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.