to projects many voters questioned — stalled tax-cutting plans. Nonetheless Ronald Reagan and a Democratic Congress pulled together the powerful tax reform of 1986, a reform which did much to fuel the growth that we have seen since that point.

    But politicians, however hard they have tried to right things, must be called to account. The Democrats' damage has come mostly as a result of their cloth-earned focus on equity. Americans move with incredible alacrity up and down the social ladder. Many families rise from poverty to the middle class in one lifetime; and many travel in the opposite direction. Democrats have generally ignored this, treating citizens as if they were locked into their social classes like so many characters in Upstairs, Downstairs, the British soap opera about an Edwardian household. The result has been laws that often punish people for making it into the parlor and even remove them, from time to time, to the scullery.

    Conservatives have done their share of the dirty work. Republicans led the way in replacing the welfare state with the tax code as government's principal social engineering tool. Sometimes, as in Friedman's withholding story, the results of their work were unintentional. At other times the conservatives planned their damage. President Bush and his colleagues knew what they were doing — although they didn't, perhaps, think it through — when in 1990 they led the move to undo the only solid tax reform in recent years, the 1986 Act. In a panic over the budget and the Gulf War, Bush reversed his campaign pledge of "Read my lips: no new taxes" and raised income tax rates. This soured voters on politicians' talk of tax reform — if betrayal came so easily, why trust new promises? As important, the switch so disillusioned many of the leaders who had pushed for 1980s changes that they are hesitant to step forward to lead tax reform now.

    Lately both parties find themselves mired in a new and vicious cycle. The cycle starts with taxpayers, who cry out to lawmakers for tax relief. The politicians are eager to respond. The Republican party was so eager in 1994 that it made taxes one of the planks of its Contract with America, and made abolishing the marriage penalty its priority in 1998.

    But rather than adopt whole-scale reform, the lawmakers try to give relief through tiny, symbolic projects. The family child credit of the Contract with America was one such project. The White House and Democratic lawmakers focus on helping the family by expanding the Earned Income Credit, a cash rebate for low earners. They cobble together new versions of IRAs, or obsess about improving day-care credits.

    In the short term, voters seem to like these devices. The idea of tax relief plays well in focus groups, a fact all-important to our anxious politicians. Little tax breaks, even win elections. Only later, after the election, after these little efforts take effect, do voters discover the puny size of a break, or the hidden perversities that attend it. Then they turn angry. Indeed, their anger about tax is one reason they check out of the political process. This sets the politicians rambling about "political disillusionment." And it panics them into yet another round of engineering. The president speaks of targeted tax breaks; lawmakers plan further fiddles. Voters turn away. Our tax weariness is an important counterpart to our general political disillusionment, the sort of weariness the writer E. J. Dionne sought to convey in his thoughtful book, Why Americans Hate Politics.

    There is a way out of this confusion. It is to drop the pursuit of solutions for a moment, a moment in which we actually consider the problem. It is to review how the whole apparatus functions, how it pervades, dampens, and makes knots of our lives. It is to go back and take a deeper look at the underlying assumptions of the tax writers — that taxing "the rich" is the best way to bring us all justice, that tiny targeted breaks are the best way to help families — to see whether they really make sense in the context of a freer and more fluid society. It is to understand how we have all, even the politicians, become servants of this improbable regime. The first step to shutting out the greedy hand is to unveil it at work.

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Table of Contents

1 The Greedy Hand 3
2 Your Clothes 27
3 Your Work 47
4 Your Marriage 73
5 Your House 97
6 Your Baby 108
7 Your School 128
8 Your Accountant 159
9 Your Success 174
10 Your Retirement 193
11 Your Death 207
12 Conclusion: Your Choice 220
Acknowledgments 231
Bibliography 235
Index 243
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First Chapter

Chapter 3

SHOPPING TAXES

What's the biggest tourist destination in america? Disney World and the Epcot Center, in Florida? The Grand Canyon? Graceland, perhaps?

