Taxing cosmetic surgery?

CPA Stacie Clifford Kitts comments on Congressional proposals to tax cosmetic surgery in Stacie's More Tax Tips) .

But what is even more perplexing is just how or why cosmetic surgery won the tax lottery. I fear that this type of legislation opens the door for a whole litany of WTF taxes. I mean why not tack on an additional tax for hair coloring, nail salons, or makeup. These are also vanity products. Frankly where does it stop?

Stacie raises some interesting issues. At the moment, Congress is "digging into the sofa cushions" to find money to keep deficits from becoming even more unmanageable than they already are. Current deficits are not sustainable for the long-term. Something has got to give.

From a selfish point of view, I wouldn't mind taxing anything on her list. I don't consume hair dye, makeup, nail salon services, or cosmetic surgery.

From a public policy point of view, there's a strong argument for taxing cosmetic surgery which does NOT apply to the other products Stacie mentioned.

The government provides large subsidies for the education of physicians. Yes, med students do pay tuition, often taking out large loans to do so, but their tuition does not cover all the costs of their training. Government subsidies for medical education make up the difference.

At the moment, people who purchase cosmetic surgery services are getting it at a discount thanks to the general public's subsidies of their physicians' training.

As a taxpayer, I think it is fine to subsidize the education of pediatricians, obstetricians, family practitioners, internists, cardiologists, neurologists, ophthalmologists, geriatricians, and many other kinds of physicians who--in my view--frequently generate a great deal of public value beyond what they may collect in their salaries, especially in these days of managed care and high malpractice premiums.

As a taxpayer, I get a "return" on my investment in physician education subsidies in many ways from most specialties. Good prenatal and pediatric care helps to create a healthier generation of infants more of whom will grow up to be self-sufficient adults who contribute to society. Good geriatric care can help elderly live higher quality lives and stay in the community longer, reducing the need for expensive long-term care. I was recently reminded of this when several elders I know had great experiences with cataract surgery, which should give them many years of independent living ahead.

More generally, I get a "warm fuzzy" feeling of happiness from knowing there are physicians attending to the pressing medical needs of those who are suffering. I hope I'll never need the services of, say, an oncologist, but I'm glad they'll be around if and when I do need one. That's what an economist would call "option" value. I value having many physician specialties available in the community. I think there are lot of taxpayers who feel the same way that I do. We taxpayers are willing to subsidize medical education for most specialties, but cosmetic surgery is not one of them.

It's a free society, however, and doctors have the right to choose to use their taxpayer-subsidized medical training to go into specialties such as cosmetic surgery if they want to do so. Many physicians find cosmetic surgery an attractive specialty--good predictable hours (middle of the night cosmetic "emergencies" are rare) and no hassles with insurance companies. Given that the general public financed some of their very expensive medical education, taxing those cosmetic procedures is one way for the general public to get some "return" on its investment in their education. Doctors who object to such a tax are free to rechannel the use of their medical talents into directions that society considers more socially valuable.

To put this in economic terms: there are "positive externalities" to the general public that justify some subsidy for the training of physicians in most specialties. It's not so clear that there are many positive externalities to the general public from subsidizing the training of doctors who perform purely cosmetic surgery. In that case, it's not unreasonable for the general taxpaying public to say, in essence, "We want our money back" to those physicians who choose to use their subsidized training to do cosmetic surgery.

To return to Stacie's point, the same arguments do not apply to the producers of hair dye and makeup, nor to the operators of nail salons, since the taxpayers make no special investments in their training.

Role of Paid Preparers in Tax Compliance: Literature Review

TaxProf Paul Caron posted a link to an interesting new paper available on SSRN,
The Role Paid Preparers Play in Taxpayer Compliance in the United States: An Empirical Investigation with Policy Implications

Here's a fascinating excerpt from their literature review:

Using 1979 Taxpayer Compliance Measurement Program (TCMP) database, Erard (1993) found that noncompliance was greater on paid, than self, prepared returns, with the highest predicted mean level of noncompliance occurring on CPA or lawyer-prepared returns. If a taxpayer’s preparation mode changed from self to using a CPA or lawyer, noncompliance increased by a factor of about 4.5! In contrast, the noncompliance of a taxpayer switching from self to some other preparer increased by only 15 percent.

More recently, the IRS reported a higher error rate on paid (56 percent)—as compared with self—prepared (47 percent) returns. This disparity in error rates translated to different dollar amounts taxpayers owed after audit. For Tax Year 2001 taxpayers using a paid preparer were liable for a median of $363 after audit, while those who self-prepared owed a median of $185 per return.

The authors of the study are Sagit Leviner, a law professor at Tel Aviv University, and Kyle Richison, an IRS researcher. (IRS Office of Research, Analysis, and Statistics) have posted The Role Paid Preparers Play in Taxpayer Compliance in the United States: An Empirical Investigation with Policy Implications

After making the observation above, they observe the possible negative externality effects from spreading "infectious" negative attitudes towards tax compliance. In other words, when tax pros encourage their clients to violate tax law, their clients may spread those attitudes to others in casual discussions.

