#3 Tax Bads (or at least don’t subsidize them!)

Time to Change the Tax Discussion #3

This is the third in a five part series about taxes.

Introductory economics tells us that when the government taxes something, unless it is perfectly inelastically supplied or demanded, the tax will cause a distortion in a market and reduce the taxed activity. For most things (labor, profits, food, etc.) this reduction is considered a bad thing, and causes welfare losses. Yet taxes on BADS (i.e., goods with strong negative externalities) are welfare improving, since they reduce something that you want to reduce anyway.  Almost all economists will agree with this conceptually. Yet politicians and consumers are not forced to confront this reality. Perhaps economists could do a better job holding politicians accountable to this, by speaking out more. Here are six examples from recent policy debates. Why are economists not lining up behind these?

1. Tax the Sale of Guns.

The constitution asserts the right of people to own “arms” but says nothing about them being free or cheap. Econmists should favor taxing the sale of all guns, and even taxing the annual ownership of guns (similar to what we do for cars and housing) because of their large negative externalities. Higher taxes on more dangerous weapons (e.g. assault weapons), would also be appropriate. We could raise several billion dollars a year this way, and even earmark it for the extra medical care and law enforcement made necessary by the widespread ownership of guns. (In theory, I prefer not to earmark revenues, but history shows it is much easier to pass legislation if this is done, such as taxes on cigarettes. Hence in practice I support it.)

2. Tax Carbon

We will never have unanimous agreement that our excess carbon is a major cause of global warning, but we don’t need to believe this unanimously to be willing to act on it. British Columbia (Canada) implemented a carbon tax in 2008 which is raising billions of dollars while nudging people to use less fuel. Look at two recent postings here

Climate Action Through a Tax Swap Describes a currrent initiative in Washington State to implement a state carbon tax. See numerous links within it.

More on BCs carbon tax shift. Posted in 2009 this discusses the reasons for the British Columbia’s tax

3. Remove US Subsidies on Corn and Sugar

It is totally bizarre that at the same that we are thinking of taxing soft drinks for their sugar content, we are still spending billions on subsidizing corn (and hence high fructose corn syrup). US Department of Agriculture numbers show that in 2011 alone we spent 4.9 billion dollars subsidizing corn, which is  $16 per American. Visit the excellent website of  Environmental Working Group, which tracks agricultural subsidies and focus on Corn if you wish.

Remarkably, even farmers in Massachusetts benefit from the corn subsidy:

Corn Subsidies** in Massachusetts totaled $16.8 million from 1995-2011.

That works out to $4 per Massachusetts resident over 17 years. But the Massachusetts subsidy is nothing compared to Iowa which received

14.9 billion dollars ($4,866 per resident, or $286 per Iowa resident per year) over the same period. 2011 is not a particularly large outlier.

For further discussion of the serious problems with our crop insurance program consider this quote about US crop insurance.

“The most stunning evidence of the need to overhaul the current system is Dr. Babcock’s estimate that taxpayers
send $1 dollar to insurance companies and agents for every $1 dollar that goes to farmers.”

Bruce Babcock “Giving It Away free: Free Crop Insurance Can Save Money and Strengthen the Farm Safety Net”
April 2012, (Professor of Economics at Iowa State University)

http://static.ewg.org/reports/2012/farm_bill/babcock_free_crop_insurance.pdf

4. Remove subsidies on US fossil fuel production, consumption, and depletion.

This follows from point #2 above. I know it is hard to do, but so is a Carbon Tax.

The surprising reason that Oil Subsidies Persist: Even Liberals Love them. Forbes, April 25, 2012.

We should not be subsidizing oil, coal and natural gas: 15.1 billion dollars in 2010 ($48 per American in 2010), according to OECD estimates.

5. Tax (more) people who do not purchase health insurance

As a health economist, I had to add at least one health related “bad”.

The Affordable Care Act of 2010 includes provisions for taxing people who choose not to purchase health insurance, as it should, since they impose costs on the rest of us who do by: relying on charity care when they have emergency medical needs, relying on bankruptcy when they have high uninsured costs, and raising average premiums for insurance buyers since the people not buying insurance are on average healthier (and lower cost) than average. Hence this tax will be welfare improving, overall.

I thought about discussing/supporting taxes on obesity, smoking, or alcohol abuse, but see lots of problems with that, even those these are bads, often under the control of consumers.

6. Don’t subsidize war

War is bad, and has a lot of negative externalities. (Yes, there are also some benefits.) In 2013 the US will spend $902 billion  on national defense (excluding police, fire, law and prisons). That is $2863 per American in 2013 alone on “defense”. (Health and Education have mostly positive externalities.)

Brown University researchers maintain a web site on the cost of wars since 9/11

Here is one sobering sentence from a recent press release.

“The war bills already paid and obligated to be paid by the U.S. federal government as of fiscal year 2012 are $3.7 trillion in constant dollars.”

That is $11,746 per US citizen…

There are many more bads that should be taxed and not subsidized, but I will end here.

For related discussion see the earlier blogs

#1 All Taxes and Budgets Should be Expressed as Dollars per Person

#2. Include Social Security and Medicare taxes when discussing tax burdens

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