How to Tax for Prosperity

We too often think of taxes as a necessary evil. Our hard-earned value is partially taken by the government to maintain public infrastructure, provide for the national defence, and do all the other things society can’t live without. The issue of to what degree the government should provide services is not at issue in this piece. There are reasonable philosophies that it should be bigger or smaller, but that is a conversation for another time.

Taxes generally fall into two categories: efficient and inefficient.

Inefficient Taxes

Most taxes are inefficient and are a drain on society. We use the word ‘inefficient’ to describe them because they create a delta between the price someone must pay for a good or service and the value that is received by the producer of that good or service. By creating that delta, we remove participants from engaging in that market and prevent what would otherwise be productive economic activity. Income, Sales, Payroll, and Corporate Taxes all fail the test of efficiency. In some areas, like Payroll and Income taxes, this represents a massive reduction in the performance of the market: consider how much more expensive it is to employ someone relative to what they will earn after tax.

The negative societal effects of Income Taxes on anyone but the highest earners cannot be understated. We exacerbate the want struggle of making just enough, pushing people towards crime and vice. We deprive people of access to cheaper labor and access to the cheaper goods and services that it provides. How many people could we save from experiencing the squaller of homelessness, if only it were cheaper to employ them and cheaper for them to house themselves?

These are the taxes modern Economists consider a necessary evil. They think, “While we don’t want to take from laborers, we will be able to spend the money better through the application of government services.” While I understand the argument, I believe it to be wrong, but only because we have efficient methods of taxation.

Efficient Taxes

Efficient taxes are distinguished by not reducing productive economic activity, and not having a deadweight loss. I prefer to extend the idea to include taxes that reduce harmful economic activity. There are a few types of efficient tax: Pigouvian Taxes, Sin Taxes, and Natural Resource Taxes.

Pigouvian Taxes are any tax that privatizes the cost of a negative externality. There exist activities that harm others, but that we don’t want to ban. For example, driving in the city center creates traffic and slows down other drivers. Road tolls privatize that harm by charging it to the driver. By dynamically setting tolls on a road that typically has traffic, we can prevent traffic from ever getting too heavy, using the pricing system to filter for people who have the need to drive at what would otherwise be busy times, while keeping the road free at times of low demand.

Another example of a Pigouvian is a Carbon Tax. By pricing in carbon emissions, we can make alternatives more price-competitive and remove the social shame that comes with emitting. Some industries need to emit Carbon, like air travel. Shaming and assigning blame doesn’t help the problem. By pricing in the negative effects, we encourage industries where the costs of electrification are lower to electrify first, making the largest decrease we can in emissions, while applying resources towards decarbonization most efficiently.

In a similar vein, Sin Taxes tax things people think are bad behavior, like smoking and drinking alcohol. They are efficient in the same method because the decrease in activity caused by the tax is considered more valuable to society than the value produced by the transaction. Sin Taxes can be extremely effective, like in the example of smoking, but great care should be given to ensure they are applied carefully and thoughtfully. It can be easy to stray into paternalism.

Finally, Natural resource taxes. These are the most important. Natural resources like mineral rights, water access, clean air, and land are natural, God-given resources to the citizens of a country. For too long, we have allowed people to claim exclusive access to some amount of natural resources and charge others for access to them, despite doing nothing in their creation. For too long, people have been able to simply purchase this claim of exclusivity on natural resources, and then sit on them, holding them for speculative purposes, as society and culture grow to demand their ‘property’ even more.

This process of natural resource speculation is a suck on all of society. It is a method people use to gain value for no exertion, and amounts to theft from those who labor. It has existed as a practice for as long as humans have organized into society and attempted to maintain property rights, from Rome to Feudal Europe to modern-day landlords. As with most things, the language in which the powerful extract value from the majority has gotten more complex over time, but the underlying mechanism is the same.

By placing taxes on simple ownership of natural resources, including land, we can remedy this. There are benefits to allowing individuals to have exclusive access to land; without that mechanism, we fall prey to the Tragedy of the Commons. The important distinction is that we must require them to pay for the privilege. A monthly tax on all access to natural resources you claim exclusive domain over. For land, that means increasing the tax on the unimproved value of land, and decreasing the tax on improvements like buildings.

Taxing and Spending

You may notice that the efficient taxes above do not specify a quantity of tax to levy. While with inefficient taxes, it is reasonable to adjust the rates of taxation dependent on the budget to maintain balance, for efficient taxes, they have a level at which they are ideal, and increasing or decreasing would have detrimental effects. Because of the nature of these taxes, they should generate in far excess of our government spending, and so with the remainder, we should distribute it directly to the citizens as a dividend.

With this tax and dividend philosophy, we can price in the negative externalities and eliminate abject poverty through the dividend. We can also change the incentive structure around government spending. Instead of government programs almost always being worthwhile if they help people, programs now become only worth their cost if the value of the program is worth the decrease in the dividend.

We can eliminate land speculation, lowering the price to use land and encouraging better land use patterns. This means denser development in cities, sparing virgin land, farms, and wetlands from development that would have happened because it was cheaper than land being speculated on.

We can bolster our economy, make (almost) everyone richer and thus have more power in the labor market, and save ourselves from the environment-destroying effects of urban sprawl and pollution by respecting How to Tax for Prosperity.

These are the ideas of Henry George that he outlined in Progress and Poverty (1879). He outlined how the value of land would increase relative to labor and capital, and cause a continuous decrease in wages and interest as a share of productive capacity.