Believe it or not, there is such a thing as a good tax.
A good tax raises the required government revenue by not only treating equals equally, but also by requiring more from those who will be hurt the least.
However, that is not all: a good tax is also a tax that is administered simply, transparently, and in a “neutral” way.
“Neutral” means it does not cause individuals and corporations to behave differently; in other words, the tax respects the outcomes of the marketplace (unless of course prices do not accurately reflect the true costs and benefits of an activity. In this case the tax might be used to explicitly correct these market failures.)
This confronts Occupiers with a dilemma.
If our starting point is that market outcomes are efficient, then requiring the rich to pay more will surely change incentives. They will try to avoid the tax, and this will compromise the amount of revenue collected. The administrative red tape needs to get thicker, but surely is limited since individuals will eventually feel that working harder or saving more are just not worth it. Ultimately the tax impacts on economic efficiency: the attempt to divide the pie in a way favourable to the less advantaged ends up making the entire pie smaller, something that is potentially damaging to everyone including the less advantaged.
What are Occupiers to do?
First, it is important to recognize that it is not just whether or not taxes distort market outcomes; no tax is perfect. The question is by how much does it distort outcomes. If minimally, then it may be worth accepting this cost. So the first thing to do is look for situations in which the likelihood of changes in behaviour are minimized.
Second, since no tax is perfect, the existing system certainly has incentives embedded in it that should be removed. The most obvious case is different tax rates for different sources of income. This creates incentives for tax avoidance: for example, when earnings are taxed at a different rate than asset income; or when corporations in one industry are treated differently than those in other industries.
So a second guiding principle for Occupiers might be to treat “a dollar as a dollar” regardless of its source. (This is an important lesson from an influential Canadian Royal Commission held in the 1960s!)
These two principles imply an immediate “don’t”: to address equity concerns don’t tinker with the sales tax system. The temptation to exempt heating expenses, food, or whatever good that is perceived to be a necessity for the poor from value-added taxes (like, in the Canadian case, the GST/HST) is just political posturing. These exemptions narrow the tax base, and imply that the rate would have to be higher to generate the same amount of revenue.
A wider base with a lower rate is preferred because it minimizes incentives to change behaviour: the tax can’t be avoided by changing consumption patterns; lower rates imply weaker inducements to behave differently.
Besides, it is debatable whether the exemptions are of relatively more advantage to the disadvantaged. To address equity concerns Occupiers should use the income tax system, and correct distortions in corporate taxes.
Some tax policies for greater equity are discussed in the next post.
Economics for public policy 
Great post as always M. Corak
“unless of course prices do not accurately reflect the true costs and benefits of an activity. In this case the tax might be used to explicitly correct these market failures”
I.E Carbon taxe?
“since no tax is perfect, the existing system certainly has incentives embedded in it that should be removed. The most obvious case is different tax rates for different sources of income.”
So you would recommend a flat tax rate for every one? But it seems to me like the more money you have to invest the more your activities are tax deductible, would these incentives not have to be removed as well for this to work?
The following may betray the fact that I have little knowledge of economics, but I keep coming back to the same conclusions and it’s annoying me. Stay with me a second while I expose my reasoning as to why I think Occupiers won’t be satisfied with the kind of tax incentives you are talking about.
So in a globalised world we want people to invest where we live. I assume small businesses come up where they can so if they are impeded it is locally – as long as people in a given area can afford their services and that they are not overly burdened by the tax code they tend to stay and continue to invest. The same it seems is basically true for corporations except their capital is more mobile so they tend to shop around for the best deal. At any rate investors could leave and because you need money to invest and create wealth or extract natural resources, local people are basically without a job unless they can make investment profitable in their area.
If investors can generate wealth it’s because they have capital. In our view the gains from investments pass through the capitalist and “trickle down” to those who can attract their investments. The role of the many therefore becomes to attract the investments of the few or to make investment profitable for the small local businesses. At this point we have to make incentives for investment and tax codes are but one of these strategies. We make it so everywhere you go people are trying to make it more profitable for capitalists (big and small). Then the Mathew effect comes along, you have a system where the more capital you have, the more capital you can generate and the more capital you can generate the more you are needed and the more you are needed the more capital you can generate and so on. And if you add the political weight that this gives you have another dimension all together…
When you look at it that way the system is geared to give more and more bargaining power to the investor and as little as possible to the workers unless they become investors themselves. People that care about inequality and the environment therefore feel left out of the political process because the politics function mostly to attract investors and so we have events like Occupy Wall Street which are simply symptoms of this frustration. To the extent that competing for tax rates is a very real example of this structure, I don’t feel that occupiers will necessarily like it, despite the “realism” it provides.
Every refutation of this I come along always just comes up with different premises that are laced with normative dimensions and so I can’t accept them because I don’t hold their values. A possible exception to this is the argument that in a sense everyone can be an investor (pension plans etc.), but that never really translates into anything meaningful in terms of the bargaining power of labour and environmental groups. This is not the political stance that I necessarily take pragmatically I think I agree with your policy recommendations but I can’t help but shake the feeling that we are treating the symptoms and not the disease…I have some free time coming up between my masters and Phd, any recommended reading to change my mind on this?
“Neutral” means it does not cause individuals and corporations to behave differently – in other words, status quo, keep the profits rolling. Sadly conservative and short-sighted.
Why would you assume markets are efficient as a starting point? Information asymmetries, environmental externalities, market power, unequal distribution of wealth all point to an opposite starting point. Excluding that sentence does undermine what follows in terms of recommendations