In an election year, Americans make decisions about the tax policies they wish to see pursued by the federal government. The issues are complex, the outcome potentially far-reaching, if not momentous. However, the arguments invariably are synthesized into a simple-to-understand message from both sides: What we want to do will help you; what the other guys want to do will hurt you. In real life, it’s almost never that simple.
Whichever side one chooses – more taxes, less taxes – it should be recognized that the ripple effects go far beyond political sloganeering.
U.S. Supreme Court Justice Oliver Wendell Holmes Jr. said, "Any tax is a discouragement and therefore a regulation so far as it goes,” and "Taxes are the price we pay for civilized society.”
Both of Holmes’ quotations are accurate, and in them can be seen an example of the continuing tug of war that exists over federal taxation policy.
President Joe Biden’s 2024 State of the Union address included a range of new taxation proposals. As Republicans now control the House of Representatives, Biden’s tax pitches won’t pass Congress unless Democrats win a majority in the November elections. In today’s U.S. Senate, Republicans outnumber Democrats 49-48, but of three Independent members, two caucus with the Democrats. With Vice President Kamala Harris able to cast tie-breaking votes as Senate president, Democrats have the majority.
Among the president’s proposals:
On one side, higher taxes on businesses and wealthier Americans are being cited as more “equitable” and “fair,” not punitive, as it’s said they will raise revenue for Americans’ benefit.
On the other side, higher taxes raise costs on businesses. The higher something costs, the less appealing it is to buy. Demand is reduced. This potentially affects production and jobs. An example in the health field is that higher taxes are often lauded for their effect on discouraging certain economic behaviors: “Evidence shows that significantly increasing tobacco excise taxes and prices is the single most effective and cost-effective measure for reducing tobacco use. … Raising taxes on tobacco products which lead to increases in their price makes tobacco less affordable,” says the Word Health Organization.
Most people would laud the health benefits from such a taxation policy. However, their attitudes might not be positive when the same effect is felt on cars, airplane tickets, video game consoles, restaurant menu items, gasoline or laundry detergent. For every taxation action, there’s a reaction.
None of this means that tax increases should always be off the table. It means they shouldn’t be viewed in a vacuum of only what is desired happening.
There are economists who will argue opposite sides of this issue. However, generally, raising taxes is the equivalent of a price increase. Except in extraordinarily unusual circumstances, a business can’t simply absorb a cost increase, whether it’s in the form of inflation or taxation, without it affecting employees, operations – something.
It’s economically unrealistic to expect that costs in the form of taxes can be raised on individuals or businesses without it affecting Americans doing the buying and paying.
Wealthier people may not change their habits if taxed more. However, some may curtail spending by reducing consumption of certain goods or services, with a resulting effect on the jobs of the people who produce those goods or provide those services.
Imagine a family donating $100 monthly to a local food pantry. But their taxes are raised, even if just a bit. Inflation is already driving up prices, and increases in corporate taxes on top of inflation pushes prices even higher. At the store, food costs more. At the gas station, gas costs more. Clothes for the family cost more. Everywhere they look, prices are increasing. As the $100 food pantry contribution is elective rather than required, their contribution goes to $50 – or maybe, in the face of other demands, it’s eliminated altogether.
Such economic ripple effects can’t be avoided or denied.
A tax increase is like a rock hitting the water: the ripples don’t stop where the rock lands. Whatever side of the more-taxes-vs.-less-taxes debate one takes, considering the issue in terms of the ripple effects economywide is useful amid election-year sloganeering.
This article first appeared in Knox News.