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Ideas: Appropriate use of taxation - Phil's Rambling Rants
September 15th, 2005
08:48 pm

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Ideas: Appropriate use of taxation
All of us have our own ideas over just how large the role of government in society ought to be, but nearly all of us agree that government should be doing some things, and that in order to pay for those things, there must be some kind of taxes.  Nearly all of us also agree that part of what government should be doing in society is to discourage individuals from activities that are harmful to the rest of society.

Economics tells us that when an activity becomes more expensive, individuals will do it less.  Tax policy affects how much certain activities cost, and can profoundly influence behavior.  Some commentators consider it wrong to use tax policy to deliberately engineer behavior, but I think this view is both disingenuous and actively wrong.  I argue that government has an affirmative responsibility to consider the consequences of tax policy on behavior, and moreover to deliberately try to identify behavior that is harmful to society and tax that behavior roughly in proportion to how harmful it is to society.

I suspect that by specifically taxing products, services, and activities that do harm to society, we could raise enough money that we could significantly reduce the burden that our main revenue generating taxes place on things we generally think of as being good for society, like earning salaries, owning property, and selling goods.  I'm not prepared to say that we could actually replace all the taxes we have now with taxes on advertising, pollution, and using up non-renewable resources; nor do I deny that there can be problems with government relying on undesirable activities as sources of tax revenue.  I do, however, think it is a sound idea, and I will articulate three principles of good government:
  • Consider taxation first.  If an activity by one group is unfairly burdening another group, see if there's a just way for a tax on the activity to pay for the burden.  If there's an activity that is tolerable at a low level but becomes detrimental when it is too widespread, see if taxing it can keep it at a tolerable level.  Taxation can't help all problems, but when it can, it is likely to be less of a burden on individual freedom than regulation.
  • Keep taxes simple (but not too simple).  It should not take a lawyer to figure out how much tax you owe, or an accountant to actually pay it.  However, the tax does need to remain visible to the person whose behavior it is meant to affect, and directly proportional to their behavior.  As an example, imagine a tax on landfilled garbage intended to encourage recycling.  Requiring the trash man to sort through the trash he picks up and bill the homeowner $.10 for each soda bottle he finds is ridiculous; on the other hand, taxing the trash company an extra $100 per truckload likely means that they will just raise their flat fee by $1 per household.  To have the intended effect, the homeowner needs his bill to reflect each cubic foot that goes on the truck.
  • Tax with intent.  Government must always consider the effect each element of tax policy has on behavior and society, and intend or at the very least accept that effect.  Tradition does not excuse government from this duty; just because we've always had a certain tax doesn't mean we always should.  If all taxes are intentional, there will be more argument over tax policy and quite possibly more complaints, but it does not follow that there will be more harm -- if the process works right, there will in fact be less harm.

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From:peteralway
Date:September 16th, 2005 02:39 am (UTC)
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I have a foggy memory of an economics class I took more than 20 years ago. There was a concept that often when you buy something, there are more costs to society than the costs of the person who buys the thing. There was some swell technical term for that. Essentially the idea was that if you buy something whose manufacture pollutes the water by some increment, that water pollution costs the people downstream from it some amount that they aren't getting compensated for. Or maybe the manufacturer clogs up traffic in the area. Or use of the product increases the incidence of asthma. There are other costs like that that might not be environmental. Say, oil imported from the Middle East requires that the government maintain an expensive military presence in the area. Anyway, the theory is that taxation should cover those costs. Cigarette taxes would cover that portion of the medical costs of smoking that aren't covered by the smoker--either because the government ends up paying, or they are effects on non-smokers who inhale the stuff.

COnsarn it. There was a technical term for that, but after 20+ years, I've forgetten it.

Not that this is exactly what you are suggesting, but it is a related idea.
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From:tigertoy
Date:September 16th, 2005 03:36 am (UTC)
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The word you're looking for is externalities.

Where the externalities are readily measured in dollars, I don't think it's revolutionary to tax in proportion to them. Unfortunately, it is hard to place an unarguable dollar value on a child's health or an unspoiled landscape; I think government has to go farther than just the well recognized economic costs of activities when deciding they deserve to be restricted. Government is often willing to restrict freedom with laws and regulations without making an economic case for it, but much less willing to restrict freedom by taxing an activity.
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From:bedlamhouse
Date:September 16th, 2005 12:19 pm (UTC)
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Leaving aside the very controversial question of whether taxes are meant to be a way to raise money for the functioning of the government or are a way to implement social policy ...

A) The problem is that item 1 (use taxes to enforce social behaviors) and item 2 (keep taxes simple) are mutually exclusive. For every additional behavior tax that cannot be assigned directly (i.e. not direct sales taxes on things you don't want people to buy) there will be further complications as someone has to figure out whether individuals need to pay the tax or not.

B) Government becomes dependent on socially-imposed taxes for activities unrelated to the activity being taxed. For instance, the money raised by tobacco taxes should have been sufficient to cover the cost of healthcare and anti-smoking campaigns, but that money has been lumped into general revenues for so long that the government has both become dependent on it and also tried to raise the money to cover the costs through litigation. On the one hand, unwillingness to allow the revenue stream from bad-behavior-tax X to be reduced leads to conflicts of interest about the behavior. On the other hand, government does not do well at using income from specific sources to fund costs rising from said source (see the various airline taxes for airport maintenance ...)

