Having just submitted our federal tax returns, it’s probably as good a time as any to reflect on the broader purposes of taxation.
As you may know, the federal tax code is not just for generating revenue. It’s also intended to achieve certain social aims, such as facilitating home ownership, marriage, charitable donations and general welfare.
That point might seem obvious. However, the federal tax code has become increasingly complex, generating calls for its overhaul and simplification. To achieve this goal, we might want to stop using taxation to achieve social aims, including one in particular: the promotion of virtue.
Massachusetts Congressman and later Governor Samuel McCall (1851-1923) once warned that adoption of a federal income tax would make the federal tax collector and inspector moral censors. The code would, he claimed, “lay bare the innermost recesses of his [the tax-payer’s] soul in affidavits, and with the aid of the federal inspector, who will supervise his books and papers and business secrets, he may be made to be good, according to the notions of virtue at the moment prevailing in Washington.”
Perhaps the most well-known virtue-inducing taxes are so-called “sin taxes,” such as taxes on alcohol, cigarettes and pornography. However, these are sales taxes, not income taxes. In addition, these taxes are usually imposed at the local level, by states, counties and municipalities, who are more proximate to the moral (or immoral) behavior of their citizens. It’s more problematic when the federal government imposes taxes on citizens in order to promote moral virtue, especially when what counts as virtue in Washington might well constitute vice elsewhere.
Moreover, there’s a question whether the promotion of virtue through federal taxes even works in all cases.
For instance, take the charitable donations deduction. Does it cultivate the virtue of charity in those who use it? Sarah Lutman, a consultant for nonprofit charitable organizations, considers the question:
“Would ending the deductibility of charitable gifts have an immediate chilling effect on individual philanthropy? Perhaps not, although this will be hotly argued, and I admit I don’t relish the opportunity to find out first-hand, particularly in an already turbulent fund-raising environment! But I believe donors’ primary motivation for support is belief in an organization’s mission, respect for its results, and trust in its stewardship of resources. The deductibility of a gift is an ancillary benefit, not a primary one...
The pivotal issue is whether people lacking charity in their heart actually give more to secure the tax break, and by doing so become more charitable people. It’s more likely that they’ll donate more to take the tax break, but ditch the virtue. For them, it’s simply a transaction. Meanwhile, those who have charity in their heart would donate to charitable organizations, whether or not a tax deduction existed.”
What do you think? Should the tax code be used to promote virtue? Or should we stop such nonsense, simplify taxes and return to the basics: government taxation simply as a way to collect revenue?