Taxocracy Tales with Scott Hodge

 All taxes tell a story, and today we’ll explore how taxes influenced Bob Dylan's decision to sell his music catalog, how the "chicken tax" reshaped the auto industry, and how the historic "tax on air and light" had profound effects on architecture and living conditions. 

Scott Hodge, President Emeritus & Senior Policy Advisor at the Tax Foundation, joins host Kyle Hulehan to discuss his new book, Taxocracy: What You Don’t Know About Taxes and How They Rule Your Daily Life.

 Links:
https://www.amazon.com/Taxocracy-What-About-Taxes-Daily/dp/B0CL3BXBVS
 

Transcript

Kyle Hulehan: 0:00

All taxes tell a story and today we'll explore how taxes influence bob dylan's decision to sell his music catalog how the chicken tax reshaped the auto industry and how the historic tax on air and light had profound effects on architecture and living conditions. Scott hodge president emeritus and senior policy advisor at the Tax Foundation joins the show to discuss his new book Taxocracy: What You Don't Know About Taxes and How They Rule Your Daily Life. Hello and welcome to the Deduction a Tax Foundation podcast. I am your host, Kyle Hulehan. And today. We are joined by Scott Hodge, President Emeritus and Senior Policy Advisor here at TF. Scott, how are you doing today?

Scott Hodge: 0:45

Oh, great. Kyle. Thanks so much for having me.

Kyle Hulehan: 0:48

It's great to have you here. Now, Scott, you were president for over two decades. You helped lead organization here to a lot of growth and expansion. You helped to bring along, a string of important developments in tax policy. But ultimately, I think some would argue And by some, I mean, me, this podcast host, one of your, your best accomplishments was actually starting this very podcast. And after two decades of being president, I have to, did you imagine the natural next step would just be to become a podcast host?

Scott Hodge: 1:15

No, I mean, I think when you start a career like this, you're just hoping to get an op ed place. Do you want to get a radio interview? And no one would ever thought about creating a podcast. So I feel very fortunate and I'm glad to have a successor such as yourself.

Kyle Hulehan: 1:30

Well, thank you very much. And, and, I'm grateful that you started this podcast, which I'm the host of and for our listeners, I would highly recommend actually checking out our recreational marijuana tax episode. Scott tells a really fun story about what he, saw at 2001, a space odyssey and Scott's a really great storyteller. You'll, you'll see that on full display here. I think that would be a fun for our listeners to check out. We could chat about your career and your accomplishments on this podcast. You've actually done something very impressive. You've written a book, something that's very hard to do. it's called Taxocracy: what you don't know about taxes and how they rule your daily life. Could you just give us an overview of what prompted you to write Taxocracy and what you hope readers take away from it?

Scott Hodge: 2:15

I've wanted to write a book for a long time, and the idea behind the book came out of a series of lectures that I gave, first to some high school students out in Idaho, and then second to a group of, folks at a conference in, of all places, Moldova, who English was their second language, so I wanted to make it very simple by presenting a series of, slides on a PowerPoint and they just basically had pictures, like a picture of a Hershey bar next to a Twix bar. We had, a Tesla next to a Mercedes, a three wheeled car. we had a picture of buildings in Paris and, and, and Copenhagen and Amsterdam. I had a picture of a, a slide of a chicken next to a Ford delivery van. And then I had a, The last slide that was, with a windmill behind each and every one of these slides was a story about taxes and how taxes impacted that sector or, created, disparities between the way different types of things were taxed. And it was a very simple way to illustrate the economic. effects of tax policy, not just on the broader economy, but on individuals themselves. And collecting stories like that, became a lot of fun. So the next step was to put them into a book and, and then to really apply the lessons from these simple little stories to our broader tax code that we have today, and then present readers with a solution to how do we fix the tax code in such a way that That it doesn't cause the kind of unintended consequences that bad tax policy can have.

