Paul L. Caron

Wednesday, March 3, 2021

Johnson: Taxing Meals And Civic Virtue

Calvin H. Johnson (Texas), Return to Civic Virtue: Tax Meals, 170 Tax Notes Fed. 1105 (Aug. 15, 2021):

Tax Notes Federal (2020)Excluding meals from taxation, when other forms of compensation are taxed, inevitably causes a loss of value — a waste — that economists call deadweight loss. The exclusion for meals causes a shift from cash to meals, until in equilibrium, the loss of value from the meals is just short of the tax avoided. In equilibrium, the loss is a tax-caused destruction of resources — not physically, but by value. The recent Consolidated Appropriations Act decreased the tax on meals by allowing a 100 percent deduction for some business meals, repealing the prior law’s 50 percent deduction, which is the wrong direction to go. The end of the limited deduction was instigated by former President Trump himself and was a high priority for the Trump Treasury in its negotiations with Congress over the appropriations bill. Trump personally takes advantage of tax-exempt meals and has interests in restaurants selling meals. Thus, the change in law was narcissistic and a betrayal of civic virtue.

With the departure of the Trump administration, we must recover our civic virtue. We must all join together, across the partisan divide, in the condemnation of unnecessary tax-caused waste, including that from the reduced tax on meals. A wise tax system needs to transfer money from private to public uses, but it also needs to minimize the deadweight loss in that transfer by defending the tax base. In a loophole-filled tax system such as ours, taxpayers move from taxed to untaxed items, doing damage to their real desires in the process. Tax avoided by the move to tax exemption is a lose-lose situation: Taxpayers inflict loss or waste on themselves up to the amount of tax avoided, and the government has to make up the revenue from some other, presumably inferior, source. A broad, unavoidable tax base keeps tax rates down for any given level of revenue needs and minimizes waste. High rates on an avoidable tax base maximize the damage from tax and minimize civic virtue. In the tax policy debate coming over the next months and years we must defend the tax base and make it fairer and more efficient.

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