The Great Pumpkin Tax

Recently, Iowa became the brunt of many jokes when it attempted to implement a sales tax on pumpkins. In Iowa, groceries are exempt from sales tax, but the Iowa government decided that most people used pumpkins for decorations and not for food. However, some specific variety of pumpkins used for pies was exempt from the tax, and you could also fill out a form if you were going to eat a pumpkin and not carve it. Seriously.

What's the real problem here? It's that the Iowa government has arbitrarily decided to tax one class of good but not another. If it had simply decided to tax everything at the same rate, this issue would never have come up. Many states exempt certain items from sales tax: in Connecticut, all groceries and any article of clothing under $50 are exempt from sales tax.

I'd rather have everything taxed, but then have the rate lower. Right now, if one class of good is taxed but another isn't, the people buying the taxed good are in effect subsidizing those who buy the untaxed good. Sure, everyone buys groceries, but not everyone spends the same ratio on groceries and taxed items. And please don't talk about helping the poor. There are many more efficient ways of helping the poor than not having a tax on groceries but having a tax on gasoline or having a tax on furniture or having a tax on cars.

When you tax people or items differently, you create many distortions. This ncludes the creation of silly government forms that make you declare you shall eat a pumpkin and not merely carve it. I'm all for low taxes. However, they need to be low on everything. Having taxes removed from one particular good, or for one preferred group of people, isn't really a tax cut. In the end, it's just a transfer payment. If the government taxed everything equally, but then gave checks for the amount of tax you paid for one particular good, that'd be a subsidy, and no one would argue with you on this fact. But that would have the same exact effect as what the situation currently is. In finance, if two financial scenarios have the exact same cash flows under all circumstances, they are deemed equivalent and would have the same price applied, and would be considered interchangeable.

For now, however, we'll be faced with the fact that we'll have to prove were eating a pumpkin pie or pumpkin bread, and not making a jack-o-lantern that is a tax dodger.