The answer is none of the above. The nation's proudest leisure-time travel destination is a seven-year-old collection of square footage in a second-ring suburb of Minneapolis-St. Paul. It is the Mall of America, a megamall so huge its developers once referred to it as the Ninth Wonder of the World. Visitors come from neighboring states like North Dakota and Iowa. They also come, and in great number, from Illinois, New York, and California. They even fly in from Winnipeg, Amsterdam, London, and Osaka. Every year the Mall of America gets nine times as many visitors as the entire population of Minnesota. Its traffic of 42 million a year makes the Mall of America a larger attraction than the Big Three of tourism combined.

In some ways, the Mall of America is any mall. It has Macy's. It has B. Dalton. It has Sears. It has a teenager problem, at times so bad that one year it had to institute a special policy of "escorted kids only." Like most modern malls, it cocoons shoppers from the harsher elements. Its air temperature is "seventy degrees, all the time," an advantage not to be dismissed in an iceland like Minnesota in February.

But the Mall of America also has things no other American mall can compete with. It has more stores than any other American mall, 520 of them. It has an amusement park called Knott's Camp Snoopy, where parents can park their children to play on a million dollars' worth of equipment, including a roller-coaster (the rate is $6 for infants, $7 for bigger kids). It has UnderWater World, a 1.2-million-gallon walk-through aquarium that takes visitors on a simulated trip of the nation's waterways. It has Golf Mountain, an eighteen-hole miniature-golf course. It has novelties like the Rainforest Cafe, where real mist sprays into the air over lunchers and thunderstorms-complete with lightning-happen every twenty minutes. And it has one other, powerful attraction: the Mall of America is a tax haven. Minnesota charges no sales tax on clothing.

At Play with the Greedy Hand

Tax shopping is a national pastime in this country, a game we take up frequently and sometimes seriously. Economists have all kinds of labels for this behavior-they call it things like "tax arbitrage" and build charts around it. In reality tax shopping depicts something simpler: citizens at play with the greedy hand. Governments, in this case state and local authorities, try to pretend the hand isn't there and that it isn't greedy-what's a 6 percent levy here, a little 1 percent charge there? People for their part don't fight with government head on: you rarely see a crowd picketing against a sales tax. But they do dodge and duck, dancing away from the Greedy Hand to shop where it can't reach. And their faces do show a trace of satisfaction: "I'm here to get something, and I'm getting it now. This is my turn."

These days, this play often seems lighthearted. Americans don't evade sales taxes on anything like the scale Europeans do. There a punitive sales tax called the value-added tax, a tax with rates of 17 percent, 18 percent, and more, has converted the tax fun to an out-and-out war. A black market in everything from autos to plumbing services thrives on the Continent. But there are plenty of signs, signs that show up in our tax shopping, that Americans too are ready to break the law-to have some real fun-the moment we decide that Paine's hand is intruding too far. It was not for nothing that the Boston Tea Party was called a party.

Our national game starts with the states, towns, and counties, the levels of government that control most sales taxes. These governments set their tax rates-often rates that differ from one another's. And shoppers respond-by surveying their options and buying at the best price-the price with the lowest tax. Every day purchasing decisions are made on the basis of tax shopping. Americans look for low taxes for the same reasons they wait for sales or transport themselves to outlet malls in rural backlands or buy products that come with cash rebates. They want to save a few pennies. Saving a few pennies along the way makes them feel a little better about the decision to shop that they made in the first place. Not all the tax shopping in this country involves such extravagant excursions as a pilgrimage to the Mall of America. From Florida to Alaska, American citizens regularly cross town, county, and state borders in the name of saving on taxes when we shop.

How important are these decisions? Taxes are rarely the main reason Americans name for choosing to shop how they do. But they are always a factor, a factor that places like the Mall of America have proven can be worth hundreds of millions of dollars. Indeed, tax shopping has grown so much in recent years that businesses that didn't have a tax advantage-in this instance, retailers in high-tax states-felt the need to send an ambassador to Washington to warn the House Committee on Small Business that the tax-free world was growing so fast it soon might kill off that most American thing, the old-fashioned, full-tax retail mall.

