More on taxing cosmetic surgery, subsidies, and tax simplification

CPA Stacie Clifford Kitts replied to my last post with more thought-provoking questions:

Given the current economic state, and the need for our government to find revenue sources, I worry what source will be next.

Indeed, governments at all levels are "digging into the sofa cushions for loose change" with creative ideas for raising revenue. New York State, for example, recently came up with the idea of forcing everyone in the state to buy brand new license plates next year, even though the old ones are perfectly good.

If we as taxpayers don't want more taxes, then we as taxpayers also have to send a clear signal to our politicians as to what we don't want the government to be spending our money on.

Are we now to accept that any government subsidized product or profession is subject to this excise tax? If this is your position, then be wary, there are hundreds of thousands of government subsidies in all types and forms.

Indeed there are hundreds of thousands of government subsidies all over the place, and an important "sofa cushion" for our government to look under is to re-examine the public justification for each of those major subsidies.

Tell me - are we now to explore the background of every product that we buy and determine if the government ever subsidized research or provided tax breaks?

In many cases, what makes the most sense is just to ELIMINATE the subsidy in the first place rather than continuing the subsidy and then excise taxing the subsidized product to undo the subsidy.

And I will now take this as an invitation to get on my favorite soapbox.

Many times those subsidies we should consider eliminating are delivered through the tax code, so eliminating the subsidy just means eliminating a special interest tax break (what I call a "bed buffalo").

The Reagan tax reforms of 1986 did exactly that, eliminating many special breaks to broaden the tax base which enabled tax rate schedules to be lowered while raising the same amount of revenue. It wasn't easy to get rid of all those bed buffaloes at once, but somehow he managed to pull it off. I was teaching public finance at the time, and I remember thinking to myself: he'll never be able to do this--I must be dreaming--this is what public finance professors have been pushing for decades, but it's politically impossible.

But President Reagan did somehow manage to pull it off (a bit like pulling off a bandaid--best to do quickly and in one fell swoop) and the result was a substantial simplification of our tax code (for a while....until those bed buffaloes started creeping back in, one by one. I have all our tax returns going back to the late 70s. I can see the bed buffaloes that left in those Reagan reforms....income averaging, deduction of credit card interest, exclusion of fellowship stipends, to take a few that applied to us...and I can see the many new bed buffaloes that have crept in, one by one, to take their place.)

The Reagan tax reforms of 1986 were a landmark achievement in tax policy. Can we do it again? I don't know.

President Obama clearly hopes so. He appointed Paul Volcker to head a tax reform simplification panel. Paul Volcker gets credit for another remarkable achievement that happened on the Reagan watch, taming a rampaging double-digit inflation that threatened to explode out of control in the early 1980s. But can Paul Volcker and his commission tame the tax code? The early signs don't look promising. When President Obama set up the commission last March, they were charged with the responsibility to issue recommendations by December 4, this Friday. But they've announced a delay. I'm not holding my breath.

But I was wrong in 1986. I thought it would never fly. And it did. So I can hope I'll be wrong this time too.

How soon do you think it will be before it becomes "public policy" to tax all of our choices, in products, or services, or lifestyle? Moreover, who gets to decide which items are wicked enough to be taxed first.

I don't think cosmetic surgery is wicked, but that doesn't mean I think our tax dollars should subsidize it. In my area, there are a few saintly doctors who treat the poor and make considerable financial sacrifices to do so, accepting the relative pittance that Medicaid pays or even volunteering their services for free. I don't begrudge a single penny of the taxpayer money spent to subsidize their medical training. But we live in a time when the federal government is spending over a quarter of the GDP (see the CBO graph at the top of my blog), with a very large chunk of that money going to the health care sector. The public, through its elected officials, has the right and the duty to examine what kinds of services it wants to prioritize for subsidy. Under our current system, we are saddling our children and grandchildren with debt, which includes the financial responsibility for paying for the medical training of today's cosmetic surgeons.

It's high time the government took a careful look at whether there are better uses for much of the money it spends on subsidizing this, that, and the other thing.

So again, I ask, why did cosmetic surgery win the tax lottery, why not the treatment of acne? After all dermatologists went to medical school too, their education was also subsidized. The answer is clear, because taxing little pimple faced teenagers for their acne treatment would tick people off. It doesn’t matter that this procedure is also elective and even vanity driven.

Hmmm, good question. There's often a grey line rather than a black line.

Our existing tax code already makes a distinction between its treatment of cosmetic surgery (which is not tax-deductible on Schedule A, nor is it eligible for tax-excluded flexible spending account use) and treatment of acne (which is, I believe, eligible for both tax breaks.) But you haven't complained about that distinction in existing tax law?

How many distinctions do we want the government making about our decisions to use health care for various purposes? How much intrusion do we want the government to have into our private decisions--whether it's cosmetic surgery, acne treatment, orthodontia, Viagra, or birth control.

Sometimes plastic surgery is needed for a disfiguring condition, for example, cleft palate, in which case it's tax deductible. Some kinds of severe acne are also clearly disfiguring as well.

Do we really want the IRS to be making such decisions in audits: "Hmm, let's see those before-and-after photos? Exactly, HOW disfigured were you before?"

All good questions, no easy answers. And there are certainly grey areas.

But those questions are not just about new taxes, they are about the priorities and bed buffaloes already embedded into our existing tax code.

Exactly how much do we want the IRS--or the government in general--to be intruding into our lives?

There are no easy answers here, but simplifying the tax code to eliminate a lot of bed buffaloes would reduce the kinds of such intrusive questions the IRS needs to ask.

However, people who elect to have cosmetic surgery are perceived as vain, spoiled, overindulged, and sinful.

Honestly, I don't see people who make such choices in that way. I feel very blessed and fortunate that I don't have a body excessively endowed in a way that causes stares or a nose that might make me feel extremely self-conscious. My body isn't perfect, I'm blessed to have one I can feel happy about living in. I'm also grateful that I'm oblivious enough to social conventions not to notice that I was supposed to dye my hair when it started turning gray. (Silly naive me--it took me years to figure out that virtually every other woman my age was dying her hair. I just thought I was one of a very few graying prematurely! But I'm used to it now.)

Do you see how letting our government tax our life choices even when those choices are not harmful to the public welfare creates a morality clause in our tax system by giving lawmakers the power to tax those items or services that they believe are wrong?

I'm perfectly fine with the idea that our society offers people who want them options for dealing with unwanted gray hair or aspects of their bodies that may make them unhappy, but it's not the highest priority use for subsidies from my taxpaying dollars--or the highest priority use for the debt our children and grandchildren will need to pay back. If there's an easy way to eliminate such subsidies upfront, say, by making cosmetic surgeons repay the subsidized cost of their training, let's do it. If not, there's something to be said for taxes and/or "user fees" after the fact.

It's analogous to airport fees. The government provides flight control services and other airplane safety services and captures some of that back in the form of user fees or taxes charged on tickets. I'm not enough of an expert on aviation policy to know if it's the "right level" or a convenient "cash cow."

I don't think that air travel is "sinful," but I think there's a case for making sure that airline passengers are not subsidized by the general taxpaying public.

Similarly, I don't think that cosmetic surgery is "sinful," but I think there's a case for making sure that it's not subsidized by the general taxpaying public.