Did you know that (as of this writing) 75 percent of the overall burden of US tariffs is on apparel? Or that of this burden, 66 percent is on women’s apparel? It’s not just because women buy more clothing than men; it’s also because the US government purposely sets tariff rates higher on women’s clothing (15.1 percent)than on men’s clothing (11.9 percent.) That’s one of many interesting nuggets you’ll find in Scott Hodge’s important new book Taxocracy.

Before I read the book, I knew a lot about the US tax system. Now I know much, much more. From 2000 to 2022, Hodge was president and CEO of the Tax Foundation, based in Washington, DC. You don’t have to read much of that foundation’s work to suspect that the professionals who work there are not big fans of taxation; you also don’t need to read much to realize that they know their subject and report it honestly. Hodge’s book is in that tradition. He considers the many ways that taxes distort our behavior and make us worse off, not just because they take our money but also because of deadweight loss—the loss of consumer and producer gains because exchange is forgone as a result of the higher prices resulting from taxes.

Dip into any chapter and you’ll learn something important, often horrifying, and—less often—amusing about the tax system. It affects, for example, what form our earnings take, how much and how we save, which items we buy, and how producers adjust their products to reduce the taxes they (and we) pay for their products. Read almost any page of Taxocracy and the odds are high that, in the words of Pocahontas, you’ll learn things you never knew you never knew.

Sin taxes / Consider so-called sin taxes, taxes that governments impose on items that some government officials and some voters disapprove of. Any economist can tell you that such taxes will alter people’s behavior. Hodge goes further and shows how specific sin taxes have done that. He notes, for example, that hard seltzer—carbonated water containing alcohol—is “one of the fastest-growing beverage classes in the US.” Why? Because the taxes on brewed beverages are much lower than the taxes on distilled spirits. Hard seltzers are brewed? Yes. Hodge explains that producers have figured out how to brew sugar to create their products.

Consider Norway’s high tax on sugar, which, writes Hodge, “has created a booming candy business … in Sweden.” Or, closer to home, New York, whose high taxes on cigarettes have led to over 50 percent of cigarettes smoked in the state coming from smugglers.

Chicken tax / In 1964, President Lyndon Johnson retaliated against a tax imposed by France’s and West Germany’s governments on chicken exported from the United States. LBJ imposed a 25 percent tariff on light trucks, thereby punishing then-popular truck exports from those countries, while keeping the tax on passenger vehicles at a modest 2.5 percent. The tariff on trucks was supposed to be temporary. Sixty years later, the tax, dubbed the “Chicken tax,” still exists.

Foreign truck producers have responded very creatively. Hodge notes a number of adjustments. Subaru, for example, installed seats in the bed of its BRAT pickup truck, resulting in its being classified a passenger vehicle. Mercedes-Benz Group (previously Daimler and DaimlerChrysler) shipped its foreign-made Sprinter delivery vans to the United States in pieces and then reassembled them in South Carolina, rebadging them as Dodge and Freightliner. Ford continued building its Transit Connect vans in Turkey but added cheap seats and windows to qualify the vans as passenger vehicles before exporting them to the United States. Once the vans arrived, Ford ripped out the seats and replaced the windows with panels. Unfortunately, Ford lost a court case over the practice and had to pay over $1 billion in penalties. I say “unfortunately” because when companies figure out a way to avoid tariffs and other taxes, not only those companies, but also consumers, gain.

Foreign truck producers have responded to the high tariff by producing many of their trucks in the United States. Presumably, it’s more costly for those companies to produce here, which is why they weren’t doing so before, but the net result for consumers is a lower overall price than if the companies produced abroad and consumers paid the tariff.

On this issue, though, Hodge makes an uncharacteristic mistake. He points out, correctly, that US fuel economy standards for light trucks, which are less onerous than for cars, push Americans to buy more trucks, including SUVs and minivans, than otherwise. So far, so good. But then he writes, “As a result [of both fuel economy standards and the 25 percent tariff], light trucks (pickups, SUVs, and minivans) now outsell cars by three to one.” The fuel economy standards certainly push Americans in that direction. But the 25 percent tariff makes light trucks more expensive than otherwise, making the push less than if the truck tariff were set at the same 2.5 percent rate as the tariff on cars.

Tariff engineering / One of the best parts of the book, and most informative to me, is Hodge’s discussion of what he calls “tariff engineering.” The idea is that in response to US tariffs, producers in other countries change their products just enough to get those products into a lower tariff category. One example is shoes versus bedroom slippers. For some reason, the tariff rate on shoes is higher than the rate on bedroom slippers. Converse, which manufactures its shoes overseas, adds a light felt to the soles of its tennis shoes, allowing them to be categorized as slippers. The ultimate buyer finds that the fuzzy bottom wears off quickly. So, both seller and buyer gain, but they do so because of the differential taxes on imports. Without those taxes (tariffs), they would gain even more. Hodge explains in a footnote that this all came about because of tariffs imposed by President Donald Trump.

