Taxes as Behavior Modification
(This entry originally posted May 25, 2005 at unrepentantindividual.com. The argument is more for tax simplification and the immorality of taxing to encourage/discourage certain behaviors than the FairTax, but I thought it might be good to post anyway. It can equally be used against exempting certain items from the FairTax, in favor of using the prebate instead.)
Much was made when Bush was reelected of his desire to simplify the tax code. I’m not sure where that went, but maybe sometime by 2008 he might give another speech supporting it. And one of the most common rationales for simplifying the tax code is that it is such a maze of unintelligible, frequently contradictory, and counter-productive cut-outs to satisfy one special interest or another. Simplification reduces compliance costs that burden our economy, and reduces economic distortion caused by unproductive uses of money designed to reduce tax burden rather than improve the economy. But that’s only half of it.
It popped to mind with this:
Bar Tabs Going Up As States Tax Alcohol
More and more states are considering higher alcohol taxes after years of raising cigarette rates.
This year, Kentucky and Washington state hiked their liquor tariffs. Montana, Indiana and North Dakota rejected higher beer taxes.
Texas is still considering an increase, which would go to help pay for public schools. And Ohio lawmakers must decide what they’re going to do before the new fiscal year starts July 1.
Yep. The demonization of smokers has been so successful that fewer and fewer people smoke. You’d think that was a good thing, but now fewer and fewer people are paying cigarette taxes, leading to less revenue in government coffers. Likewise, those nasty buyers of hybrid vehicles, with their care for the environment and desire for high fuel efficiency, are forcing lawmakers to consider taxing by the mile to offset the reduction in gasoline taxes. Faced with the success of their policies, now they want to go after alcohol, or I should say, further after alcohol, because it is typically already given its own excise and “sin” taxes.
But is this the right thing to do? Is it legitimate, in the spirit of America’s founding, for the majority to decide that certain activities are “bad” or “good”, and thus should be taxed at higher or different rates than others? Is it legitimate, in a country where we supposedly have “equal protection under the law”, that some people and activities are just more “equal” than others?
I think we can look at some things, and most people will agree that some of these cutouts are a good idea. Like, for example, the mortgage interest deduction. Unless you’re a renter, of course, which probably means you can’t itemize and you get slammed. Or that mileage and car leases are deductible if you’re in sales as a business expense. Unless, of course you live in LA, an hour away from your work, but can’t deduct a dime because getting to an office is not actually a business expense, and you get slammed. Even the well-meaning exemptions and deductions are unfair to those who can’t claim them. But the little exemptions for special interest groups, that may impact 1% or less of the population, are unconscionable windfalls to them, paid for by the rest of us.
Taxes are one of those things in life that nobody likes. But it’s absolutely wrong that your tax burden should be based upon your ability to get elected officials to write special exemptions into the law for you. And it’s absolutely wrong that your tax burden should be based on whether you’re engaging in perfectly legal activities that are a “sin”, like smoking, or a “luxury”, like buying a Lexus. The tax burden should be equally painful to all.
But the FairTax also contains behavior modifing tendencies. As a matter of design it discourages:
1) Consumption of new goods and services
2) Borrowing for consumption
And encourages:
1) Savings and investment
2) Reuse of used goods
3) Borrowing for investment
I happen to believe these behavior modification elements are virtuous and broad… but that’s just me
Yes, this is true. And replacing all taxation with a flat, no-loophole income tax still creates a disincentive for generating income.
No tax system is perfect. The idea is to make it as fair and as flat as possible. Taxing *anything* creates a disincentive for that behavior, but at least if we pick something broad-based like consumption, remove loopholes/etc, we can try to make it as simple and fair as possible.
I should clarify that the goal is to minimize use of the tax code to encourage or discourage individual behaviors, because it’s not the correct scope of government to play those games. It can never completely go away, as long as we have taxes at all.
I agree pretty much. I would rather see user fees (e.g., filing costs pay for Courts; tolls pay for roads) than sin taxes. Typically, the sin or stupidity taxes (to include lotteries) have nothing to do with what they are sold as, e.g. to pay for schools.
KJ,
Not to mention the fact that, education is supposedly a beneficiary lottery, which is essentially a tax on stupidity. Doesn’t that create a conflict of interest? Schools improve their funding by keeping kids dumb
Now you know why our math education sucks! It is essential to funding.
In case you haven’t noticed, there is a HUGE loophole and social engineering aspect to the FairTax. Buy a home, pay no tax on the principal. Rent the same home, pay tax on your rent, including the property taxes embedded in the rent. Can’t buy a home? Tough luck. Pay up, sucker.
Terry, that’s what the prebate is for. Among other things.
The taxes you pay on the first $18,000 you spend (or whatever the annual poverty level is for your family size) will be prorated and refunded to you, in advance, at the beginning of each month. This more than offsets any taxes you pay on rent.
“But the guy who can afford to buy a home gets the same rebate for the same size family.” Yep. And he’s also likely to spend far more on consumer goods, causing him to pay much more in federal taxes than renters would.
Income-tax-lovers can play class warfare games by criticizing isolated pieces of the FairTax plan, but if you step back and look at the overall picture, you’ll see that the “little guy” is much better off under this plan than under the current system.
Reading the FairTax Book, if you haven’t already done so, is a very good place to start in grasping the big picture.
A renter will always pay a higher effective tax rate under the FairTax than a homeowner spending the same amount.
In some parts of the country, low-end rents are so high that they will consume the entire prebate, and thus all other necessities will be fully taxed.
I ran numbers comparing a person buying an existing $100K home and one renting the same home for $1000 per month. (Casual rule of thumb suggests a property should command monthly rent of one percent of its value. Used to be 1/70 of value a generation ago, but housing inflation changed things.) Over 30 years (life of the typical conventional mortgage) the renter will pay about three times as much FairTax on housing than will the homeowner, assuming property taxes, rents, and operating costs rise 2-3 percent per year.
For low earners, homeownership represents a crucial defensive financial position, as it not only affords protection against rising property values (rents) but also builds wealth. The person unable to buy a home not only misses out on the protection and the wealth, he also bears a huge tax penalty and he will be left poor and broke in old age.
As someone with no hope of buying a home, I’m unwilling to sign up for a huge tax penalty and future destitution. That huge tax penalty will cause many renters to live in poverty in their last years, as opposed to enjoying a modest living.