Taxes You Have to Love . . .

From: "Find the Taxes That Due Double Duty" by Robert H. Frank in the 2.20.11 NYT

Taxes levied on harmful activities kill two birds with one stone. They generate desperately needed revenue while discouraging behaviors whose costs greatly outweigh their benefits.

Antigovernment activists reliably denounce such taxes as “social engineering”— attempts to “control our behavior, steer our choices, and change the way we live our lives.” Gasoline taxes aimed at discouraging dependence on foreign oil, for example, invariably elicit this accusation.

But it’s a strange complaint, because virtually every law and regulation constitutes social engineering. Laws against homicide and theft? Because they aim to control our behavior, steer our choices, and change the way we live our lives, they are social engineering. So are noise ordinances, speed limits, even stop signs and traffic lights. Social engineering is inescapable, simply because narrow self-interest would otherwise lead people to cause unacceptable harm to others. Only a committed anarchist could favor a world without social engineering.

If outright prohibitions are an acceptable way to discourage harmful behavior, why can’t taxes be used for the same purpose? Taxes are, in fact, a far cheaper and less coercive way to curtail such behavior than laws or prescriptive regulations. That’s because taxes concentrate harm reduction in the hands of those who can alter their behavior most easily.

When we tax pollution, for instance, polluters with the cheapest ways to reduce emissions rush to adopt them, thereby avoiding the tax. Similarly, when we tax vehicles by weight, those who can get by most easily with a lighter vehicle will buy one. Others find it cheaper to pay the tax.

The list of behaviors that cause undue harm to others is long. When we drink heavily, we increase the likelihood that others will die in accidents. When we smoke, we cause others to suffer tobacco-related illnesses. When we emit carbon dioxide into the atmosphere, we increase the damage from greater climate volatility.

EVERY dollar raised by taxing harmful activities is one dollar less that we must raise by taxing useful ones. The resulting revenue would enable us to reduce not only the federal deficit, but also the highly regressive payroll tax. And cutting that tax would stimulate hiring and help low-income families meet the burden of new taxes on harmful activities.