Thursday, July 30, 2009

Let’s tax destructive consumption not economic production

The current proposals to slap a surtax on the nations top earners to fund a massive increase in government health care spending leads to an interesting question. Why do we insist on penalising economic production, while destructive consumption remains relatively penalty-free?

Consider the following examples based on quick searches:

Cigarettes: Various sources note that 20-30 billion packs of cigarettes are sold each year in the United States.

Gasoline: Americans use approximately 140 billion gallons of gas each year.

Beer: Americans drink approximately 5 billion gallons of beer each year.

Wine: Americans drink approximately 750 million gallons of wine each year.

Fast Food Meals: Americans eat approximately 70 billion fast food meals each year.

Instead of placing a 5% tax surcharge on the most economically productive members of our society (i.e. those that create jobs, buy goods and services, while already paying the majority of taxes), why don’t we just tax counter-productive activities instead?

Admittedly, some of the items above are already some of the most heavily taxed items for sale at the moment, but there is no evidence this level of taxation has materially impacted consumption of these items.

If we slapped an additional $2/pack surcharge on cigarettes, a $1/gallon surcharge on gas, a $4/gallon surcharge on beer ($0.50/pint), a $2/meal surcharge on fast food meals, and a $10/gallon surcharge on wine ($2/bottle), using the conservative numbers above, this would generate approx. $250 billion in revenue, per year. This is 2.5x the White House estimates for the cost of the new health care proposals ($1 trillion over 10 years), so it should just about cover the actual costs.

Worst case from a revenue perspective, which is actually a best case from a cost perspective, is that sales of these items are reduced substantially due to the excess taxes imposed. The revenue would start to dry up, but this reduction in revenue is directly correlated to a reduction in risk and collateral costs. Would it be beneficial to reduce the number of smokers, reduce the number of drunk driving fatalities or incidences of alcohol abuse, reduce the amount of fast food meals consumed? I consider this a win/win situation. If consumption is not impacted by the higher price, at least the government has the appropriate level of funding to treat the after effects of such behaviour. If the consumption is impacted, the country will by definition get healthier, lowering the burden of costly heart attacks, lung cancer treatments, liver transplants, high blood pressure medicines, etc.

The analysis above is really just a starting point. You could significantly increase that number through various other measures (e.g. legalise and tax marijuana, additional fines on minor illegal activities such as speeding or parking tickets, taxes on sugary drinks/snacks or salty foods, etc., etc.). If we can’t morally persuade people to change (or at least reduce) their bad habits, let’s use economics to persuade this change. The key to this is that everyone still has a choice to do whatever they want, but that choice comes with economic consequences. You could even flip this approach around and reward productive behaviours by providing tax breaks (such as the ability to buy with pre-tax dollars) on things such as public transportation, gym memberships, basic annual check ups, fruits and vegetables, charitable donations, etc.

Ideally, the government would control spending by making substantial cuts to governmental programs, eliminating the need for additional tax revenues, however, I don't see that happening in Washington in the near future. Therefore, if they are going to raise taxes, I hope they do it a sensible manner.

Now, I’m no fan of taxes or government influence in my life, but if the alternative is a straight property grab (i.e. taking upwards of 45% of hard earned income, just because it is there for the taking), I could live with uncomfortable taxes on consumption if the unintended consequences of the tax policy result in positive, productive results. This is the win/win situation mentioned above – either tax revenues go up (win), or Americans are healthier (win - economically as well). Unfortunately, Washington is currently attached to it’s lose/lose/lose situation - higher taxes lead to less economic activity (lose) which leads to fewer jobs (lose) which leads to lower tax revenue (lose) - because it provides them with the best job security.

Will this ever work? Probably not. The reason? Populism. Why make the entire population upset with tax increases when you think you can get the same revenue from 5% (or less) of the voting public?

Unfortunately, our elected representatives are too worried about securing that extra campaign contribution or winning the next election to make the hard choices required to make this country better.


  1. Unbelievably, the NY Times seems to agree with this (at least the gas tax part). First NYT op-ed I’ve agreed with in principle in a long time!