Some Thoughts on Tax Policy

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Some Thoughts on Tax Policy

Postby Carleas » Thu Jun 08, 2017 9:39 pm

Setting aside the total tax revenue or percent of GDP that should be collected as tax, it seems that some ways of collecting taxes should be preferable others. Different tax policies seem to reflect different value systems, independent of the total tax revenue.

For example, compare a flat tax on earnings to a progressive tax on earnings (i.e., where the tax rate is higher on those who earn more). The flat tax system is likely to have less overhead, be more certain and thus more efficient, and may be perceived as fairer (because it's more easily understood). The progressive tax may also be perceived as fairer (because those earning more can afford to pay more with less impact on quality of life), and there may be knock on effects to e.g. reducing inequality and redistributing down.

Compare also an income tax with a sales tax. An income tax is generally more progressive, because the effective tax rate imposed on the very poor by a sales tax will be much higher; those living paycheck-to-paycheck will effectively give a larger percentage of their pay than those who are able to save a portion of their earnings. On the other hand, sales tax allows people to avoid taxes through their actions, namely by consuming less and saving more.

Another useful comparison is between what I will call explicit and implicit taxation. Taxes like income and sales tax can be thought of as explicit: the government tells you how much you owe in taxes, and you pay it. An implicit tax would be something like inflation through an increased money supply: taxes are 'collected' by devaluing the money already in circulation and 'printing' new money which the government spends. An implicit tax like inflation has the benefit of being cheap to levy and applies uniformly to all wealth, but at the cost of transparency and possibly some perverse incentives with respect to saving and investing.

A general question for tax policy is how the tax burden is best distributed across individuals relative to their wealth or other attributes. Progressive taxes seem fairer due to decreasing marginal utility: taking a dollar from a rich person is very different from taking a dollar from a poor person. Moreover, it seems that 10% of the earnings of someone who is making twice what it costs to survive hurts that person less than taking 2% of someone who is just barely making enough to survive. And socially, the very wealthy may be more likely to spend their money in socially less-valuable ways. The classic example is that a wealthy person buying a third care is using a lot of resources mostly for entertainment, while someone buying a first car may significantly increase their value to society using those same resources.

I would even argue that land value tax and taxes on orbital location and spectrum should be progressive, so that e.g. a person who owns a lot of land or a significant portion of the spectrum should pay a much higher rate than someone who owns a small portion, because of some diversity of use is socially valuable, and helps to avoid monopolization of fixed resources.

For any progressive tax, though, setting the slope of the tax rate is difficult and significantly effects how beneficial the tax policy will be.

Other interesting options are a land value tax (including taxes on e.g. orbital locations and spectrum), and targeted taxes to disincentivize socially costly behavior and/or offset the cost (e.g. sin taxes, carbon taxes, soda taxes -- not all are equally good, but the concept seems reasonable). These later two have valuable social spillover and are relatively easy to administer.

An important further consideration is on 'who' should be paying the taxes. As I've argued before, I don't think corporate taxes are a good idea. First, as I argued before, they aren't progressive (and are actually regressive). Second, they are not transparent: the burden ultimately falls on individuals, but most of those carrying the burden do not see, and have no power to influence, how that burden is allocated. Corporations could pay value added taxes and land value taxes, i.e. taxes on assets or activities which they own or engage in directly, because those taxes are actually targeting the activity or assets, and are partially justified by how an increase in the price of those activities or assets affects a rational economic actor. For example, if part of the justification for a land value tax is to encourage the efficient use of land, requiring a corporation to pay the tax encourages the corporation to consider whether their use of the land is ideal, and if they shouldn't move or reduce their physical footprint.

However, corporate taxes have the benefit of possibly being cheaper to administer, since there are fewer corporations that need to be regulated than there are individuals that make them up. It may also allow taxes to be levied on money that otherwise never 'touches down', i.e. is never paid to an individual as income or spent on goods, and is instead e.g. borrowed against, or leveraged for influence, or otherwise invisible (or not easily made visible) to other forms of taxation. There's also the issue that corporations use public goods, and so fairness seems to suggest that they should pay their fair share.

My intuition about what makes the best tax policy is to have a mix of taxes. Different types of taxes each have their benefits and costs. Taxing a little bit on each of them seems like it would tend to distort market choices less, and at least to diversify the risks each imposes. But it is probably inefficient to have too many tax sources. Overhead probably does not scale linearly, so that the first dollar of a certain type of tax is probably much more expensive than the millionth.
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