Governing by Obfuscation?

Obfuscate-verb; To make so confused or opaque as to be difficult to perceive or understand; To render indistinct or dim (The American Heritage Dictionary of the English Language, 3rd Edition)

So there I was, trying to calculate the adjusted capital cash flow using the venture capital method for some case, when I realized that I didn’t present value the interest tax shield with the correct rate. (I was never very good with numbers-that’s why I went into banking. I thought it was better to hide among the numerically gifted.) Cursing at the irritation of having to worry about the effect of corporate taxes, I began to wonder how much time accountants and MBAs are spending annually in analyzing and planning for corporate tax avoidance. I think we may even have a whole course in the subject here at HBS. But that begs the question, why do we even have corporate taxes at all.

When corporations are taxed, the tax increases the price of the goods and services they produce, and that cost is passed along to the purchaser or consumer. As consumers, we are buying the goods with money that has been taxed when we earned it. We’ve learned that since WE are also the shareholders of the corporation, WE are getting implicitly taxed. Is that double taxation or triple taxation?

There are other economic distortions Merely from their existence (not to mention the cost of compliance) corporate taxes also give the government many opportunities to create incentives and disincentives through tinkering. So why do we have corporate taxes? Consider that the reason is that politicians need to hide from the American people how much tax we are really paying. By splitting tax between corporations and individuals, our real tax burden is obfuscated.
Come to think of it, maybe a lot of government policies are designed from the ground up with obfuscation in mind. Consider tax withholding, which was originally authorized under a temporary “war emergency.” For most of us, withholding seems like the obvious way to pay taxes so we don’t have a huge bill at the end of the year, but I wonder if we would have ever gotten here if Americans always had to write one big check at the end of the year. And how about that whole social security “trust fund”? There’s no such thing as a government trust fund.

Other obfuscations leap to mind: health insurance is paid for by our employers (another temporary war emergency measure) for most Americans, hiding from us the cost of our system; the hidden 7%+ that our employer pays for each employee’s social security. The sheer complexity of the tax code is another great example-I mean do you really believe that even when a tax expert has done his own taxes that he isn’t petrified when he hears he’s getting audited? Even the experts can’t understand income taxes.

Other examples may not be quite as obvious. Consider a law that is routinely violated in a way that obfuscates the real law: the speed limit. We know we can drive faster than the speed limit on interstates, but we’re not sure HOW MUCH faster. This obfuscation affects everyone with a drivers license.

In the end, we know why there’s all this obfuscation in government: it enables policies that otherwise would be intolerable to a majority of Americans. I can help but wonder what a more honest government would look like…

March 12, 2001
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