As an important aside: the evidence cited above from the old TCMP study is especially interesting because the TCMP data was based on a random selection of returns for audits. In other words, TCMP audits are not subject to sample selection bias.

This is all quite interesting. I will need to go look at the original sources the authors cite as their sources for the passages above. One of the sources may be an IRS internal research study not available to the public, however.

Here are the footnoted sources for the passages above:

Brian Erard, Taxation With Representation: An Analysis of the Role of Tax Practitioners in Tax Compliance, 52(2) JOURNAL OF PUBLIC ECONOMICS 163 (1993).

Id; see also Internal Revenue Service, Survey of Tax Practitioners and Advisers (1987); Ayres et al. (1989), supra note 11. But cf. Andrew D. Cuccia, The Effects of Increased Sanctions on Paid Tax Preparers: Integrating Economic and Psychological Factors, 16(1) THE JOURNAL OF THE AMERICAN TAXATION ASSOCIATION 41 (1994); Richars G. Broody and John J. Masselli, Tax Preparers: Whose Team Are They On?, 41 THE NATIONAL PUBLIC ACCOUNTANT 18 (1996).

National Research Program (2001)

This is just their literature review of prior work done by others. In my next post, I'll go on to discuss the results of their new contribution to the literature.

Getting the Pigovian tax right on tobacco

Pennsylvania Governor Rendell is looking for new sources of revenue to plug the budget gap in his state. Pigovian taxes are a great place to look for new revenues, because they yield revenue AND improve economic efficiency at the same time.

Tobacco products are always a tempting target. Currently, Pennsylvania, like most states, already taxes cigarettes quite heavily. In fact, Professor Kip Viscusi of Vanderbilt Law School studied the taxes on cigarettes and found that cigarette taxes actually exceeded the net externality costs associated with smoking.

For some reason, however, Pennsylvania does not tax other tobacco products (cigars, cigarillos, chewing tobacco, for example.) So Gov. Rendell wants to tax them now.

Villanova Law School Professor James Maule makes the case that the Pigovian argument for taxing cigarettes extends to taxing other tobacco products as well as cigarettes.

Cigarettes are taxed for a reason. They are taxed because their use imposes costs on society, ranging from the litter of cigarette butt through the impact of second-hand smoke to the increases in health care costs triggered by smoking. Indeed, cigarettes are taxed for several good reasons, and those reasons are no less applicable to cigars and smokeless tobacco. The differences between them are a matter of size, shape, and color. At best, one might argue that tobacco chewers don’t generate second-hand smoke, but they spit the tobacco juice all over the place, which for most people is far worse than cigarette butts covering the ground.

Why does the government like to single out beverages for taxation so much?

Yesterday's San Francisco Chronicle reported that Mayor Gavin Newsom is joining the list of politicians calling for a soda tax, citing a new UCLA study on soda consumption and obesity:

"Soda is cheap, sweet and irresistibly marketed to teens," said Susan Babey, the study's lead author. "Not enough teens know about the health and dietary risks of drinking huge quantities of what is essentially liquid sugar." San Francisco would be the first city in the country to levy a fee on soda if, as expected, it is approved by the board. A handful of states, including Arkansas and Missouri, tax sodas, and California has considered the idea in the past. A soda tax has also come up in the national debate about health care reform as one way to help pay to insure more people.

The soda tax debate has gotten me musing once again--why does the government like singling out beverages so much for taxation?

Taxes on tea, taxes on whiskey, taxes on alcohol, all of them have played a vivid and memorable part in our nation's history, and all of them really riled up the taxpayers.



We have all grown up with images in our head of infuriated colonial tax protesters throwing bales of tea overboard in Boston, angry farmers tarring and feathering federal revenue agents during the Whiskey Rebellion (shown in the picture above), and struggles in the backwoods of Appalachia between "revenooers" and "moonshiners."

With all the popular uproar about beverage taxes in the past, why are government officials considering taxing soda?

Equity argument: Soda is not a necessity and it's easy to avoid paying the tax by changing to other beverages, including tap water, so taxing soda doesn't impose the same kind of hardship on the poor that a tax on a necessity or a broader-based and harder to avoid tax would impose.

Economic efficiency argument: This is the most controversial argument, because it relies on three debatable propositions.

(1) Soda consumption contributes to obesity.
(2) Obesity leads to poor health and greater health care costs.
(3) Because of insurance and/or government provided health care, individuals do not bear the full cost of their health care costs.

If (1), (2), and (3) are all true, then there is an externality argument for a tax on soda. This would be an example of a Pigovian tax, a tax that corrects for a case in which the social marginal cost of a good is greater than the private marginal cost of the good.

If (1) and (2) are true, but (3) is false, then there might still be an internality argument for a tax on soda. The idea of an internality argument is far more controversial than externality.

But these equity and economic efficiency arguments are hardly unique to soda--you could make a similar case for taxing other non-beverage junk foods as well.

There's another important argument that doesn't get cited as much, but I think it's an important one in actual practice.

