How does a tax exemption for an action = penalty for inaction?
This business of framing an event as a gain or loss has applications
beyond settlement negotiations, of course. And sometimes the framing
is simply a matter of words—the “cash discount” that is more attractive
to customers than a penalty for using a credit card, though they are the
same thing; or, to take a legal example, the difference between a tax exemption
for doing something or some sort of or penalty for not doing
it: again these may be the same, yet they can provoke quite different
reactions among taxpayers.
Source: p 228, The Legal Analyst, Ward Farnsworth
Would someone please explain the subtlety? A cash discount and tax exemption is a gain for me, while a credit card and tax penalties are losses? How are they equal?
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What it means is that you can always come up with alternative framings where the difference between two options is stated as a gain or a loss, but the effect is the same in either case. For instance, if I offer to sell a T-shirt for and offer a cash discount of , you pay if buying with a credit card or if buying with cash. If I instead offer the shirt for with a surcharge for credit card use, you still pay if buying with a credit card or if buying with cash. The financial result is the same in either case, but psychologically people may perceive them differently and make different buying decisions.
In a tax situation it may be more complicated since exemptions wouldn't directly reduce your tax, but only your taxable income. However, you can still see that, in general, having to pay $X more in tax for not doing some action (e.g., not purchasing health insurance) is the same as being able to pay $X less in tax as a reward for doing the action. Either way, doing the action results in you paying $X less than you would if you didn't do it; the only difference is in which behavior (doing it or not doing it) is framed as the "default" option. Again, these framings may differentially influence people's behavior even when the net result is the same.
There's a significant difference between "discount" and "surcharge". For starters - legal difference.
If you have a list price of $X - that's the price you're committed to sell regardless of the payment method. So it doesn't matter if I pay with cash or credit - I'll pay $X. However, it costs you more when I pay with credit - so you want to pass that cost on me. You charge me surcharge - an addition to the price. In some States in the US and in some other countries - that is against the law. You cannot add on top of the listed price any amount regardless of the payment method.
However, you can say that the list price is $X, which includes the assumed credit card surcharge of $Y. And then you give discount of $Y to anyone not paying with credit card. The list price is still $X, regardless of the payment method. You don't have to give the discount, the discount is your cost of doing business. But that would be legal in some places (not all!) that forbid credit card surcharge.
So the main difference from legal perspective is that you're not allowed to add to the list price, but you're allowed to discount from it.
Regarding taxes - exemption/deduction is not a penalty for negative. Exemption/deduction is an implementation of a social policy.
For example, it is for the public benefit for everyone to own a house. So the Congress comes up with a deduction of mortgage interest. However, you're not penalized if you don't own a house by paying higher taxes. Your tax rate doesn't change. You just don't get to deduct something that you might be able to deduct had you owned a house with a mortgage. This is, again - a discount of a list price, not a surcharge. You're not penalized if you don't have a house or don't have a mortgage, but if you do - you get a break.
The author you're quoting claims that bottom line would be the same as if you considered the absence of a deduction as a penalty. But that's not true, because even if you do have a mortgage you may not be able to deduct it because your income is too high, the mortgage is for too much, or your mortgage is not on the primary residence. So mere existence of the mortgage doesn't directly correlate to the existence of the deduction.
Similarly with credit card surcharges - you may get a cash discount, but you may get the similar amount of money back even if you use a credit card. Not as a cash discount but rather as rewards, cash-backs or points. However, if there's no cash discount, you won't be getting these if you're paying cash. So again - you're not penalized for having a credit card by not getting a discount, because you may still get it in a different way - and if you don't, you still may end up not getting it.
So the quote is a rather simplistic and negative view and more of an opinion than stating a fact.
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