Taxation and Economic Incentivization
Posted May 9, 12:43 pm in business, consumerism, economics, environment, finance, marketing, politics, sustainability, transportation
Back in March, I took a trip to a developing country in Latin America for a project I was working on. As it would turn out, my expenses were fully paid by the institution I was operating under. Very quickly, I noticed something different about the way I was ordering meals at restaurants; I was getting dessert.
I never order dessert at meals.
Then it hit me. The reason I never order dessert is because dessert tacks on an additional $5-$7 onto the bill. It has nothing to do with the fact that dessert is bad for my health and is chock full of empty calories. Sadly, I’d probably order it every time I eat out if someone else was flipping the bill.
Behavioral economists have long realized that one of the greatest drivers of human consumption behavior is economic interest— money. Make it expensive to do something and it discourages the behavior. Behold the so-called ‘sin tax,’ which makes smoking cigarettes slightly more unappealing through an increased price (though apparently the price elasticity of cigarettes is virtually nil).
For her presidential candidacy, Hillary Clinton is proposing a gas tax holiday. Let’s think about the logic here in the context of economic incentive:
1) America relies on gasoline for operation.
2) America’s gasoline prices are going up.
3) A high gasoline tax discourages people from using gas unnecessarily; therefore the opposite, removing the tax, encourages more liberal use of gasoline on a macro scale.
4) Higher use of gasoline ensures higher prices in the future given the reality that gasoline is a limited resource, and increasing reliance on other countries for oil.
This strategy makes no sense. Our country should be doing everything in its power to discourage unnecessary gasoline usage. The government should be providing tax incentives for companies to use renewable energy, and should be making it easier for renewable energy companies to form and grow. Instead, the government is doing the exact opposite, which is not only a terrible long-term strategy for energy policy, but ensures a grim future for the people of the United States in many ways.
Many, if not most, of the world’s current problems come from a single source: consumption. High levels of consumerism and consumption behavior have driven many of the issues that plague the world. Reduce the occurences of this, and we start to address problems like pollution, deforestation, wars (for natural resources), energy shortages, water shortages, and the like in a meaningful way.
Federal Taxation
My own ideal form of taxation would come in the form of a VAT tax instead of the standard income tax that we have in the United States. Many in the US argue over the respective merits of progressive, regressive, and flat-taxes, but if you ask me, the VAT is the most sensible. Basically, my idea is that you don’t pay automatic income taxes to the government; instead, you pay 20-50% on everything you buy (something that everyone in the supply chain has to do— meaning that a single item gets taxed multiple times).
If it were up to me, the percentage of the VAT tax would depend on the nature of the item in question. The amount of tax levied should depend on external costs that society has to bear by the fact that this item is out there in the world. If manufacturing the product has led to environmental destruction in some way, tax it higher. Products made of plastic or which contain lots wood should be taxed high. Products that don’t biodegrade or which need special processing to re-enter the waste stream should be taxed high. Products that damage our water supply and pollute the air should be taxed high. On the other hand, items that can safely be returned to the earth to decompose should be taxed low. Unprocessed foodstuffs should be taxed low. Bicycles should be taxed low (while they use up resources in manufacturing, they encourage more prudent use of other more damaging resources).
A hypothetical scenario: say you buy a $100 stereo. By the time you check out, you’re in the $120 range. Maybe even higher, like $140 or $150. That’s considerably higher than the state sales tax you’ll pay in the United States. You’ll question whether you really need that stereo. You’ll be forced to think about the environmental and external impact of your purchasing behavior. True, you’ll have to fork over much more once you buy stuff, but you’ll have extra money in your pocket from not paying income tax.
I like this idea for a variety of reasons, but primarily because it ensures that those who consume the most also bear the external costs— a cost that is often left to society as a whole to bear. If proposed on a large scale, my guess is that many people would complain for the following reasons:
- The VAT may encourage people to spend less, but most countries and their governments push for strong economic growth to maintain or promote “high standards of living”
- Companies and stockholders expect their profits to grow year after year without fail
- While endless consumption empties rainforests, fills the air with pollution, and contaminates drinking water, companies and governments are more interested in short-term success of their enterprises and consider addressing these issues as a hassle, especially since the marketplace typically does not reward good behavior on these fronts
- Society largely views cycles containing periods of economic decline as negative
- On the whole, people want the benefits associated with certain behavior, but are unwilling to personally bear the costs (ex. “I want clear air, but I am unwilling to give up driving”)
- The stock market does not address long-term strategical moves; instead, it focuses on instant gratification efforts