To the extent that taxation is used to modify behavior, it should be revenue-neutral to the cost of mitigating such behavior and applied only to said mitigation. This would be better described as "fees" rather than "taxes", and has been rejected out of hand by many who feel it is "paying for permission to do <whatever>" as opposed to "raising the price of <whatever> to its real costs".
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From:tigertoy
Date:September 16th, 2005 08:53 pm (UTC)
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Leaving aside the very controversial question of whether taxes are meant to be a way to raise money for the functioning of the government or are a way to implement social policy ...

But in my meanderings about the perfect world I want to live in, I get to decide (or at least comment on) what taxes are meant for, and my whole point is that they should be used with directed intent for both purposes, because even if the intent is to serve one purpose and ignore the other, the other will still be affected.

The problem is that item 1 (use taxes to enforce social behaviors) and item 2 (keep taxes simple) are mutually exclusive.

Which is why I explicitly included "(but not too simple)".

For every additional behavior tax that cannot be assigned directly ... there will be further complications as someone has to figure out whether individuals need to pay the tax or not.

If there isn't something that a tax can be assigned directly to, taxation probably isn't the answer. I'm arguing that taxation is the first approach that should be considered, not the only approach. If the complications are such that figuring out who owes how much tax and the logistics of actually making the payment are more of a burden than paying the tax in the first place, it's a bad tax.

Government becomes dependent on socially-imposed taxes for activities unrelated to the activity being taxed.

This is a danger. Government has a responsibility to continually evaluate its tax policies and make sure that they are actually still doing what they were meant to do, and to change them when they're not even if it is inconvenient at budget time. But I think it's actually more of a problem if a specific tax on a behavior that some people want to eliminate is directed to a specific program that other people support than if it's just general revenue.

To the extent that taxation is used to modify behavior...

All taxation modifies behavior. I think it is better to tax with intent, and to review the effects to see if they match the intent, than to pretend that taxes don't modify behavior.
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From:tigertoy
Date:September 16th, 2005 06:25 pm (UTC)
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X could be money, physical force, moral authority, intelligence... it sounds like you're saying that controlling society is a very bad idea.

I contend that if we do not intentionally control society, society will nonetheless be controlled, with results that are probably as bad as the worst we could do intentionally.
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From:tigertoy
Date:September 16th, 2005 08:28 pm (UTC)
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And I am saying that there can be nothing that is held in exactly the same amount by every person, whether it is money, property, or any other physical commodity, strength, intelligence, or any other definable personal characteristic, or divine favor, moral goodness, or any other intangible. I suppose you could argue that all people are equal on some intangible scale, but I can equally well argue that they are not.

Any control on society inevitably affects different people differently, because a control only affects a person to the extent that they want to behave differently from the direction of the control, and different people want to behave the same way.

I guess maybe what you really mean is that a control is unjust if two different people want to engage in a controlled activity, but because of their unequal position in society one of them gets more of a chance to do it than the other. That inevitably leads you to the conclusion that the only just form of control on any activity is to absolutely ban any activity that is controlled at all, and leave no control at all on any activity too widely valued to be banned. Any regulation that requires that you show you can do the activity in a proper way gives an advantage to people who are smarter, have more connections, or have money or power to gain the smartness or connections.

A total ban on an activity, from one point of view, is the fairest way to control it, because everyone is denied the same way, but from another point of view, it is the most unfair, because the person whose entire existence depends on that activity is affected far more than the person who never wanted to do that activity anyway. A tax, on the other hand, is unfair from one point of view, because different people have different amounts of money, but ultimately fair from another, because each person gets to decide for themselves if the activity is worth enough to them to pay the tax.
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From:tigertoy
Date:September 16th, 2005 09:24 pm (UTC)
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you're either talking about something that just hands more power disproportionally to the rich or a complete re-write of the tax structure.

I *am* talking about a complete re-write of the tax structure. Or more specifically, the principles that should be used in completely rewriting the tax structure.

I would also point out that taxes on alcohol and cigarettes have done nothing whatsoever to reduce the number of people that drink or smoke. Maybe the tax just isn't high enough yet?

I don't know much about alcohol taxes, but cigarette taxes definitely reduce smoking. Not as much as I'd like. Maybe the tax isn't high enough. More likely, though, it's something where taxation alone can't have the desired effect. Taxation should be used to discourage smoking in proportion to the harm smokers do to themselves, but smoking in the presence of non-smokers should be a separate matter, and the appropriate level of tax would be indistinguishable from a ban.

Oh, and you need to replace "you" with "me" in this sentence, because otherwise the conclusion is false.

Actually, I should have left the last 'you' out entirely, it's a proofreading error. Striking the 'you', I stand by the logic.

As an example the current system in which the freedom of individuals is variably impaired depending on the crimes they commit. I suppose you could claim that people in the US have varying levels of freedom...in which case it's likely there is nothing you would agree that people have identical levels of to any meaningful degree.

I don't understand your point here. I do, in fact, argue that there is nothing that people have identical levels of to any meaningful degree. The only thing they should have identical levels of is the right to a fair hearing and the right to be treated as individuals, and I think you'll agree that in this society they don't have those.
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