Among consumers, the American tax-shopping game has distinct winners and losers. Take the examples of Washington State and Oregon: Washington has no income tax, and Oregon has no sales tax. Citizens of Washington's border towns, therefore, drive over the Columbia River to Portland, Oregon, to do their shopping, avoiding both levies. They have their tax cake and eat it too. The losers in that equation are Oregonians. The reverse trip up Interstate 5 gains them nothing, except the opportunity to pay Washington sales tax along with their home income tax. In Illinois and other old, industrial states, the losers are city dwellers-cities like Chicago and New York tend to charge urban shoppers an extra penny or more in sales tax on their consumption. In Louisiana the losers are Louisianans: the state offers a rebate on sales taxes to foreign visitors, but locals must pay the full levy. In Florida the losers are people with weak bladders. Gas taxes change from county to county, and the fixed-income crowd tend to pick their rest stops accordingly.

Part of the challenge confronting the players of the tax game is that the tax-scape doesn't stay the same. From time to time lawmakers will change the rules-often, it seems, just to amuse themselves. But the pleasure of victory for tax shoppers is important to them, so important that they willingly fight back by traveling farther, or altering their habits yet again, just to keep their tax breaks.

The Mall's Story

To see the full extent of the shopping-tax game, it helps to look at a place like the Mall of America. For starters, it is no accident that the mall, which could be sited anywhere, chose Bloomington for its site. When they were ready to build, the mall's developers did some some tax shopping of their own. They obtained various tax favors to undertake the project, a daring one given its scope and the fact that, at the time, America lay mired in a recession. The mall got tax breaks on $100 million in financing from Bloomington to help it build its parking decks and transit station where public buses arrive.

Minnesotans themselves don't gain any advantage on clothing tax by driving to Bloomington-they don't pay tax on clothing anywhere in the state. But if they choose to eat at the Mall of America, they get a break. That's because the Mall of America doesn't have a restaurant tax, whereas the Twin Cities, for example, have a 3.5 percent levy. Minnesotans' overall tax load is high: when the Tax Foundation, a Washington think tank that charts tax burdens, compared Minnesotans' total tax load with that of citizens of other states, it found that Minnesotans' burden was the sixth-heaviest in the nation-only tax hells like New York or California were worse. So some citizens of Minneapolis-St. Paul notice that they are saving when they choose to show relatives a good time at the Rainforest Cafe.

When it comes to out-of-state shoppers, the tax game at the Mall of America gets serious. Wisconsin, Iowa, North Dakota, and South Dakota all have a 5 percent tax on clothing. The fact that Minnesota has none is an accident of the state's progressive Northern European heritage. State lawmakers long held that taxing necessities like clothing and food put an unjust burden on the poor. Today Minnesota's progressivism is fading, but the progressives' work is still in place. Clothing-all clothing-is tax-free. You have to wonder whether the state's fathers, doubtless stuffy fellows all, actually envisioned young women converging from four states to slither into tax-free camisoles in the dressing rooms of the mall's two Victoria's Secret shops. But that's what happens.

Indeed, Minnesota's clothing-tax advantage ensures that the Mall of America is a regional shoppers' mecca. When time comes for a spree, many of them hop into one of the shuttle flights Northwest Airlines operates to Minnesota and the Mall of America. Northwest WorldVacations, the tour operator for Northwest Airlines, saw a 47 percent increase in package passengers to Mall of America from North America cities in the first quarter of 1998 over 1997.

Miles as Money

The savviest of the tax shoppers don't pay for such flights. They use another tax advantage-their "miles"-to get to Minnesota. Frequent-flier miles are a marketing phenomenon, a trick airlines and now credit card companies have learned to use to build customer loyalty. But, in their way, miles are also a form of tax shopping. Many people build up their miles while working. When their employers let them keep the miles, they are giving the employees something of value-something that neither employer nor employee pays tax on. In this sense, miles really are tax-free money, which escapes the greedy hand altogether.