Kyle Hulehan: 3:56

And I've heard you say this before, and I'm going to steal this from you, is that taxes tell a story, and everything you're talking about is telling a story. And, I do a little bit of writing myself, and I, Two years ago, I had a book published in a very different genre poetry. but I'm very curious a little bit, about the writing process, writing a book, it's no small, no small feat. And, especially on a topic of taxation, it's pretty complex. Could you just maybe walk us through, you know, just the behind the scenes of your writing process. How did you manage to weave this all together? And what did even like a typical day of writing look like for you?

Scott Hodge: 4:29

I had to be very disciplined. The book was green lit by the publisher in early 2023, I think it was January of 2023, and the idea was to have the book published before tax day. of this year. So that it would be available and part of the hopefully the tax debate at the presidential level as well. But in order to do that, I had to finish a manuscript by July 15th of last summer. And so that gave me only four and a half to five months to write the book. And. I had a pretty good idea of what every chapter was going to be, so I had to map out how many chapters and how many pages I had to write each and every week in order to get the book finished by that mid summer of last year. And then, by doing so, that would give us time for any revisions, editing, and so forth, so that it would be published and ready by this spring. It really came down to discipline, but also the fact that I had done so much thinking about what I wanted to include in every chapter and the kind of research that was necessary to bring these stories to light and then to apply them, to real circumstances and in, in our tax code today, I have to admit it was a lot of fun. I really, really enjoyed the process. And now I've started thinking about book number two.

Kyle Hulehan: 5:52

that that's really incredible. So many people I feel like are kind of like, beating their head against the wall and they're just like, so like having such a hard time trying to figure out exactly what to say and the words. And I think it's really a testament to, the work you've done here at tax foundation throughout your career. You'd already built these stories and narratives in a lot of ways and kind of knew them. And then you were just able to lay them out. In a really, really good format. It's a really good book that I think people are going to enjoy. and, and something I want to mention real quick is I actually really like the title Taxocracy. it's kind of a striking title and could you explain maybe how you landed on that title and what it means to you?

Scott Hodge: 6:28

I have to give all the credit to my wife. Morning after morning, we would discuss what should the title of this book be based on all the thoughts I had in my head about the message and what I was trying to communicate. And as we started talking about it, we started thinking about the two things that people dread most about government taxes and bureaucracy. And through that, we put together this term taxocracy. We live in a taxocracy. in our entire lives to some degree are dictated by taxes. we have the kind of healthcare we do because of tax policy. We get, in some cases, we buy a car because of tax policy. We, buy a home, and tax policy plays a role in that. Everywhere we turn tax policy is part of it. And, then of course, beyond that, Or behind that is the bureaucracy of the IRS and government. So these are two things that I think most of us dread most in life and sadly they come together into this simple message.

Kyle Hulehan: 7:31

The title really signifies, I think, a lot of what you get at in this book and you've collected, quite a few intriguing anecdotes in taxocracy. Could you just maybe kick us off with one I found really interesting, which was the window tax story? Could you run us through that?

Scott Hodge: 7:45

I think the window tax is one of the most, I don't know, Telling, stories, in the book in so many different ways. the window tax, goes back to the 18th century in England when the king imposed this tax. It was kind of a wealth tax, on the number of windows in a building. And the idea was that the more windows you had, the richer you must be. And it was a progressive tax, so you paid a different rate and a different amount based on the number of windows you had. Well, there were two Two, I think, interesting, implications of this. The first is that anytime that threshold changed, people would brick up windows, in order to reduce the number so that they would pay a lower tax. But this really hit the poor as, landlords started bricking up apartment buildings, especially tenements in, in London. And it, these windowless, apartment buildings or tenements became, became. what some called a tax on, air and light, and they cause disease to spread rampantly in some of these areas. And so the consequences, of a tax on wealth, so to speak, became essentially a tax on the poor. And I think that's one of the bigger lessons that we can take from this as we understand how politicians are always trying to tax the rich, well, oftentimes the result is a tax on the poor.

