Practical considerations of a consumption tax

I enjoy listening to NPR's Planet Money podcasts and I have learned a lot about economics from them.

One recent show that was particularly interesting and that has had me thinking is the one about the no brainer economic platform. That has made me reconsider several of my own economic opinions and throw several sacred cows on the barbecue (to mix up some metaphors).

In particular, I had always thought that income taxes were the best kind of taxes, being progressive and cheap to collect. However, as Planet Money points out - taxing something discourages that behavior and we don't want to discourage income and employment! A consumption tax makes much more sense in terms of incentives - discouraging consumption is environmentally friendly and, while it isn't naturally the most progressive form of taxation, can be tweaked to make it reasonably progressive. How to make it practical to collect is a different matter, though. Taxing something is always extremely invasive, as the government will require lots of information and documentation about that thing in order to make sure that you're not cheating on your taxes.

A carbon emission tax seems like one of the best kinds of consumption tax. We're pretty universally agreed that putting carbon dioxide in the atmosphere is an undesirable thing. Most of that net carbon comes from fossil fuels which tend to come from a few big mining operations, so it's natural and easy to tax these operations per tonne of carbon they sell. They will then pass these costs on to their customers and ultimately to the consumer, discouraging the consumption by means of increased fuel costs (of course, there are political problems with raising fuel prices but that's a bit out of the scope of this discussion - after all, Planet Money does point out that their economic platform would be political suicide!)

Fossil fuels aren't the only way carbon gets into the atmosphere, though. Should we also charge dairy farmers for the methane emissions from cows? That has a big effect on climate change too, although the carbon involved came out of the atmosphere much more recently than that from fossil fuels. The fairer we try to be, the more invasive the tax becomes. For example, consider someone who lives completely off the grid, growing trees and felling them for firewood. He's completely self-sufficient in terms of carbon cycles (while burning the trees puts out carbon dioxide, it's completely cancelled by growing them in the first place). So it doesn't seem like he should be paying any carbon tax. So we'd have to offset the emission tax against carbon absorption - in other words pay a credit to individuals and organizations causing a net reduction in the amount of carbon in the atmosphere. Growing trees is one such activity. What about landfill site operators, who sequester enormous amounts of carbon in the ground? That's not generally considered to be a hugely "green" activity, but by this measure it would be.

Of course, as we inevitably move away from fossil fuels, that form of tax becomes increasingly useless. We can tax other forms of "digging up stuff from the ground and using it up" consumption, but I suspect that getting all the tax money we need that way would have some really undesirable consequences (like pricing a lot of useful things like electronics right out of the range of what most people can afford).

What other things are consumed that we could tax? Well, there's a lot of energy falling on the earth in terms of sunlight that we can collect and reuse in various forms (and indeed I expect that's where much of our energy will come from in a few decades). But it's hard to think of that as "consumption" when it's so plentiful and so much of it just goes to waste. Harnessing solar energy is also something we don't really have any interest in discouraging.

There is one resource that we each have a finite amount of and have to be very careful how we use it. That is our time. Could we tax consumption of time? That sounds like a very regressive poll tax on the face of it. But what if we tax only wasted time? I subscribe to the view that time is only wasted if you're spending it doing something that you don't truly enjoy. There's an easy way to tell (from a taxation point of view) if you're doing something that you don't really enjoy - somebody has to pay you to do it. If you do it without being paid, then you're probably doing it because you want to and therefore not wasting your time.

So that brings us right back around to the income tax again. There's even a justification here for making the income tax progressive - if you need to be paid more to do some piece of work, obviously it's more unpleasant and therefore should be taxed at a higher rate (yes, I know that people don't really get paid in proportion to the unpleasantness of their jobs but it could be a useful legal fiction).

There's one aspect to income taxes that I don't really like, which is casual labour. Suppose I wanted to hire the kid next door to trim my hedges - if I had to fill in a big pile of tax paperwork in order to do so I probably wouldn't bother - I'd just do it myself instead. Lots of "under the table" work goes on and many blind eyes are turned to it which is a sad state of affairs - our laws ought to reflect actual practice rather than making huge swathes of our population (technically) outlaws. How do we draw the line between which jobs should be taxed and which shouldn't?

I haven't thought through all the ramifications of this, but I have an idea that perhaps income tax ought be linked to limited liability. We give this great gift to corporations, limiting the liability of investors to only the amount of money they invest - if the corporation does something which costs society more than that, society absorbs the remainder of that cost. The idea is that by doing this we encourage entrepreneurship, which is all very well but it seems like there should be a cost to limiting liability, so perhaps income tax should only be raised when the employer is a limited liability organization. The deal ends up being the same as it currently is for such organizations, but if you don't need to limit your liability, then your employees don't need to pay income tax either - I think it's quite a neat way to delineate. On the small business end of things, there will be a population of companies with limited liability and a population without, they will compete with each other and market forces will determine the size of business at which limiting liability becomes worth it. Perhaps there could be some kind of sliding scale of liability (and therefore taxation) to ease the transition for companies growing across that boundary. I suspect I don't have the economic chops to have a good sense of how well that would work out in the real world though.

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