Taxing The Bads

Taxation is an interesting facet of our society. Economists view taxes as a disincentive in a free market, and rightly so. Taxes increase the price of a product or service, making it less desirable. Yet, when you think about what we tax in this country, it’s mostly things we desire more of – income, profits, sales, et cetera. This odd behavior should be questioned, even more so today when every budget (state, city, federal) seems to be facing seriously tenuous times.

I took the train down to Oregon this last weekend to see my sister graduate from college. While there I stayed with Rob Dietz, Executive Director of CASSE and a good friend of mine. He handed me a very modest looking magazine called Sockeye. I am sure I will be drawing material from this one issue for some time (check it out, amazing articles). For now I want to talk about tax shifting, as mentioned in the article by Alan Durning and Amy Chan, “Making Prices Tell The Truth: Shifting Taxes from Bads to Goods.” (pdf)

The Imbalance of the Free Market

Taxes have the power of acting as a means of balancing what are called “market inefficiencies,” things in the free market system that generate negative externalities. These are unwanted side effects that are not taken into account in a product, service or activity. A great example of this is any fossil fuel, let’s take Coal for instance.

Let’s imagine a coal power plant starts leeching mercury into a watershed and a city water planet down river takes it in (coal accounts for most of the mercury in our waterways). The coal power plant is not paying to filter this mercury out, nor is it paying for all the damage that could occur from the toxin leeching into the ecosystems. Because the producer does not pay for the negative externalities it is left out of the decision to pursue coal power.

If these externalities were eliminated by charging or compensating for them, then they could be factored into the decision making process. This is especially important as all too often these become costs placed upon the society instead of the producer (e.g. the city water plant in the above example has to filter out the mercury from its water source). If these prices were added into coal’s price they would eventually make coal production to costly to be worthwhile.

One of the best ways to internalize these negatives into our free market is to increase their expense with taxes to help offset costs like oil spill clean ups, health care or water treatment.

More Taxes, Less Cuts

Instead of cutting important, meaningful services like education, health care, welfare, police and fire departments we should be looking at new sources of income. No one is looking forward to more taxes, so this leads us to the need to consider something – I know when I say it, politicians everywhere will wince – out of the box. The conventional isn’t working, hasn’t worked and only seems to make things worse as we go forward into the future.

Here are some of the tax/income ideas that I think have great potential:

  • Tax Pollution – We have the systems to monitor pollutants, so we should tax everything on a global warming potential basis. Carbon costs $1 per unit, so methane (which has a GWP of 12 times that of CO2) would cost $12 per unit.
  • Toll Roads – If we want to be serious about transitioning to sustainable means of travel, we need to start tolling more roads here in the states. These funds should go directly into funding more transit, maintenance, et cetera and keeping state transit workers employed.
  • Tax Gasoline/Propane/Diesel – Here I have the same sentiment as the last point. The “true cost” of gasoline, when you add in all the externalities that can be priced, is around $12 per gallon. Now, a $12 gallon of gasoline would take a while to work up too – but it shouldn’t be seen as ridiculous (Europeans pay over $7 per gallon), especially since it will get there eventually on its own. However, if we start now we gain a better reward and help fight climate change along the way.
  • Tax Resource Extraction – If you harvest anything unsustainably, it should be taxed. This goes doubly so for non-renewable resources like oil, natural gas and coal.
  • Tax Advertising – This is a blight on human psyches and generally accepted by most as a nuisance. Personally, I think we should ake São Paulo’s route and outlaw advertising in public spaces. All others should be taxed as the public nuisance they are!
  • Tax BanksBanking is screwed up. Private banks and their CEOs make exorbitant amounts of money doing something provides comparably little service to society. As the current state of economic affairs is a great example of, banking is actually more detrimental to society than we thought just a few years ago. We need a small percentage tax on all banking transactions. This “Robin Hood Tax” could raise billions to fund education, social services, climate mitigation and aid in eliminating poverty and hunger.
  • Tax Corporations – If anyone is to blame for most of the worlds problems, I could surely name more large corporations than individual people. Why don’t we tax them when they get “too big to fail”?
  • Fuel Efficiency “Feebates” – A feebate is a combination of fee and rebate, often proposed as a means to improve fuel efficiency in vehicles. It works rather simply: for every mpg below the average on a new car purchase you pay a fee. For every mpg above the average on a new car purchase you get a rebate. This creates an incentive for both consumer and manufacturer to purchase/make more fuel efficient vehicles, thereby increasing the average. A study done at UC Berkeley showed that a $70 per mpg feebate would increase fuel efficiency about 1 mpg per year.
  • Tax the Rich – People making more than 20 times the average wage should be taxed on their income. They are promoting inequality, which have been linked to a range of social and economic problems. Take this a few steps further, increase the taxes the further away you get from the average national income and subsidize the income of those 20 times below the average. This is more Robin Hood than the bank tax even: it supports equality and actually lifts people out of poverty. Basically, this could be a feebate for wage equality.

That’s all I got for now, though I am sure we could come up with a few more ways to generate income. All of these taxes could be instituted in small levels, gradually increased as we deem appropriate, and eventually should lead to the elimination of taxes on median-level incomes, profits and sales. This levy on taxing the goods would help offset the trickle-down of price increases that would likely occur with instituting this new types of taxes. Plus, we get a double-whammy: income for our ailing budgets and discouraging bad behavior.

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