Kyle Hulehan: 9:10

And, and this really shows about the design of a tax. Like, why are we taxing windows? Like, this isn't really getting at what we, what we need to get at. This isn't serving its purpose. if they wanted to do that, there's, there's a different or better way or a better approach. And, and I think that story really, really signifies that. And there's another really interesting anecdote you talk about, which is, the chicken tax. And that's another. Unintended ripple effect kind of story. I think I think these two kind of go together. Well, because you just see this like this ripple effect as you say, could you could you shed some light on maybe the chicken tax? And if there's anything else you want to circle back to on on the window tax, feel free.

Scott Hodge: 9:48

Yeah, the chicken tax goes back to 1964, when Europe, some European countries, Germany and France, imposed very high tariffs on imported American chickens. And so President, Johnson at the time got pretty mad at them for doing that. And so he imposed a 25 percent tax tariff on imported, items from Europe, in particular, delivery vans. It was originally tended, I think aimed at, at Volkswagen and, and those kind of delivery vans. Well, flash forward to today, that, tariff is still in place. And so imported delivery vans and pickup trucks and so forth, are taxed at a higher 25 percent rate than the normal 2. 5 percent rate on normal cars. As a result, that's given an advantage to American, truck builders, automakers that make trucks and delivery vans. But it's caused some rather interesting ways in which companies have tried to avoid the tax. Daimler, Chrysler, imported, delivery vans in pieces to South Carolina, and then put them back together so that they would be made in America. And that avoided the tariff. Ford imported their delivery vans from Turkey, and put, fake seats in them so that they would appear to be, passenger vans and thus pay the lower tariff. Well, eventually they got caught doing that. And now they, they're having to pay a huge penalty, for trying to avoid the tariff. And so the, the, the lesson here is that when you impose taxes on different types of things, you get what many call tariff engineering, where companies will go to great lengths to try to avoid that tariff. Another good example of that is the tariff differential between Tennis shoes and, and, bedroom slippers. One company actually puts felt or fuzz on the bottom of their, their, tennis shoes so that they qualify as bedroom slippers and pay a lower tariff. so if you ever buy shoes with fuzz on the bottom, you'll know why.

Kyle Hulehan: 11:53

That's that's so interesting. And I think like, it's funny that the chicken tax kind of has nothing to do with chickens. And you see, like, it's all of these things. They just don't really like, They're not even going to the things that we're speaking to or what you're talking about. They're changing behavior far down the line. And, and I also think, when you're talking about this, I think I saw something in the book that maybe even SUVs had something to do with this. I saw something about SUVs. Was that, was that right? Like maybe that's why America loves an SUV.

Scott Hodge: 12:22

In many respects, it is. It's because the tariff gives American auto manufacturers a leg up in in building both SUVs and large pickup trucks. it's really made them a very, very popular. vehicle and it's put a penalty on foreign manufacturers. And it's one of the reasons why some of the foreign manufacturers have started building their pickup trucks here in the United States, rather than importing them, from abroad. And so the distortions that come from these kinds of taxes, are, are not always obvious. Eventually we, we begin to see them and we need to pay attention so that we don't repeat them.

Kyle Hulehan: 12:59

And, there's this discussion at times, like how much does tax, like how much does it really affect behavior? And you see things like this where companies react in a unique way and to change the tax, to changes in the tax code and, every decision isn't about taxes, but also ultimately people do respond to these incentives and, unfortunately these changes that you're talking about. we're not actually good or helpful changes. so it's just a really interesting way that like how this all kind of works. And, and one other thing I think is, is there's this story about, I don't know about you, but I love Bob Dylan and I think he's a really amazing, amazing musician. And, you mentioned Michael Jackson and Bruce Springsteen and their estates and, Could you kind of discuss how their estates are connected to tax decisions? And can you dive into some of those stories for us here?

