Morton J. Marcus is an economist formerly with the Kelley School of Business, Indiana University. His column appears in Indiana newspapers.
The Governor and his select invitees to his closed tax conference last month praised simplifying Indiana’s tax code. It is an idea better loved by Americans than baseball, apple, pie or motherhood.
There is no question that our national and state tax codes are enormous tomes when printed, complex and detailed beyond belief. How did they get that way? Blame the legislators who give special privileges to persons and businesses willing to plead their arguments (live or in cash).
For example, Indiana exempts $1,000 from taxation for each person in your household. Then, if the taxpayer and the spouse are 65 or older, they each get an additional $500 exemption. Plus, if the taxpayer or the spouse is blind, there is another $1,000 income exemption.
Wouldn’t it be simpler to count a person as a person without regard to age or disability? Why the exemptions for some blind persons and not all blind persons? In fact, why is blindness favored over other disabilities?
Do these exemptions clog our tax code because we desire to encourage having babies? Perhaps, we wish to help the poor and believe they tend to have more babies than the wealthy. We want also to aid people 65 and older, in part because we think they are more needy than younger Hoosiers.
The complexities of our tax codes arise from our fundamental concerns about being fair. When a good case is made to legislators about the difficulties of one group compared to another group, our elected representatives respond by making laws to treat the two groups differently.
We don’t just tax property, we tax the form of ownership (owner-occupied or renter-occupied). We differentiate between agricultural, commercial, and industrial uses. When a church is converted to a condominium, the land is taxed as residential rather than in religious use.
Some, who piously plead for tax simplification, want to extend the sales tax to services. Well, perhaps not all services. Often they will exempt medical services; then someone has to decide if teeth whitening or straightening is cosmetic or necessary for mental health. Maybe an argument could be made to exempt attorney fees from sales taxation. I doubt realtors want their commissions taxed. I know my barber is opposed to a tax on his services. And funeral directors? Are we going to make death more expensive?
Although it would be simpler to tax all consumer transactions, there is strong reason for not taxing services. Such a tax can be a direct tax on labor. You might as well raise the income tax.
When the plumber comes to my home, he charges for parts (which are subject to the sales tax) and for his time separately. Put a 7 percent sales tax on his time and you reduce his income by more than double the 3.4 percent of the Indiana income tax.
If we are going to have tax simplification, let’s understand what we are doing, or is that asking too much?