Then there are the international tax gamesters, more than two million of them a year by the mall's count. Citizens of Winnipeg pay Canada's onerous goods and services tax, which is 7 percent. Manitoba drops an additional 7 percent on top of that. With Northwest offering flights from Winnipeg at $258 round trip, the draw of saving 14 percent begins to look worthwhile. Shoppers know that if they stay forty-eight hours, Canadian customs will allow them to bring up to $500 in purchases back home, duty-free. (The deal is $200 in purchases for shorter stays.) Are tax savings important to these shoppers? "Big factor," sums up one of Northwest's booking agents telegraphically.

Among these arrivals number the truly international tax shoppers. Europeans and Asians pay giant sales taxes ranging in the high teens. The evidence: Minnesota's Minneapolis-St. Paul International Airport has 240 international flights a week-seven each from Tokyo, Osaka, and London, and twenty-one from Amsterdam. This is up from a mere sixty-one in the mall's younger days. Frankfurt added on a direct flight for summer shopping. "Jerusalem has the Wall, but Minneapolis has the Mall," announced the Jerusalem Post from high-tax Israel. In August 1997 the Minneapolis Star Tribune reported what has to be the ultimate tax-travel factoid: couples from ten countries have held their weddings in the Mall of America's little chapel.

Some of this international behavior is due to another kind of economic pastime: currency shopping. The dollar in this decade has been relatively weak, so that foreigners from developed countries can buy more with their money here than they can at home. But a good part of it is taxes. You can tell this because foreigners often betray an expertise worthy of a state revenue official when it comes to the minutiae of our sales-tax laws. Switzerland's stuffy Neue Zuercher Zeitung complained that not everything in America was a bargain-"especially when you're looking for the sort of quality the Swiss are accustomed to." The paper's reporter, though, went on to hand his readership a few well-valued tax tips: "In the city of Chicago, 8.75 percent is the rule, but in the bordering parts of Illinois, it's only 6 percent. In New York a sweater from the same retail chain costs 2.25 percent more than in Florida. For foreigners New Orleans is particularly attractive. There you can get sales tax you pay back at the border." The title of the article? "America, Land of Unlimited Shopping."

All this activity has made a deep impression on Minnesota's tourism officials, who for years had only more traditional attractions like the state's fifteen thousand-odd blue lakes, or the Edward Hopper at Minneapolis's Walker Art Center to compete with. The mall elevated Minnesota to a new class as a tourist destination, and the officials know that tax is part of that. The government employees are of course not eager to spell out the amounts of business they are taking away from fellow states and foreign governments. But they do confirm that tax is a huge component of their tourism success. "I can't say it's fifty percent, but it's a big share," says Brian Dietz of Minnesota's Department of Trade and Economic Development.

The Tax Frog

Indeed, when Minnesota had good news about taxes to give its citizens, the Mall of America was one of the places it chose to make its announcement. On one Friday in February of 1998, Minnesotans who shopped at the Mall of America encountered a new entity: a huge felt frog figure, the "Tax Frog," who handed out tax forms that would allow them to collect a statewide tax rebate. The state's revenue officials sent out a wire explaining helpfully why they had chosen a frog as their symbol. "The answer is simply because frogs say, 'rebate-rebate.' "

IKEA's Example

The Mall of America is only the most visible symbol of this kind of activity. New York City, for example, clearly has it over Bloomington when it comes to the variety of attractions it offers. But when it comes to shopping, New York citizens spurn their hometown. They have a single word they use to describe their tax shopping-"IKEA." IKEA, pronounced "i-KEE-a," is a Swedish housewares giant. The store closest to New Yorkers is located in a place highly inconvenient to them: an old industrial park off the highway in Elizabeth, New Jersey. But New Yorkers travel to IKEA quite willingly-by car through the clogged Holland Tunnel or by special, free IKEA buses departing the city's grimy Port Authority terminal on the half hour.

