Taxing Times

The timing couldn’t be better.

For once governments are discussing taxing and spending plans just when folks are focused on the issue. As we collect our W-2s, 1099s, and receipts, our elected representatives are debating how to deal with the ever-present gaps in government finances. And taxes are important. They’re a wedge between producers and consumers. If high enough, they eliminate economic activity that would otherwise happen. It’s been suggested part of the reason Europe has grown more slowly than the US over the years had to do with the level of its taxes.

And taxes distort things. When one part of the economy receives special favors from the government, this creates a structural incentive to devote more resources to that sector. Housing is a great example: making mortgage interest and property taxes deductible means that more people are homeowners. Maybe that’s a good thing, but it probably contributed to the housing bubble. And the lost revenue from the tax-break has to be made up somewhere else.

Which contributes to the complexity of the tax code. Figuring out your taxes by hand used to be fairly common. Now, only a few intrepid souls try to master the myriad State and Federal forms without the assistance of an accountant or tax-preparation software. And a byzantine tax code creates permanent opportunities to game the system.

Taxes are inevitable, but distortions and complexity aren’t. Let’s hope our officials can see this now.

Douglas R. Tengdin, CFA
Chief Investment Officer
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