Re: AltInst: Tax Inferred Ability to Pay

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Date: Mon Aug 30 1999 - 12:15:21 PDT

I would never trust Congress to set different taxes based on
characteristics that may affect one's ability to earn, except for those
characteristics that an individual could not change.

Taxing education, which has positive externalities, is really perverse.
The debates of the appropriatesness and value of IQ tests would be
never ending. (I expect IQ has little correlation with income anyway,
except for really low IQs.) Different taxes based upon zip code would
just get many people to move. This may be good public policy for other
reasons (equalizing support for public schools and increasing
information, and, one hopes, understanding about the lives of people
with significantly different incomes), but it would be a mess to
administrate. Measure incomes only every ten years at a census? Are you
willing to spend the amount necessary to measure it more often? Think
about the hub-bub created when a post office closes! (Small regions
established by the census may be better than zip codes.)

Different taxes for the blind, the deaf, the mentally ill, or those
with other physical disabilities would be administratively feasible,
and they would not create significant distortions themselves, but these
people already pay relatively few taxes now.

To reduce the distortions of our current income tax, I think it would
be more important to take two actions:

1) Reduce the load for these taxes by taxing actions with negative
externalities or where efficiency benefits from trading are now absent
due to prohibition.
  a) Tax the hell out of sin: alcohol, cigarettes, marijuana, heroin,
cocaine, prostitution, X-rated activities. Alcohol and cigarettes we
already tax. Are they enough to cover the cost of all treatment and
productivity decreases? I would introduce the other taxes
incrementally. Taxes on marijuana could generate huge dollars, as they
could for X-rated activities, and potential costs are likely to be low.
If it works as well as I think it would, then extend it to hard drugs.
  b) Implement a very-broad-based carbon tax. The negative
externalities from general air pollution and from global warming might
be significant. Start with a relatively low tax, and adjust it with
experience. (This would also reduce distortions from CAFE standards.)

2) Move the current income tax towards a progressive consumption tax.
  a) Give a current tax credit for all savings and investment, and tax
them later when their results are consumed. Eliminate the tax
difference between capital gains and income.
  b) Give a current tax credit for any funds given to another
individual or organization, who must then include these funds on his,
her, or the organization's tax return.

Dan Alger

original article:
> Taxes have the problem that they can distort incentives to save,
work, and
> buy things. If you tax particular goods, people buy those goods less.
> Taxing income is better, but that still distorts incentives to save.
> consumption works better still, but still distorts incentives to work
> "leisure", i.e. non-"work" activity.)
> If rat-racing signaling problems make people work too much, then
> consumption taxes might actually improve things. But if tax
> to work are still a problem I have a suggestion: tax better inferred
> to pay or consume (or earn), rather than current consumption (or
> The tax that least distorts choices is a poll tax, a fixed amount per
> person. The poorest are unable to pay such a tax, however, and
> seem to prefer to tax "the rich" more. Presumably what we really
mean to do
> is tax more those who are *able* to earn (or pay or consume) more.
But what
> we actually do is tax more those who actually *do* earn more. And
this is
> what creates the possibly problematic incentives to not work.
> What we are doing is inferring ability to earn/consume from actual
> earnings/consumption. This creates an incentive for people who *can*
> more to hide this ability by working less. By mimicing those who
> less, they can pay less in taxes.
> We can reduce this problem by using more information when inferring
> to earn. For example, we can make taxes this year depend not just on
> or consumption this year, but also on income or consumption in
> years. Taxes could depend on one's education level, IQ score,
> education level, or zip code of residence. If one expected that such
> methods would better reveal one's ability to earn, one should be less
> inclined to work less in order to try to mimic those less able to
> This approach doesn't really solve the problem of taxes discouraging
> early in life from doing things, like getting an education, which can
> increase their ability to earn later in life. But it doesn't make
> problems any worse, and it *does* help reduce distortions in
incentives to
> work/earn/consume later in life.
> Of course one might naturally be hesitant to trust congress to tax
based on
> these various characteristics, fearing they would mainly look to
> wealth from some groups to others, rather than inferring ability to
pay. I
> have some further thoughts on this topic.
> In all fairness, I should point out some disturbing implications of
> proposal. First, consider the fate of those who graduate in English
> literature from a good school. Even if this person chooses to live
> while writing the great American novel, we can infer that this person
> probably could have done well in some more marketable degree such as
> business, and could do well in some other more boring but better paid
> Should we tax this person based on what they could earn if they got
such a
> better paying job or degree?
> A similar scenario is someone like me, who was once in the well-paid
> computer industry, but chose to switch careers into academia, which
not only
> pays less but required a long break as a student where I was paid
much less.
> Should I have been taxed all along based on what I could have earned
in the
> computer industry?
> How far do we want to go in taxing ability to earn, rather than
> Robin Hanson
> Asst. Prof. Economics, George Mason University
> MSN 1D3, Carow Hall, Fairfax VA 22030
> 703-993-2326 FAX: 703-993-2323
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Received on Mon Aug 30 12:35:21 1999

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