Not every tax is bad

In the U.S., questions on taxes are on the agenda, especially days before an election, at a staggering economy with an unemployment rate at the upper single digits, struggling working class families and individuals. However, not all taxes are bad. I will aim at presenting a more commonsense approach on certain taxes.

The upcoming midterm elections are not only about jobs but also about government spending. With the passage of the $800 billion stimulus package and the $940 billion health care reform bill, unemployment benefits and federal aid for public school teachers in New Jersey (mainly because of Governor Christopher Christie’s conservative stance on the state budget) and other states, public outrage in the United States toward President Barack Obama and the Democrats in Congress is growing. With that outrage comes the support for fiscal conservatism which calls for smaller size of the government and less spending by the government.

Public outrage is growing to such an extent that it could be argued that it looks as if the word tax has never been dirtier. Cases in point are this ad and that ad that oppose taxes on juice drinks and sodas. The two ads were launched by Americans Against Food Taxes. Amazing how juice and soda are considered food, if this organization is against food taxes.

The first ad claims that “like a lot of families we’ve had to cut back in this economy, and now we are hearing about a new tax on juice drinks and sodas [as a tax] that hurts families who can least afford it,” while their newest ad claims that “feeding a family is difficult enough in today’s economy [and] now some politicians want the government to tell me how I should do it.”

The organization’s rationale behind these ads can be read here (their mission statement). According its mission statement, “the enactment of regressive and discriminatory taxes will not teach our children how to live a healthy lifestyle, and will have no meaningful impact on public health, but will have a negative impact on American families struggling in this economy.” Americans Against Food Taxes are right that such taxes are truly regressive (the lower one’s income is, the more it hurts them) and discriminatory (only certain beverages being taxed). Their mission statement has a much better argument than “cut back in this economy” and “feeding a family in this economy” because it is a counterargument to the rationale behind taxing products that impair health such as tobacco and alcohol.

Besides, that part of their mission statement is not too time-consuming to be expressed in less than 30 seconds. However, the problem with their counterargument is that it opens a debate on the tax issue which Coca-Cola, Pepsi-Cola and other entrepreneurships that are behind Americans Against Food Taxes have no interest in.

Other similar problem with taxes…

In September, the Cato Institute, a conservative think-tank, issued its sixth biennial report card on Governors “from limited government perspective.” The least the particular Governor (the Governors from Kansas, Utah, New Jersey and Virginia were not evaluated because of their recent inauguration, and the Alaska Governor was not included either because of peculiarities in that state’s budget process) would tax and spend, the higher grade they can possibly get ranging from A to F. The think-tank’s methodology includes seven tax-and-spending variables – four tax, two spend and one revenue variables. This straightforward methodology completely ignores other rationales behind tax increases, such as addressing compromises (the debates between the Governors and the legislatures), negative externalities (impaired health from smoking or drinking, for example), and as an impartial political correspondent for ConnecticutPlus.com I will prove it to you.

The Cato Institute gave Connecticut Governor M. Jodi Rell an F on fiscal conservatism based on her approval in 2009 of “increasing the top income tax rate, broadened corporate tax base, and raising the cigarette tax to $3.00,” among other things. While Governor Rell had really proposed tax increases on alcohol, cigarettes and profitable companies in her budget plan, she had had months of disagreements with the Democrat-controlled General Assembly that had passed a budget bill because of her fiscal conservatism – something not accounted for in the Cato’s report card. The legislature’s budget bill would have raised taxes and fees by a total of $2.5 billion for fiscal years 2010 and 2011. However, she vetoed the legislation.

Moreover, the think-tank’s report is wrong on her approval of the state budget discussed there. Jodi Rell has taken no action on the budget. You can see it in my weekly roundups, her announcement on her website, and the tax experts from Grant Thornton, LLP (bottom of page 1). Apparently, the Cato Institute’s report even lied about her “approval” of the budget. Governor Rell said she accepted tax increases she did not want as part of a compromise for state budget cuts – another part of the whole picture that is not included in their calculations on fiscal conservatism.

Don’t get me wrong

Suffocating businesses with taxes is not rational, even if these businesses’ products are unhealthy. It could potentially create a black market for the taxed (or extra-taxed) products. However, not taxing such products more than other products, let alone giving them tax breaks, will neither create jobs, nor will make society better off, especially judging by the health problems some Americans are already experiencing.

When reading numerical (statistical) or philosophical (verbal) analyses, paradoxes like the aforementioned should be avoided unless we want to give up on our independent thinking and let the numbers or premises think for us. And letting them think for us is almost as alarming as “the government telling me how I should do it.”

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2 Comments

Filed under Books, Movies and Analyses, Economy, Life, Politics

2 responses to “Not every tax is bad

  1. Naiden

    I agree. Taxes are a necessary part of our society and need to be reviewed on a case by case basis. You made an interesting point about overtaxing certain products for the purpose of discouraging their proliferation. I am personally a proponent of a larget (why not 500 percent) tax increase on cigarettes, for instance, however I agree with you that this would probably spike up the black market for nicotine products. However, a more modest but frequent increases might mitigate this risk while gradually decreasing the amount of people interested in this product.

  2. I should do some research on the impact that taxes on cigarrettes, for the sake of argument, have on consumer behavior because so far, based on my personal and non-scientific observation (a non-defined sample of smokers that I know), I haven’t seen it have any noticeable impact on people’s interest in the product (I exclude non-smokers because they are a different breed – one that values money enough to spend it on something better than cigarettes). Calculations in public policy models (so I am talking theoretically here) on tax rates take marginal external costs into account. In other words, if the marginal external cost is $5 (a cost that is very difficult to calculate, and it is often not calculated) per pack of cigarettes, then each pack should be taxed $5. Decreasing the amount of people interested in a product should not be the rationale of setting a certain tax rate on it. That’s as good as banning the product in your area (be it a country, a state, a municipality, or whatever entity that has the authority to impose taxes), and you end up putting the entrepreneurs in a damned-if-you-do-damned-if-you-don’t situation. They are damned if they are selling their product openly because of the high tax, and they are damned if they are selling it under the table. Campaigns against the product, often launched by non-profit organizations through various ads, is usually the most constructive method of decreasing the amount of people interested in it, at least in my opinion.

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