We Tax Behavior, Not People 8/9
Basic economics of taxation
The media often report this sort of policy change as representing higher taxes on “the rich.” But investment is a key factor in boosting productivity, which is what ultimately determines the living standards of ordinary workers. Taxes on investment have the effect of taxing future consumption at higher rates than current consumption, which reduces saving and investment and slows economic growth.
This is where economists differ from non-economists in how we think about taxation. Non-economists focus on who gets taxed. Is it the rich? The middle class? The poor?
Economists focus on what behavior gets taxed. We notice that means-tested benefits penalize low-income people who work, because they lose eligibility as they earn incomes. They also are penalized for getting married. We notice that the payroll tax penalizes employment. We notice that the corporate income tax and other forms of capital taxation penalize thrift. We notice that the income tax penalizes risk-taking in investment. If you want to see people punished for working, getting married, saving, and undertaking risky investments, then you should love our tax system.
When you realize that what gets taxed is behavior, it should occur to you to want to tax behavior that we would like to discourage. In that sense, taxes on cigarettes and alcohol are reasonable. A tax on carbon emissions seems more reasonable than mandating or subsidizing technologies that may in the end not reduce carbon emissions.
Somewhere in the middle is an overall consumption tax. I would not say that consumption is a bad thing. But it is less virtuous than work, thrift and risk-taking investment. So economists are more likely than non-economists to favor consumption taxes.
A consumption tax does have the advantage of being relatively value-neutral so you don't get distortions like subsidies for making certain purchases.
The difficulty is always in the transition or implementation scheme. Much like UBI sounds like a great idea until it's clear it will be *in addition to* the existing welfare state because the government unions aren't going to let you fire all the people administering those programs, a consumption tax sounds great in theory but in practice it is likely to be an addition to rather than replacement for our existing tax regime and if implemented as a VAT its operation is opaque and not easily understood.
> I would not say that consumption is a bad thing. But it is less virtuous than work, thrift and risk-taking investment.
Why bring virtue into it at all? It would be silly to say someone who spends an hour painstakingly sweeping a floor instead of ten minutes using a vacuum is being virtuous. Or to celebrate the thrift of the 80 year old who goes hungry to stuff an extra couple bucks under their mattress. There's nothing fundamentally virtuous or vicious about these things.
Better to think in terms of utility. Consumption is the economic activity from which we derive utility. All the others (work, saving, and investment) force us to forego utility in the hope of gaining more down the road.
Taxing consumption, then, is better, because it's the most inelastic. People already want to consume (and usually too much), so throwing up an obstacle to something they want to do is, on the whole, somewhat beneficial. We already don't enjoy work, saving, and investment, and taxing these things creates a further disincentive.