What are some examples of tax laws which changed out behavior in an unintended or not desirable way?

Answer 1

The Luxury Tax back in the 1980s is a classic example. It was imposed on high-cost items such as expensive cars, yachts, etc. with the intent of forcing the wealthy to pay their fair share.

It worked OK on cars, since US citizens can't just go overseas and buy a car and import it. DOT and EPA rules take care of that, as do the rules that require the importation of a conforming vehicle delivered overseas (Mercedes' European Delivery Program, for example) to be routed through the manufacturer's distributor network in the US and therefore be taxed.

Yachts and expensive boats were another story entirely. The wealthy simply arranged delivery of their new toy in The Bahamas or the BVI and legally avoided the tax entirely. The result of course was the bankruptcy of a number of dealers in expensive yachts who could no longer compete with the foreign delivery. While it may seem hard to feel the pain for a dealer in expensive toys, keep in mind that those dealers had fairly large staffs who maintained those boats and THEY were all tossed onto the unemployment lines as a result.

Answer 2

The tax law I dislike is the earned income tax credit. This credit gives a tax handout to people making a certain income and increases with 1 child and again with 2 or more children. The maximum credit of about $4,400 comes with wages around $13-14,000 per year and two or more children.

The downside I've seen is that many people simply stop working when they've hit the magic maximum income amount so they won't endanger their credit. Many divorced parents fight more viciously over dependents since only the parent claiming the children gets the credit. People claim kids, nephews, nieces, grandchildren, heck anyone, on their tax return that they are not legally entitled to. And worst of all, parents decide not to get married because to do so (and thereby increase their income) would cause the loss of the EITC.

Answer 3

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