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.