This link has been bookmarked by 2 people . It was first bookmarked on 26 Mar 2009, by Todd Suomela.
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02 Apr 09
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26 Mar 09
Todd SuomelaInteresting ideas on progressive consumption and pollution taxes.
taxes economics consumption pollution carbon-tax environment progressive
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One important form of private waste is caused by garden-variety market failures like congestion and pollution. This type of waste yields easily to simple disincentives like carbon taxes, gasoline taxes, and congestion fees.
A less widely recognized but far larger form of private waste stems from "positional arms races," which are well illustrated by the familiar metaphor in which everyone stands up to get a better view, yet no one sees any better than before. It is the same with many forms of consumption. Hedge-fund managers need a 40,000-square-foot house and Gulfstream jet only because their peers have them. Evidence suggests that if top earners all spent less on such things, their lives would be no less fulfilling than before. And like the waste that stems from pollution and congestion, the waste caused by positional arms races can be curtailed sharply by a relatively simple change in tax policy.
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If we had perfect information, the ideal remedy for positional waste would be to tax different goods in proportion to the extent to which their use generates negative side effects. In practice, we lack the detailed information necessary to implement this remedy. But a steeply progressive tax on each family's total annual consumption would serve almost as well.
The amount a family consumes each year is simply the difference between what it earns and what it saves. Under a progressive consumption tax, people would report their income to the Internal Revenue Service as they do now and also their annual savings, much as they currently document contributions to 401(k) and other retirement accounts. The difference between these two amounts, less a large standard deduction -- say, $30,000 for a family of four -- would be the family's taxable consumption. Rates would start low, perhaps only at 10 percent. In this illustration, a family that earned $50,000 and saved $5,000 would have a taxable consumption of $15,000 and pay only $1,500 in tax. By comparison, it would pay about twice that amount under the current income tax.
As taxable consumption rises, the tax rate on additional consumption would also rise. With a progressive income tax, marginal tax rates cannot rise too far without threatening incentives to save and invest. Under a progressive consumption tax, however, higher marginal tax rates actually strengthen those incentives.
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Pollution taxes have proven their effectiveness in the environmental domain. In addition to generating a lot of revenue, they provide powerful incentives for the private sector to undertake much of the required investment for successful transition to sustainable energy sources. And as the European experience has shown, people are able to adapt to these taxes in ways that leave their standard of living essentially undiminished.
Progressive consumption taxation has a similar pedigree. It has long been proposed, for example, by distinguished economists on both sides of the aisle. In a 1943 article published in the American Economic Review, Milton Friedman, the patron saint of free-market conservatism, proposed such a tax as by far the best way to pay for the war effort. In 1995, a progressive consumption tax was proposed in the Senate under the bipartisan sponsorship of Republican Pete Domenici and Democrat Sam Nunn. This tax is not a fringe idea. On the contrary, it is a veritable poster child for the kind of bipartisan policy wisdom the president has been actively seeking.
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