IKEA, like Mall of America, has many attractions. It is giant-shoppers confront thousands of articles, all displayed in a charming, Swedish manner. But its most powerful attraction is, arguably, its tax rate. Elizabeth, New Jersey, is an urban enterprise zone with a sales-tax rate all its own: 3 percent. Since New Yorkers normally pay 8.25 percent, they save over $5 per hundred dollars. So many of them apparently found this deal worth it that New York's department of revenue got excited. In IKEA's early days, they sent revenue officials to IKEA's parking lot to note down New York shoppers' license plates so they could go after them, by claiming a "use tax" on goods imported to New York. This caused a lot of disgruntlement among shoppers.

New York shoppers in search of clothing and shoes also travel outside their state to evade an 8.25 percent sales tax. The numbers crunchers estimate that the state's retailers lose something like $700 million in sales just because people choose to buy clothes outside of New York rather than pay the tax. Pennsylvania newspapers brag that the state's booming outlet business-no sales tax on clothes or shoes-have made it the "outlet capital of the world."

Indiana has enjoyed a similar advantage, for cigarettes. In May 1994 neighboring Michigan raised its cigarette tax from 25ó to 75ó a pack, the second-highest in the nation, according to scholar Patrick Fleenor and Price Waterhouse, who made a study of it. During the next year, Fleenor reports, cigarette sales fell in Michigan by 26.7 percent.

Just across the border, though, many Indiana store owners found cigarette sales rising up to 40 percent. The reason was clear: consumers who drove from Union Pier, Michigan-to name a border town-down the road to Michigan City, Indiana, saved $5.95 in taxes on each pack they bought.

There are those too who respond to tax intrusions in the opposite way: by not shopping, or by shopping at a moment when the greedy hand isn't around. The state of Alaska found this out the hard way when it planned a huge increase in its cigarette tax, to a dollar a pack. The tax was to go into effect October 1, 1997. Smokers struck back by buying an astounding 175 million more cigarettes than usual in the three months before the tax deadline. Richard Watts of the Great Alaska Tobacco Company told the local papers that some smokers even bought sixty-carton cases-at $1,200 each-rather than pay the tax. As for Alaska's Department of Revenue, it saw its revenue estimates go up in smoke: collections slowed 60 percent following the infamous increase date.

L. L. Bean

Most tax shoppers know yet another way to play the game with the greedy hand: by mail. When a Californian or a Pennsylvanian orders from L. L. Bean in Maine, California's and Iowa's revenue departments dearly like to collect tax on that purchase. But states don't have power over interstate commerce-Congress does-and Congress can't-and won't-enforce a state tax. So local tax authorities from California (6 percent base rate), Illinois (base rate 6.25 percent), Nevada (6.5 percent), and Pennsylvania (6 percent) lose when their citizens shop by mail at J. Crew or L. L. Bean. So, by the way, do the local tax authorities in those states: Maine may be home to L. L. Bean, but its authorities don't get the sales tax either. In many cases money saved in tax on a pair of sweaters just about offsets the price of the shipping bill, a pleasure that does not elude shoppers. Everyone likes the feeling of getting a UPS package for "free."

Frustrated states of course do their best to pursue the escaping revenue, which one group estimated at $3 billion a year. But this is an area where consumer rage commands some respect. When the Direct Marketing Association, the lobby that represents the mail-order giants, opened negotiations with the various states to work toward a general collection arrangement, shoppers protested. The mail-order houses saw the light. Suddenly, everyone was denying plans to collect the sales taxes. On fax letterhead complete with leaping stag and trout, L. L. Bean responded to an inquiry from The Wall Street Journal on the matter that the firm "has no plans to change its practices . . . related to sales tax collection for out-of-state orders."

A Serious Conversation

At some point one has to ask: what's going on? Why will people put up with waistlines that don't fit because they ordered them from a catalog or spend dollars in gas and time to save pennies on cartons of cigarettes? Why are honest citizens willing to lie and ship clothing to false addresses in order to spare themselves sales tax? Tax shopping generates a frenzy of activity, not all of it logical.