Scott Hodge: 13:51

You know, sometimes people react to taxes in advance of a tax increase. you, You know, obviously we've been talking about the way people respond to real taxes, but sometimes people respond to the promise of a tax. And Bob Dylan, sold his music, library to a commercial outfit for some 350 million back in 2021. Because Joe Biden was promising to increase taxes on the rich. And so the way he could avoid that was to sell his, music library and, licensing, in advance of that, to take advantage of the lower tax rates that were in place before Biden promised to increase them. many musicians did that at the time. Bruce Springsteen was another one. And here, it's kind of an interesting story because you have these very, liberal musicians trying to avoid attacks by a liberal president. but things like, the Michael Jackson, estate is a really interesting one too because that, Michael Jackson's estate was in litigation with the IRS for about 12 years over the value of his name and the associated music. at the time, the IRS was. Michael Jackson was must, or his estate must be worth a whole lot. But the estate was saying, wait a minute, when he died, he was. Died in, in ignominy, because of some scandals and so forth. And so the value of his name was very low. Well, it took him 12 years to debate that. And what does that matter today? Well, it matters a lot when you think about, things like the estate tax, or, or, or a possibility of a wealth tax, where these arguments about the value of things are gonna dominate. And, And tie up the, the IRS and litigation for years. so we have to be very careful about trying to tax things, that are not necessarily, saleable because, of the difficulty in putting true values on them.

Kyle Hulehan: 15:47

And, podcasts are all about tangents and I have a kind of question that, I didn't have listed out here, but I'm just curious, is it really worth the time? Like, that seems like it's not almost worth the bite on some of these. When you, when you read some of these stories, like, Do you see it that way? Like, is it worth the IRS kind of chasing after these nuggets or how do you see that? I'm just curious.

Scott Hodge: 16:08

Well, no, ultimately, I think it's a waste of time, for the IRS to do this, but they see a value in going after highly public, names and, celebrities because they're trying to prove a point that no one can avoid attacks and even in death, no one can avoid attacks. But I think that, that ultimately we have to rethink. What we're trying to accomplish with these kinds of things. Are we trying to punish success, punish wealth, or are we just trying to collect revenues for, to pay for government programs? And I think we have to be very careful about trying to use the tax code, to punish people or punish behavior because ultimately you get these kinds of, of, of stories that come out of them.

Kyle Hulehan: 16:50

Yeah. And, you mentioned in the book, there's this really interesting case where the IRS assessed, I think it was 29 million in taxes, for a piece of art or a painting or something that maybe didn't have a ton of value. Could, could you walk us through this and maybe share some lessons on that story?

Scott Hodge: 17:09

Yes. If you, in, in fact, if you went to the, the website for the Metropolitan Mu Museum of Art of Art in New York, there's a painting or a, what they call a, sculptural combine, by a artist by the name of Robert Rauschenberg. And it's a, it's a painting called Canyon. And in the midst of this, this combine is a stuffed bald eagle. And the, the Bald Eagle, by the way, had been stuffed in the early uh, 1900s by one of Teddy Roosevelt's, Rough Riders. But by the time that the family, the heirs of this, art collector, was, trying to settle their estate, the, the IRS was putting a value on this painting of around 65 million, which would have put a tax on it of 29 million. Now, the family said, wait a minute, because this, this painting has a bald eagle in it, and bald eagles are on the endangered list, we can't sell it, so the real value is zero. Well, they were in litigation, once again, for a couple of years, and finally settled with the, the family got to donate it to the museum, but they didn't get a tax deduction for it, neither did they have to eventually pay a tax on it. But once again, it's this whole idea of how do you value something like that? You've got experts on the one hand at the IRS saying, Oh no, it's worth 65 million. On the other hand, you've got people saying, well, you can't sell it legally. So it has to be valued at zero. This is where we get into trouble when we try to tax things like this, especially that have intrinsic value and that are not readily saleable.