Taxes, health insurance, and pets / One issue that most US health economists are familiar with is the historical origin of employer-provided health insurance. Hodge tells the story. During World War II, employers who were constrained by economy-wide government wage controls got around them by adding health insurance to employees’ compensation. The Internal Revenue Service decided not to tax this in-kind payment compensation and the 1954 tax law made the tax exemption part of the law. As I pointed out in my 2001 book The Joy of Freedom: An Economist’s Odyssey, from the 1950s to 1980, rising marginal federal and state income tax rates for most people, along with rising Social Security tax rates, put most people in higher tax brackets. So, payment in the form of health insurance became more and more attractive for employers and employees. As a result, notes Hodge, patients often have less say about their healthcare than doctors and insurance companies. To some extent, patients are like pets sitting “quietly while the doctor and the owner negotiate over the cost and quality of the care.”

Hodge gives an example of the difference between competitive responses when the patient rather than the insurance company pays for health care. One December, when he went to his doctor for treatment of his flu, she prescribed some medicine, Hodge paid the $25 co-pay, and he never saw the bill. The next month, January, he was still sick and went back to his clinic. Meanwhile, his employer had switched to a policy with a health savings account (HSA) and a high deductible. When he told the doctor that he would be paying with his HSA debit card, her attitude changed. She admitted that under the previous low-deductible insurance, she would have ordered a number of tests without even consulting him. But instead, she gave him options and prices and let him choose. Hodge writes, “In one month, I went from being a pet to [being] a patient.”

CTC / One of the most data-intensive parts of Taxocracy is Hodge’s discussion of the Child Tax Credit (CTC), which Republicans and Democrats in Congress have pushed to increase in recent years. Hodge notes many problems with the CTC, including but not limited to the following:

  • overpayments (based on fraud and errors) that average 14 percent of total payments,
  • little good effect on economic growth because the tax credits, being tax credits, don’t reduce marginal tax rates, and
  • turning the IRS into a benefits agency, leaving less room for employees to give tax information to callers.

On the second point, notes Hodge, cutting individual income tax rates would produce four times the economic growth that the CTC produces and cutting corporate tax rates would produce five times the growth.

Corporate taxation / Taxocracy lays out in grisly detail the complications of the corporate income tax. One is separate depreciation schedules for various forms of corporate capital. All the schedules ignore the fact that future inflation, at even a modest rate of 2 percent, means that the corporation can never deduct the full cost of an investment. Only expensing that investment—letting the corporation deduct it in the year it makes the investment—can do that. Hodges, quite naturally, advocates expensing.

There are many more complications, too numerous to discuss here. And corporate taxes matter for economic growth. Referencing a 2008 report from the Organisation for Economic Co-operate and Development (OECD), Hodge writes, “Corporate income taxes were found to be the most harmful taxes for economic growth because capital is the most mobile factor in the economy and, thus, the most sensitive to high tax rates” (bold and italics in original).

Cost of compliance / One of the most striking numbers in the book is Hodge’s estimate of the cost of complying with the federal estate tax. Based on paperwork data that the federal government’s Office of Information and Regulatory Affairs reported, in 2022, that was $18 billion. His footnote indicates that this estimate is based on the over 300 million hours spent filling out forms. That means that the $18 billion is an underestimate because people don’t simply fill out forms, they also change their investments and their gifts to make the estate tax less onerous than otherwise. And how much did the federal government expect to raise in 2021 in estate and gift taxes? A comparable $27 billion. Now that’s what I call an inefficient tax.

Conclusion / Hodge covers much more than I’ve highlighted here. He notes, for example, the many ways we can reduce current taxes to save for our retirement. While I find such ways easy to understand, the reason is that I’ve been following them for 40 years and I am an economist. But many people would have more trouble understanding.

To handle that issue and many others, Hodge advocates a radical restructuring of our tax system to make it more like that of Estonia. Estonia’s whole tax law is only 88 pages long; there’s a flat 20 percent tax rate on individual and corporate income, and a Value-Added Tax (VAT) of 20 percent. One result is that Estonian businesses spend about five hours per year complying with taxes, versus 87 hours per year for US firms.

Whether or not we move in Estonia’s direction, those who care about tax policy could easily use Taxocracy as a handbook for simplifying and improving our tax systems.