Beneath all the noise there is a very serious conversation going on here, a conversation between our governments and our people. Officials-town, county, state, and federal-regularly pretend to the world that they may choose the tax rate, and that their tax receipts will grow or shrink accordingly. This pretense is actually codified in American law and regulation-the technocrats call it "static analysis." Static analysis says that a 5 percent tax will bring in 5 percent of a certain revenue pool, and an 8 percent tax will bring in 8 percent-enough. Most government officials write their budgets with such assumptions and expect the people to go along in the name of deficit reduction, necessities, or the general social good.

But people aren't automatons. And shoppers, who are also citizens and taxpayers, do react to avoid government's demands when they are able. In shopping, unlike other areas, they actually have a choice about taxation, even if it is a choice of saving a penny on a dollar. And the vigor with which they exercise this choice reflects the seriousness with which they question government and its taxes. They are saying, "This is too much." Or "This I won't take." Or "I will live with this, but only if something else compensates for it." They talk back to government by modifying their behavior-by buying less and thereby giving back less in tax to the government. The result is that the revenue officers very often find themselves disappointed with their take. If they want more revenue, they are going to have to listen to shoppers.

The conversation is not a new one. It dates back to the American revolution, when Americans told the British they wouldn't stand for their sorts of taxes. Several of the founding fathers tried to figure out which takes the new American citizens would live with. They thought a lot about excise taxes, one of the names for sales taxes. They thought that people would tolerate them better than other taxes. Alexander Hamilton praised these consumption taxes: "The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. The rich may be extravagant, the poor can be frugal; and private oppression may always be avoided by a judicious selection of objects proper for such impositions." He also wrote, "It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess." Government's excess, that is. Another thing that Hamilton liked about the excise taxes was that they were visible. People knew when they were encountering the greedy hand and could avoid it if they chose. So the young nation tried its excise-tax experiment, imposing, at different points, taxes on spirits and other goods.

A Reply from Citizens

It turned out that early Americans didn't want to encounter the greedy hand, even in the form of an excise tax. When the founding fathers levied their tax on spirits and the like, America's early citizens talked back-with violence. During the Whiskey Rebellion, and Shays' Rebellion as well, they picked up muskets and pitchforks. It was a bloody conversation between a people and their government, but a real one. Government listened, and by 1800 the United States, led by Thomas Jefferson, had given up on internal taxes altogether.

Today the descendants of those rebellions are the tax shoppers. And they, too, have an effect on their government, albeit a more moderate one. In 1992, for example, Minnesota was having budget problems. Lawmakers proposed introducing a sales tax on clothing. And why not? Minnesota's coffers badly needed one. But there was an outcry from citizens against the tax. Among the louder complainers were representatives of the then-new Mall of America. The lawmakers backed down.

At this writing, Minnesota is in surplus. Much of that surplus is due to the general prosperity of the nation. But some of it-a healthy share of it-comes from the Mall of America. Today the mall employs twelve thousand Minnesotans. Shoppers who spend at the Mall of America do pay tax-6.5 percent-on nonclothing items. That money has played a role in swelling the state's surplus. Today the state estimates that the megamall has had a $1.5 billion impact on the state. In this sense, Minnesota is a winner. It got the revenue that governments in North Dakota, South Dakota, Wisconsin, Manitoba, Bonn, and Tokyo lost.

New York's IKEA story provides another example of the give-and-take. In the beginning, New York officials just sat back and watched in frustration as state and city lost much desired revenue to New Jersey. They were particularly unhappy that shoppers were traveling to New Jersey malls to buy clothing without paying sales tax. Then IKEA was so bold as to boast about the advantage in advertising, announcing "whopping" tax savings in advertisements it posted in New York. Finally, New York had a convenient scapegoat. James W. Wetzler, New York State's commissioner of taxation and finance, lashed out at the store. He sent staffers to copy down the license numbers of New York cars in IKEA's lot. Wetzler also threatened to subpoena delivery records for the tables, chairs, and garden furniture people bought at IKEA and had shipped to New York. But the news of these snoops also set off the shoppers. "First of all, I have a right to spend my own money where I want," Donna Currington, a thirty-three-year-old nurse from the Bronx told The New York Times. "That's the most ridiculous thing I ever heard," Lisa Halgren, a thirty-two-year-old Manhattanite, told The Times when it told her about New York's enforcement efforts, "I work hard. I pay taxes. If I want to save a little money, that's my business and no one else's."