Administrative practical convenience argument: Most states already have bottle bill deposit laws which have caused retailers to create accounting systems that make it relatively easy to single out soda for taxation.

If we think about the history of the tea tax and the whiskey tax and federal excise taxes on alcohol in general, there were probably similar practical administrative arguments for choosing those tax bases.

There's also the big question of the relative power of special interest lobbies. One might argue that it would make more sense just to impose big taxes on sugar and corn syrup, rather than soda, but that would mean taking on a different set of lobbyists.

Speed traps: adventures in creative municipal public finance?

Traffic ticket fines have long been a tempting source of municipal revenues in cities and towns large and small, but an AP news story shows one small town taking that creative revenue source to an irresponsible extreme that far transcends any possible Pigovian taxation justification.

JERICHO, Ark. – It was just too much, having to return to court twice on the same day to contest yet another traffic ticket, and Fire Chief Don Payne didn't hesitate to tell the judge what he thought of the police and their speed traps.
The response from cops? They shot him. Right there in court.
Payne ended up in the hospital, but his shooting last week brought to a boil simmering tensions between residents of this tiny former cotton city and their police force. Drivers quickly learn to slow to a crawl along the gravel roads and the two-lane highway that run through Jericho, but they say sometimes that isn't enough to fend off the city ticketing machine.
"You can't even get them to answer a call because normally they're writing tickets," said Thomas Martin, chief investigator for the Crittenden County Sheriff's Department. "They're not providing a service to the citizens."
Now the police chief has disbanded his force "until things calm down," a judge has voided all outstanding police-issued citations and sheriff's deputies are asking where all the money from the tickets went. With 174 residents, the city can keep seven police officers on its rolls but missed payments on police and fire department vehicles and saw its last business close its doors a few weeks ago.
"You can't even buy a loaf of bread, but we've got seven police officers," said former resident Larry Harris, who left town because he said the police harassment became unbearable.
Sheriff's deputies patrolled Jericho until the 1990s, when the city received grant money to start its own police force, Martin said.
Police often camped out in the department's two cruisers along the highway that runs through town, waiting for drivers who failed to slow down when they reached the 45 mph zone ringing Jericho. Residents say the ticketing got out of hand.
"When I first moved out here, they wrote me a ticket for going 58 mph in my driveway," 75-year-old retiree Albert Beebe said.
The frequent ticketing apparently led to the vandalization of the cruisers, and the department took to parking the cars overnight at the sheriff's department eight miles away.
It was anger over traffic tickets that brought Payne to city hall last week, said his lawyer, Randy Fishman. After Payne failed to get a traffic ticket dismissed on Aug. 27, police gave Payne or his son another ticket that day. Payne, 39, returned to court to vent his anger to Judge Tonya Alexander, Fishman said.
It's unclear exactly what happened next, but Martin said an argument between Payne and the seven police officers who attended the hearing apparently escalated to a scuffle, ending when an officer shot Payne from behind.
Doctors in Memphis, Tenn., removed a .40-caliber bullet from Payne's hip bone, Martin said. Another officer suffered a grazing wound to his finger from the bullet.
Martin declined to name the officer who shot Payne. It's unclear if the officer has been disciplined.
Prosecutor Lindsey Fairley said Thursday that he didn't plan to file any felony charges against the officer or Payne. Fairley, reached at his home, said Payne could face a misdemeanor charge stemming from the scuffle, but that would be up to the city's judge. He said he didn't remember the name of the officer who fired the shot.
Payne remains in good condition at the Regional Medical Center at Memphis. He referred questions to his lawyer.
"I know that he was unarmed and I know he was shot," Fishman said. "None of that sounds too good for the city to me."
After the shooting, Martin said police chief Willie Frazier told the sheriff's department he was disbanding the police force "until things calm down." The sheriff's department has been patrolling the town in the meantime.
A call to a city hall number listed as Frazier's went to a fax machine. Frazier did not respond to a written request for comment sent to his office.
Alexander, the judge, has voided all the tickets written by the department both inside the city and others written outside of its jurisdiction — citations that the department apparently had no power to write. Alexander, who works as a lawyer in West Memphis, resigned as Jericho's judge in the aftermath of the shooting, Fairley said. She did not return calls for comment.
Meanwhile, sheriff's deputies want to know where the money from the traffic fines went. Martin said that it appeared the $150 tickets weren't enough to protect the city's finances. Sheriff's deputies once had to repossess one of the town's police cruisers for failure to pay on a lease, and the state Forestry Commission recently repossessed one of the city's fire trucks because of nonpayment.
City hall has been shuttered since the shooting, and any records of how the money was spent are apparently locked inside. No one answered when a reporter knocked on the door on Tuesday.
Mayor Helen Adams declined to speak about the shooting when approached outside her home, saying she had just returned from a doctor's appointment and couldn't talk.
"We'll get with you after all this comes through," Adams said Tuesday before shutting the door.
A white Ford Crown Victoria sat in her driveway with "public property" license plates. A sales brochure advertising police equipment sat in the back seat of the car.