Kyle Hulehan: 18:45

Yeah, I mean, this is also just really frustrating to see situations where, Americans are actually just kind of losing out. Like this is a lose lose in a lot of ways because, there's this really special piece of cultural art that maybe, would have been sold or sent somewhere else. And I think maybe in other cases, like art has been sold or maybe taken out of the U. S. economy. And so it's kind of a, this lose lose situation over a tax that's honestly, maybe not the most well designed. Is that, is that how you see it?

Scott Hodge: 19:12

In, in part that's true, but it's, it's what we're trying to tax and another story that came out of that same family, they had to sell 600 million dollars worth of art in order to pay their estate tax back in the 1990s. Well, who bought it? Well, there were three foreign billionaires that bought that art. Well, by definition. That took that art out of the U. S. economy, made it the property of foreigners, and of course, then it was no longer subject to U. S. tax. so we have to be careful about trying to especially tax the wealthy who may be asset rich but cash poor. And so things like the wealth tax, which President Biden wants to impose, could have very detrimental effects because people would have to sell off assets to pay it. And yet, you can see in this case where foreign investors would swoop in, buy up those assets and take it out of the U. S. economy. So the consequences of trying to tax the rich, always have, unintended consequences.

Kyle Hulehan: 20:07

And I myself as a fan of just like, going to a museum and walking through something is sometimes you just also lose cultural value to have something that people that would be here for American citizens to see. And, and I think that this is a really good example of that. And some of the, the complexity that we see here. That's very, very challenging. and so right now, we're going to kind of transition a little bit away from these really great stories. I'm sure Scott will still weave in stories as we're talking about some of these other concepts, but in your book, you discuss, four principles of good tax policy and how Loss aversion can be a significant barrier to reform. Could you, walk us through these principles and how they can maybe achieve a more effective tax system, which is, an important factor in your book as well.

Scott Hodge: 20:54

You know, the Tax Foundation has always stood for these four principles, which is taxes should be neutral, meaning they shouldn't be used to either punish behavior or or subsidized behavior. you should just set a level playing field and allow the economy to work. taxes should be simple. obviously, easy to understand, easy to comply with, they should be stable and not change much, and they should be transparent so we can understand why we're being taxed and where our dollars are going. If we stick to those principles and apply them rigorously to tax reform, we can take a lot of the politics out of tax reform and out of the tax code, and simply allow, us to go about our daily lives without him and to think about how politicians are trying to change our behavior by using taxes to do so. How does that affect tax reform? Well, a lot of us have what psychologists called loss aversion, meaning we're reluctant to give up what we know. For something better, because at least we understand what we have, even if it's not perfect. Now, we all understand that we, we kind of like these deductions that we have in the code, we like the charitable deduction. We like the mortgage interest deduction. We like to be able to, to, to deduct our state and local taxes and all these other things that are in the code today. those are really bad pieces of legislation that are in the code and should be eliminated in order to get a simple tax code. But most of us are afraid to do that. We're afraid to have a simple tax code because we like the things that we know, even if they may be bad tax policy. So we're going to have to overcome that and kind of come to grips with the fact that in order to have a very simple tax code that's neutral, we're going to have to give up some of these credits and deductions we've gotten used to. And

Kyle Hulehan: 22:42

I think like, when you're talking loss aversion makes a lot of sense to me, I feel like maybe even, uh, people maybe more so in my generation also really feel connected to that where you just don't really necessarily want things to change and especially me i'm kind of just figuring out the tax code and how all of how retirement savings works and how all this stuff works and listeners heard me talk about this many times But i'm just figuring out. I don't want it to change. I just figured it out. I just started doing all of this stuff and

Scott Hodge: 23:06

Corporations are the same. one of the things that we're gonna have to do is get corporate leaders to, realize that their tax departments should not be profit centers, but thanks to things like the Inflation Reduction Act and all of the, industrial subsidies that are in the Inflation Reduction Act for green subsidies and whatnot, all of these businesses are contorting themselves In order to try to get a piece of those subsidies and those tax credits. And we're going to have to convince business leaders that their tax departments should not be profit centers. They should not be chasing these kinds of things. And so they need to think about this too. It would be a whole lot better to have lower tax rates and fewer deductions. At the same time, we've got to convince our politicians that the IRS is not the best, vehicle for, either economic or, or social engineering and reason that we have about 220 different tax cuts and, deductions in the code is because politicians over the years have tried to incentivize us in so many different ways that they've actually then end up making this incredibly complex tax code that no one understands.