IKEA retreated, confining its ad copy to vaguer talk about affordability. But so did New York. Fast-forward to the late 1990s, and IKEA is still benefiting New Jersey. And, even though transfusions from Wall Street have improved New York's fiscal health, the state is still facing shortfalls because shoppers travel to places like IKEA. New Yorkers are still angry about taxes. So angry that New York Health & Racquet Club, a local chain, publishes a series of ads under the title "Tax Break." The health club of course doesn't have the power to offer a tax break, just the simple price break, $300 off on a membership. But the copywriters recognized that New Yorkers are so hungry for tax relief that an advertisement mentioning the topic can sell gym memberships.

Finally, New York's mayor and governor started responding to the music. They announced an experiment: state and city would hold weeklong "tax holidays" on clothing purchases twice in a year's time. The consumers talked back-with tax-holiday spending sprees. Heartened, the lawmakers began to plan a broader and more permanent sales-tax decrease on clothing.

Governments, though, aren't always willing to give up their power. So they find ways to turn the tables on the tax game. One way they do this is by concealing their work, in the hopes that taxpayers won't react. This is why lawmakers don't break out what we pay in gas taxes on the gas pump. And it is why, whenever they introduce a new tax, they like to call it a charge, a fee, a license-anything other than a tax.

The Phone Tax

The most recent example of this came up when the Federal Communications Commission was planning a new tax on telephone calls. The tax was a high one-up to 5 percent on long distance calls. The goal of the tax was a noble one: funding the wiring of schools to the Internet. But the FCC guessed people didn't want to fund the wiring of schools, at least not to the tune of 5 percent a call. So it disguised its tax by calling it a "universal service charge." And the commission did its very best to conceal even that phrase from consumers. It begged major phone carriers like AT&T and Sprint to bury the cost in bills, not to itemize at all, so consumers wouldn't know what was driving up their costs. In the old days-before the breakup of AT&T in the early 1980s, this might have worked. AT&T did all sorts of favors for the federal government in exchange for the power to keep its national telephone monopoly.

But these aren't the old days. AT&T isn't a monopoly. The phone companies, all of them, must operate in a competitive market. AT&T, Sprint, and MCI were legitimately afraid they would lose customers if they didn't explain the new cost to customers. Eventually-after an enormous fight-they prevailed and itemized the tax on monthly statements. The FCC began to hem and haw about the size of its tax, even talked about reducing it. It seemed the invisible hand might get the better of the greedy hand, at least for the moment.

Meanwhile, though, the greedy hand, always on the lookout for new pockets, was busy elsewhere. As soon as Internet shopping took wings in the mid-1990s, state revenue departments got to work trying to find a way to tax it. The state of Ohio was the most aggressive of the tax collectors. But Americans didn't like the notion of tax coming to their Internet lives, an area that had heretofore seemed blissfully free of government intervention. They complained. Eventually Congress passed, and President Clinton signed, the Internet freedom bill, severely curtailing Web taxation.

Over the years state lawmakers and those who levy shopping taxes have gotten cleverer about this. They have figured out that the greedy hand can keep its control-and continue to jerk citizens around-if it dispenses tax favors. The Mall of America's tax financing was one such example. Elizabeth, New Jersey's, special urban-enterprise zone is another one. Taxpayers shouldn't necessarily welcome these changes. That's because many of them end up losers in the game. Minnesota's losers are the citizens of Minneapolis and St. Paul, who pay more to subsidize the breaks the state gives to Bloomington's Mall of America. They are the purchasers of furniture, batteries, cars-anything but clothing or food-who subsidize the citizens who make those tax-free purchases of clothing and food. Over the years this form of patronage has become very expensive: states spend hundreds of millions to lure particular businesses. That's a form of corporate welfare that hurts a silent majority who don't have a lobby to pound doors at the state office for industrial development.

