Too Many Carrots?

I came across a great article today that I felt compelled to write about.  The piece, Life and Taxes, was written by Yaron Brook for Forbes.  First, I would like each reader to stop for a moment and consider all of the impacts taxes have on your day-to-day life and on your financial decisions.  The most obvious effect of taxation is the large chunk of income tax withholding that drains cash from each paycheck.  Almost certainly you will recall the property tax, sales tax, FICA tax, gas tax, and sin taxes too.  What Dr. Brook made me realize is that taxes actually have a much larger impact that just draining away your money.

Taxes are a means for the government to control the people.  How is that possible you say?  By rewarding the behaviors that the government deems moral and punishing the behaviors that the government deems immoral.  There are carrots (ie rewards) for buying a home (mortgage interest deduction), saving for retirement (401(k) and IRA), having children (dependent and childcare deductions), and getting an education (Lifetime Learning Credit, Hope Credit, etc).  There are also penalties, extra taxes, for driving a car with poor gas mileage (guzzler tax) and smoking and drinking (sin taxes).  On the surface it appears that influencing or regulating these behaviors is indeed beneficial.  Instead, I would agree with Dr. Brook that in fact this system is terrible for both the individual and society as a whole.

For example, how can it be bad to incentivize saving for retirement?  The simple answer is because it distorts the free market mechanics of the economy.  A better answer, and the one I focus on, is how it affects the individual.  As a person intent on saving for my retirement I am going to save, invest, and prepare for the future no matter what.  Now, because there is a government tax structure called a 401(k) it controls my behavior.  Rather than select the investment brokerage I prefer, I am instead effectively handcuffed to a single provider.  To get my tax break I am forced to pay a third party, which I did not select, management fees and commissions.  Without this government intervention I'd be free to pick the lowest cost, best service provider and likely keep more of my money.  The market place would respond to the increased freedom and choice given to the individual and in response companies would compete for my business. 

Under the current system I am also limited in the investment vehicles available to me.  Mutual funds, often with high costs, are the investment of choice in most 401(k) plans.  The government and its retirement tax legislation discourages novel investment ideas and exotic asset classes.  I am also restricted as to when, why, and how I access my own money.  Again the government controls my behavior and my money by using the 401(k) legislation and the carrot of tax deductions.  There is also a stick, to punish me, should I need to spend my own money before I reach the government designated age (59 1/2).  Clearly early retirement is discouraged and the system is weighed against it.  There is in fact, an illusion created by the system that everyone should work until the designated age.  Why?  It could be because it is good for the government but not necessarily for the individual. 

Furthermore, not everyone has access to a 401(k) account.  This skews the system of rewards further by punishing people who fit outside the accepted worker/drone role that the government overtly encourages.  How many people would be more apt to take a different job, become an entrepreneur, or work as an independent consultant if the 401(k) system did not tip the scales.  The same is even more true when we consider the tax incentive toward employer centered health insurance.  Look at how much this government tinkering distorts our life choices!  I am an employee less because that is what is best for me, but more because the government has created a tax system to pigeonhole me into that role.

There is even an entire legion of white collar professionals that exist solely to deal with the implications of the tax code and our governments policies of taxation.   Accountants, tax preparers, IRA custodians, 401(k) plan providers, human resources benefits experts, and the entire IRS exist solely to execute this government moral agenda.   If there was a vastly simplified tax legislation none of these people would be needed.  In fact, most personal finance blogs too would have very little to talk about too if the government would butt out of our personal spending choices.  No more headlines like: 46 Tax Deductions that Bloggers Often Overlook, My 401(k) to IRA Rollover Decision Process, or Bush Proposes Health Insurance Tax Reform.  We could stop spending so much time reading blogs and analyzing the tax implications of our finances and simply make the best choice for us, as an individual.

There are dozens of other examples:  buying too much house, having too many children, being content with underemployment, paying inflated tuition, being less productive (work less) because of punitive tax rates.  These are all symptoms of tax policies which steer individuals to fall in line with the government determined ideal.  The conceit that government can better decide than individuals is at the heart of this issue.  Dr. Brook and I are in agreement that we are more than capable of making decisions for ourselves without any government meddling.

It could also simply be the unintended consequences and unfortunate side effects, but it all distorts the market none the less.  The more I learn the more I wish government would stay out of my finances and let us use our freedom to make our own decisions about what is right for our money.