Kyle Hulehan: 24:15

That makes so much sense to me because it is very complicated and it is very confusing and you know You provided so many great stories and, and, these stories have a lesson in them. And I think that's really at the heart of your book, the, there's a lesson in each one of these stories, there's an economic consequence, there's a behavior change. And if there was, one key message that you'd like policymakers or readers of this book to take away from taxocracy, what would it be? Yeah. And

Scott Hodge: 24:42

Simply, let us lead our lives without having to think about the tax code. we should be able to go about our daily lives, buy a home, buy a car, make business and personal decisions without having to think first about the tax system. And we need to get our politicians to stop trying to use the tax code to either, incentivize us to do things that they want us to do or to punish us for doing things they don't want us to do and simply use the tax code as a means of raising revenues for the federal government and to pay for for basic services and rather as a tool for social and economic engineering.

Kyle Hulehan: 25:23

I'm wondering, as we're closing out here, is there any other story or anything else that, you know, from this book that, that maybe we didn't touch on that you'd really like to highlight or, or did we kind of get to all of them?

Scott Hodge: 25:34

Well, there, there are many, so I encourage everybody, you can go to Amazon or Target or Barnes and Noble's website and order Taxocracy and, dig into it yourself. my mom just sent me a text that she's enjoying the book. She's finding it very readable. Very clever, and very interesting because it's, the stories are so easy to understand and relate to. And that's what I really tried to do. There's no geek speak in there. This is written in English, for a general audience. And I hope also that it's the kind of book that you could give to your teenager, or your college student, so that they can understand the tax system, before they have to, get into their professional lives.

Kyle Hulehan: 26:16

And now, Scott, I actually have a really big compliment that I can pay you here is that most of the time when I'm talking to my girlfriend about podcast episodes on, on here on the Deduction or, or things related to tax policy, she totally tunes me out. Yeah. Yesterday, I was explaining her the concept of this episode, and she was actually very interested because I was walking her through some of the stories you've explained to us here today. And I think that really, you know, goes to show, the interesting stories and the way that you've relayed them and how taxocracy is actually kind of a book for everyone, My girlfriend is not someone who's super fascinated by taxes and like wanting to hear about them, but taxocracy, what you don't know about taxes and how they rule your daily life is interesting to everyone.

Scott Hodge: 26:59

I hope so. And, I remember stories and not facts often. And I think most people remember anecdotes and stories and not necessarily facts. And I think that oftentimes the best way we can learn is to learn through stories and then take those lessons and apply them to, more important things as well. And that's what we've tried to do in Taxocracy. And I hope people take those lessons, learn from them, and also then Buy a copy for your member of Congress too, and maybe they'll learn something too.

Kyle Hulehan: 27:30

Yeah, I hope people do. And Scott, thank you for being on the show today. It was really great to have you here and hear all of these great stories.

Scott Hodge: 27:37

Thank you so much. I appreciate the opportunity.

Kyle Hulehan: 27:42

This has been another episode of the deduction to learn more about the tax foundation and the deduction. Visit us at taxfoundation. org slash podcast. You can follow us on Twitter, Facebook, and LinkedIn at tax foundation. If you've been enjoying our show and want to help us grow, please leave a five star review on Apple Podcasts, Spotify, or wherever you get your podcasts. It helps others find the show. And if you didn't enjoy the deduction, well, keep it to yourself. Another way you can support our work is by donating to the Tax Foundation on our website. Thank you all for listening, and we'll see you next time.