The Case of Cigarettes

Today this has particular relevance, because in coming years America will see one of the greater experiments in tax shopping in our history. Federal and state lawmakers have joined hands to raise tobacco taxes, an effort to gain revenue by punishing a behavior we've come to know is dangerous: smoking. But if they raise tobacco taxes too much, people will react. They will manufacture bootleg cigarettes here. Or they will cross the border to buy cigarettes off the books in Mexico, or pay runners and smugglers who do that for them.

Canada ran such an experiment when it raised cigarette taxes in 1991. Soon there was massive smuggling, which led to terrible crime and a general breakdown of order. The Mounties were called out: the government took to running elaborate sting operations. But not all provinces went along. Bruce Bartlett, an economist who studied the matter, noted that a carton of cigarettes can be bought for $26.40 Canadian (U.S. $18.50) in Ontario and resold illegally for $48.55 in British Columbia or $50.62 in Newfoundland. A new round of smuggling ensued. The papers reported that enough cigarettes were being smuggled into British Columbia to feed the habits of 130,000 smokers.

To those who say that can't happen in America, the sobering answer is that it already has. In the 1930s, Prohibition's constraints on the sale of liquor showed how angry citizens can become when government intrudes too much on the matter of their sin. The result was the greatest lawlessness of this century. While heavy cigarette taxes are not the same as an outright ban, they too are likely to do wonders for the underground sale and smuggling of the punished commodity.

Meanwhile the tax game goes on, move and countermove, an amusing exercise but also a grim one. To know what it means to consumers, one only has to talk to people who plan trips to the Mall of America, or look at the faces of the parents filing under the blue-and-yellow awning of IKEA stores. They are excited, but they are also determined: their bargain better be there at the other end, their excursion had better deliver the excitement and the savings they hope for. They have come this far, and damned if they aren't going to get something back.

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  • Anonymous

    Posted April 25, 2001

    On the Cost of Paying More and More

    When George Washington was president, taxes were few. Since then, times have really gotten expensive. The 20th century especially was an arms race between the governments in the United States and its citizens to determine who would control the citizens' income. Government was on the offense and the citizens were on the defense. The citizens lost to date. Taxes went from less than 5 percent of income to 40 percent over that time. Most would agree that we cannot afford another century like that one. This book nicely lays out the history of taxes that take more income and waste a lot of time and effort in the process. The author looks at sales taxes, withholding taxes at work, the marriage penalty in the income tax, whether the housing deduction for interest and taxes is a good thing or not, the problems with taxes on domestic help, property taxes and school support, the social security system, and estate taxes. She doesn't like much of what she sees, and is concerned that reform could simply lead to adding new types of taxes (like a national sales tax while keeping all of the old taxes). The newer the tax or tax idea, it seems like the worse it is working. Her solutions are basically principles to be followed in reforming taxes. I doubt if they will be followed anytime soon. Recent polls show that most Americans are concerned about paying off the national debt and fixing social security before doing anything about cutting taxes. Although most of her observations were good ones, I was a little doubtful about her automatic focus on the high income people being taken to the cleaners unfairly. There was not as much attention paid to benefits that lower income people may be receiving. If you spend time thinking about how to keep your tax bill down, there's not much new in this book. If you are new to all of the ways that government helps you spend your money, this is a good introduction to the subject. The book is well written and pleasant to read. The only drawback I found was that it was a little depressing to be reminded of how much I actually pay to all of the various governments. Every year, I find April 15 more and more depressing. Donald Mitchell, co-author of The Irresistible Growth Enterprise and The 2,000 Percent Solutiion

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