Americans don’t need politicians to tell them that things are expensive. They know it every time they fill up the gas tank, buy groceries, take the family out to dinner or call a contractor to fix something around the house.
Washington’s usual response is to spend more taxpayer money: create another government program, offer another subsidy or send another check. But there is a simpler way to make life more affordable: let Americans keep more of the money they earn.
Taxes are an important and often overlooked part of the affordability problem. We tend to think of taxes as something deducted from a paycheck. But Americans also pay taxes when they buy things, and many of those taxes are embedded in the prices of goods and services.
Consider gasoline. The federal government imposes an 18.4-cent-per-gallon tax on gasoline, before state and local taxes. The cost is obvious at the pump, but its effects extend throughout the economy. Nearly every product sold in America must be transported at some point. Trucks deliver food to supermarkets; manufacturers move raw materials and businesses ship finished products. Higher transportation costs eventually show up in the prices consumers pay.
Sales taxes are another straightforward example. The average combined state and local sales tax rate is roughly 7.5 percent, according to the Tax Foundation, with some states exceeding 10 percent. A family that spends $10,000 on taxable purchases in a jurisdiction with a 9 percent sales tax sends $900 to the government rather than putting that money toward food, a utility bill, a car payment or savings.
The tax burden can be less visible. Some states tax business purchases and inputs. Those taxes become part of the cost of producing goods and services and can ultimately be reflected in consumer prices. Excise taxes on gasoline, alcohol and tobacco can also represent a substantial share of the final price. Consumers often blame manufacturers and retailers for higher prices without recognizing how much government taxation contributes to the cost.
The same principle applies to taxes on businesses. Corporations do not simply absorb higher taxes. They adjust. Depending on the circumstances, that can mean higher prices, slower wage growth, fewer hires or less investment. The precise effect varies, but the basic economic reality does not: taxes have consequences, and those consequences are ultimately borne by people.
If politicians are serious about affordability, they should spend less time asking what government can give people and more time asking what government can stop taking from them.
First, reduce or temporarily suspend the federal gasoline tax. Cutting the 18.4-cent federal levy would immediately reduce the federal tax component of gasoline prices and lower transportation costs across the economy. If Congress is concerned about the Highway Trust Fund, it can find another way to finance it rather than making consumers pay more every time they fill up.
Second, eliminate sales taxes on necessities, particularly groceries. Families have to eat. They should not have to pay a tax simply for putting basic food on the table. State and local government officials should temporarily reduce those taxes, which would provide an immediate benefit every time families shop for food.
Third, reduce payroll taxes on working Americans. A two-percentage-point reduction in the employee Social Security payroll tax would put up to $1,200 a year back in the pocket of someone earning $60,000. That is real money for a middle-class family. Reducing the employer share could also lower the cost of hiring and encourage additional employment and investment.
Fourth, stop taxing inflation when Americans sell their homes. The tax code generally measures capital gains in nominal dollars, meaning Americans can owe taxes on gains that partly reflect nothing more than inflation. The problem is particularly acute in housing. The $250,000 capital-gains exclusion for individuals and $500,000 for married couples selling a primary residence has not been adjusted since 1997. A couple that bought a modest home decades ago can face a substantial tax bill on a large portion of what is essentially an inflationary gain.
That can discourage homeowners from selling, reducing the supply of homes available to younger families. Indexing the tax basis of assets for inflation would help ensure Americans are not taxed on gains that never really occurred.
None of these measures will solve every affordability problem. But they would move policy in the right direction, and provide needed relief from the energy price shock resulting from the Iran conflict.
The basic principle is worth remembering: government cannot tax its way to affordability. If Washington really wants to help Americans cope with the rising cost of living, it should start by letting them keep more of what they earn and pay less of what they spend.
Cesar Conda, Secretary Marco Rubio’s first Chief of Staff when he served in the U.S. Senate, is a Founding Principal of Navigators Global and an Economic Advisory Board Member of Unleash Prosperity Now.
