January 23, 2015

TAX WHAT YOU DON'T WANT:

Why States Like Sin Taxes (Megan McArdle, 1/23/15, Bloomberg View)

Consumption taxes are economically efficient. When you tax something, you get less of it. That's simply inherently true of any tax. However, the distortions are not equal across taxes, so good tax policy will try to lean on taxes that introduce the least harmful distortions.

In the case of sin taxes, some of the distortions might actually be positive -- less cancer and drunken driving, for example. But even when that is not the case, we still might consider some distortions better than others. For example, income taxes discourage not only work, but also saving, because they raise the "price" of saving. Every saving decision is ultimately a decision whether to forgo saving now in order to increase your future consumption. Taxing the earnings on savings means that you have to save more now in order to consume a given amount later -- and since most people prefer a bird in the hand to two in the bush, some people will say "to hell with it, I'd rather just enjoy spending it now." That makes us all poorer in the future.

Consumption taxes don't introduce this sort of temporal distortion; as long as the tax is roughly stable, it raises the price of current consumption and future consumption by the same amount. This is why economists like them, and why most developed countries have a value-added tax.

Posted by at January 23, 2015 11:02 AM
  

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