Look At Hidden Taxes, Not Just Hidden Fees

President Joe Biden talked about how he was working to protect Americans against hidden junk fees in his State of the Union address. Now he has called, as a White House press release put it, “for all agencies to reduce or eliminate hidden fees, charges and add-ons” that might “confuse or deceive” us in many markets. Similarly, in California, “A bevy of new legislation takes aim at hidden fees across several industries.”

What is proposed so closely parallels a 2017 report from President Barack Obama’s National Economic Council that it makes me ask why the problem is still around six years later if solving it is so crucially important. But even more important is to ask why there is so much rhetorical emphasis on keeping Americans from being fooled and harmed by hidden fees in markets, but none given to by far the greatest source of such abuses of Americans — government itself, via hidden taxes.

As public finance scholars Edgar and Jaqueline Browning could already put it in their “Public Finance and the Price System” text decades ago, it is “no accident that nearly 50 percent of all federal expenditures” are financed by hidden taxes. And hiding the real costs of government impositions makes them appear far better than they are, which saddles us with far more government than if we recognized what the real costs were.   

The corporate income tax, perhaps the most inefficient and distorting tax for the revenue raised, is one example. Lulled by the fiction that businesses pay taxes — in fact, only people pay taxes — customers blame corporations for increased prices that result and employees blame them for reduced wages. But government gets the money and claims the credit for benefits where that money is spent. The same reasoning holds for excise taxes, import duties and restrictions, and business property taxes.

The government plays a similar misdirection game with the employer half of Social Security and Medicare taxes. Employers, knowing they must pay this 7.65% tax on top of wages, offer lower wages as a result. So the employer half of Social Security really comes out of employees’ pockets, as do workman’s compensation and unemployment insurance premiums. But workers blame employers for the costs they are forced to bear, while government gets the resources.

Mandated benefits also impose massive hidden taxes, because they also come out of workers’ overall compensation. Mandating the provision of employee health insurance, for instance, lets government claim credit for delivering the benefits, but companies get the blame when they offer lower wages or charge higher product prices to pay for them. And such mandated benefits can comprise as much as 30% of an employers’ labor costs.

Government regulations that create barriers to entry, such as licensing regulations, also restrict supply and competition, which acts as a tax on consumers, but focuses complaints about high prices and shoddy services that result on those in the industry. Another similar illustration involves antitrust, where the Biden administration is now pushing a “big-is-bad” approach, acting as a tax by threatening firms that have grown large by providing greater benefits to their consumers, rather than celebrating the gains in consumer welfare they have created.  

Deficits are deferred taxes, hidden to the extent those who will be stuck with the bill is hard to clearly identify at the time. And the government always assures us that those who will pay in the future will be named “not you.” The same is true for the trillions of dollars of unfunded benefit promises to Social Security, Medicare and government pension participants, which politicians occasionally decry, but mercilessly attack any proposal to do anything about, even when those programs’ commitments cannot all possibly be honored.

These hidden tax examples are far from exhaustive. Income tax withholding acts to reduce awareness of its burdens, compared to paying in a single check at tax time. Also common is taxing those unable to vote on an issue (e.g., high hotel taxes in tourist meccas and fee or facility charges at airports, primarily borne by visitors) or who make up voting minorities (e.g., taxing “the rich” and the rent control “tax” imposed on landlords forcing them to accept lower rents from tenants). Regulatory burdens also act like massive taxes, recently estimated at about $2 trillion per year, while escaping scrutiny as taxation. As recent experience has reminded Americans, inflation can also act as a very large tax.

At every level, much of government spending is financed with hidden taxes, designed to obscure who really pays and how much they pay. To the great extent that Americans underestimate their costs because of economic ignorance, we similarly greatly overestimate what the government can do to advance our general welfare and therefore support government programs that we would oppose if we were more accurately informed.

That government preens as a protector against hidden fees, while harming Americans far more with hidden taxes, says a lot about hypocrisy and how poor a deal our government offers us as our protector. But reining in the hidden tax ruse also offers us a useful avenue of reform. Unfortunately, the government seems unwilling to apply its warnings to itself, one more illustration of Adam Smith’s observation that “There is no art which one government sooner learns of another than that of draining money from the pockets of the people.”  

Gary M. Galles is a professor of economics at Pepperdine University.