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

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

by Amity Shlaes

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The Greedy Hand is an illuminating examination of the culture of tax and a persuasive call for reform, written by one of the nation's leading policy makers, Amity Shlaes of The Wall Street Journal.
The father of the modern American state was an obscure Macy's department store executive named


The Greedy Hand is an illuminating examination of the culture of tax and a persuasive call for reform, written by one of the nation's leading policy makers, Amity Shlaes of The Wall Street Journal.
The father of the modern American state was an obscure Macy's department store executive named Beardsley Ruml.  During World War II, he devised the plan for withholding taxes from your paycheck, thereby laying in place a system that allows the hand of government to reach into your wallet and take what it wants.
Today, taxes make up more than a third of our economy, the highest level in history outside war.  We live in the nation revolutionary father Thomas Paine foresaw when he wrote of "the Greedy Hand of government thrusting itself into every corner of industry." This book is a cultural examination of the way taxes influence our behavior, how they force us into an arbitrary system that punishes families and individual enterprise.
Amity Shlaes unveils the hidden perversities of our lifelong tax experience:  how family tax breaks do little to help the family, and can even hurt it.  She demonstrates how married women pay a special women's tax rate, higher than anybody else's.  She shows how problems that engage and enrage us--Social Security problems, or the things we don't like about schools--are, at heart, tax problems.  And she explains why the solutions Washington offers merely accelerate a vicious cycle.
Finally, Amity Shlaes shows us a way out of this madness, endorsing a number of common-sense reforms that will give all Americans a fairer and simpler tax system. Written with eloquent compassion for working Americans and their families, The Greedy Hand makes the best case yet for rethinking our tax code. It is a book no tax-paying citizen can afford to ignore.

Editorial Reviews

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 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
Peter G. Gosselin
...[M]ost usefully read 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.

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

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Read an Excerpt


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.

What People are saying about this

Paul Johnson
Amity Shlaes is among the most brilliant of the young writers who are transforming American financial journalism. -- Author of Modern Times
Philip K. Howard
Finally, someone has given us a common-sense guide to America's worst regulatory mess: the tax system. -- Author of The Death of Common Sense
Steve Forbes
The Greedy Hand is the economic bible for those who believe in growth. -- Author of A New Vision for America

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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