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Saturday, February 19, 2011

Robert Frank: Tax Harmful Activities to Raise Revenue and Enhance Growth

Robert Frank says taxing harmful behavior can help to solve the debt problem and increase growth at the same time:

Find the Taxes That Do Double Duty, by Robert Frank, Commentary, NY Times: ... Clearly, reduced spending alone can’t solve our deficit problem..., we must also raise additional revenue.
The good news is that doing so will not require difficult sacrifices from anyone. But it will require a Congress that is willing to redesign tax policy from the ground up. ...
A tax on any activity not only generates revenue, but also discourages the activity. The second effect, of course, underlies the claim that taxes inhibit economic growth. That’s often true of taxes on useful activities...
But the reverse is true when we tax activities that cause harm to others. ... Taxes levied on harmful activities ... 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 ... aim to control our behavior..., they are social engineering. So are noise ordinances, speed limits, even stop signs and traffic lights. Social engineering is inescapable... Only a committed anarchist could favor a world without social engineering. ...
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. ... Taxing harmful activities is the best way to raise the revenue essential for reducing deficits. Only someone who thinks that people have a right to cause undue harm to others could object that such taxes violate anyone’s rights. And because such taxes make the national economic pie bigger, it makes little sense to object that we can’t afford them.
The new taxes should be phased in only after the economy is back at full employment. But even with federal taxes at their lowest level since the 1950s, we are unlikely to summon the political will to take that step until leaders stop insisting that all taxes are evil.

Libertarian types will often agree that a market failure exists, and that correcting it would enhance efficiency. But they will rarely agree that the government is the best solution to the problem even when the externalities impose large costs and the benefits of intervention appear to be relatively clear. The argument is that the government is almost always inefficient and incompetent relative to the private sector, exceptions are rare (or non-existent for the true believers), and by intervening the government will cause costs that exceed the potential benefits. This group believes that market failures are best corrected by the private sector in almost every case, and that this will happen automatically if the market failures are important enough. Thus, it's best to let the private sector fix this on its own.

So it's not as though the people who oppose taxes will, when told about this miraculous no cost strategy for raising revenues, suddenly see the light and favor a carbon tax. They won't be slapping themselves on the forehead and saying, "Doh! We could have had a carbon tax!"

And mention of a carbon tax brings up another point. Even when the externalities appear to be relatively clear, and hence the case for a tax hard to oppose, the objections will remain. If theory can't carry the day, and if the data work against you, then attack the data: There is no global warming, or if there is it's not caused by people. There is no growing inequality, it's a mirage due to bad data, or when forced to finally admit that the data say otherwise, it's not due to any type of market failure, it's a reward for talents and skills. You say firms are too large, e.g. financial firms, and have too much monopoly power? You want to tax size? That's because you are defining markets and products too narrowly. When the markets are broadened to a global scale, or products defined very loosely, the market power is not in evidence.

So while I have no disagreement with this, and wish that the government would move to tax obvious negative behaviors, those who oppose taxes will not admit that there is much benefit from the government intervening, but they will assert there are considerable costs. Again, when arguments are presented to them, they aren't going to suddenly realize that this is some magic way to solve our deficit problems. Don't get me wrong, this is a fight worth having, but it's not an argument that will be easily won no matter how obvious and compelling the arguments appear to be.

I didn't expect the recession to change the views of hard-core free-marketeers, but I did expect that people in general would be more receptive to arguments that free, unregulated markets are not always best. I thought more people would come to see that sometimes intervention is needed to ensure markets approximate the conditions needed to maximize social gains. But, disappointingly, with for example Republicans doing all they can to repeal new financial regulation and hardly any reaction from the public, it's not at all clear that has happened on a scale large enough to have a siginificant impact on public policy.

    Posted by on Saturday, February 19, 2011 at 11:07 AM in Budget Deficit, Economics, Market Failure | Permalink  Comments (19)


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