Wednesday, December 27, 2006

Pigou Taxes

In this recent paper (Taxing Consumption and Other Sins) from James R. Hines Jr., Hines examines the disparity between the US’ consumption taxes compared with other countries.

The U.S. doesn’t used a value-added tax most likely because too many people would argue that it’s regressive in implementation, which would make it very difficult to pass as legislation. On the whole, consumption taxes in the U.S. are low, and most states enforce their own state taxes.

Still though, the U.S. does use some excise taxes. The gasoline tax makes up a huge chunk of the excise taxes in the U.S. (45%). The gasoline tax is about as close as we’ve gotten to a genuine “Pigou” tax.

According to Hines, the U.S. in the past has often created excise taxes when in need of revenue and then later gotten rid of those taxes. In most cases, the taxes needed to be raised for funding of certain wars. There has always been opposition over excise taxes (e.g. The Whiskey Rebellion) even when the tax is on a “sin.” However, when the government apparently gives into the will of the people, they are really just making a trade-off of what gets taxed…

The government of Thomas Jefferson abolished all federal excises in 1802, balancing its budget instead with tariffs, land sales, and military spending cuts (Dewey, 1907, p. 120).

Where Hines really starts to make reference to Pigou taxes is here…

The federal gasoline tax, introduced in 1933, discourages driving and thereby reduces pollution and traffic congestion; furthermore, since 1956, federal gas tax revenues have been parked in the Highway Trust Fund, which finances the construction and maintenance of interstate highways and urban mass transit projects.

The taxes are obviously not always efficient. Hines explains that the government’s LUST tax (to clean up underground storage tanks) “collects more revenue than it spends each year, its surplus seeping (MK: what a great pun) into the U.S. treasury.” However, when the taxes are efficient, they can provide great service to the items they tax. Some examples Hines includes are the federal tax on rifles and fishing tackle.

Hines also makes note that taxing liquor seems to be consistent for the US as well.

But back to gas…it turns out that the US consumer doesn’t pay that much for gasoline relative to other countries. Now while the economists, or anyone who ever traveled to another country knows this, I think we’d be surprised to find out just how many people still either don’t know how much better off we are, or simply don’t care. Also, as it turns out, we don’t tax alcohol that much either relative to other countries.

…but any of these comparisons classifies the United States as a low tax country.

This paper leaves me wondering though that if we increased tax rates (in any manner) would the size of the government also increase to a more inefficient amount? Should we not tax "bad" things because of this fear? In any case, the U.S.’s excise taxes are half of other OECD (Organization for Economic Cooperation and Development) countries. Also, the US tax system is the “least environmentally oriented” of any OECD country. And in terms of these environmental taxes, once again the U.S. taxes half of what other OECD countries do.

And for the many people who cry out “commie” when they hear of taxes, it’s important to note that Hines’ paper sees that the OECD countries that use value-added taxes have more open economies. Also, for those that might argue that value-added taxes might hurt small business, it really depends on the regulations that come afterwards. And to address the regressive argument against a VAT…

For example, Michael Graetz (2002) has proposed one version of such a comprehensive U.S. tax reform, that includes a 15% VAT, elimination of personal taxes on the first $100,000 of income, reduction of payroll taxes for low-income workers, and other features designed to maintain progressivity.

And even a flat tax on gas would have some progressive effects. Don’t believe me? Here’s Hines…

Poterba (1989, 1991) and Walls and Hanson (1999) analyze U.S. gasoline taxes from the standpoint of lifetime incidence, finding that gasoline consumption rises more than proportionally with affluence over much of the range of total spending, suggesting that gasoline taxes are progressive, albeit less so than income taxes.

So, is a government excise tax increase possible? One thing is for sure, the current tax system would have to go through a major overhaul because states would have to re-work their own sales taxes.

And as for those excise taxes, even if they are not perfect and don’t have very sensitive tailoring, the taxes can still be beneficial by reducing the amount of harmful externalities by associating a cost with those externalities that would be realized in the present transaction.

So, would it be hard to start excise taxing (taxing “sin” as Hines likes to put it)? You betcha! Lobbying would still be a horrendous problem. Also, even my good friend,
William Zeallor made mention to a culture of materialism that seems to be manifesting. And in terms of a value-added tax, both political parties in the U.S. hate it. “Democrats think it is regressive, and Republicans think it is too easy to raise revenue with one.”
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