Every year, individuals and companies pay taxes, based on the rules in the Internal Revenue Code. The Internal Revenue Code is the highest form of tax law in the United States, and is created by the United States Congress. For example, when Congress changes a tax law, what they are really doing is amending the Internal Revenue Code. So, what’s the purpose of the Internal Revenue Code? When members of Congress write the Internal Revenue Code, they have four purposes, which can be overlapping. First, they want to raise revenue. It takes money to run a country, from funding a massive army, to buying lots of health care for old people, and, some (but not all!) of that money comes from taxes (the rest comes from borrowing from the future). Second, politicians create the Internal Revenue Code to redistribute money, hopefully from high income people to low income people. Third, they want to change what taxpayers do—they want to reform behavior. For example, we have the R&D tax credit to encourage companies to engage in more research and development. Finally, if you actually look at some pieces of the tax code, it is pretty clear that the motivation behind some of our tax code is simply to benefit the politicians, in most cases, helping them get reelected by pleasing some constituency of the individual Congress person. And there you have it—our tax code has four purposes—to raise revenue, redistribute, reform behavior, and, get politicians reelected. So, the next time you are in a dark alley, and, someone sneaks up and demands you answer the question “What is the purpose of the tax code?”, you will know what to say.
