Australian economics professor and author of Parentonomics Joshua Gans shows that excise rates can be too high to collect any revenue and that evasion can beat the system as he tried this plan for his daughter “B.”:
Gans came up with a special incentive plan for candy. If B. wanted to buy candy, she would have to pay her parents a 100 percent tax, effectively doubling the cost.
The tax was based on how much B.’s candy consumption would add to the family’s health costs, because of increased dental visits and the like. As it turned out, Gans never earned any revenue from the tax — because B. never bought candy with her allowance.
“I realized that’s just a ripoff,” B. says. “Why would I want the candy then?”
Of course, just as people evade government regulation by crossing state lines for cigarettes or fireworks, B. can go to her grandmother’s for tax-free candy.
http://www.npr.org/blogs/money/2010/09/02/129604336/?ft=1&f=93559255, via http://taxprof.typepad.com/
“Halfway through college, and still drifting, I decided to become a high-powered tax lawyer. The plan was sailing along until I took my first course in tax law. I was stunned by its complexity and lunacy, and I barely passed the course.”
This is why some of my friends make big bucks. Grisham abandoned tax pronto on his way to writing best sellers.
Two recent examples in the news prove that drawing reasonable lines in taxation is not child’s play. New York taxes sliced bagels at 9 percent, as it taxes bagels with cream cheese spread by the seller, and exempts unsliced bagels. Federal tax on loose cigarette tobacco is about 10 times that on pipe tobacco.
In the New York case, the answer seems to me to be to exempt bagels that are simply sliced. They are more like a loaf of bread than they are like a sandwich. More transformation than just slicing, like combining (as with cream cheese) or heating should be required for a change in tax categories. The answer should definitely not be to create a new category and tax it at 4.5 percent. Fairness is the enemy of simplicity.
In the tobacco case, I don’t know about the differences in the kinds of tobacco, but roll-your-own smokers are now happy to put pipe tobacco in their cigarettes. The 10-fold difference is way out of whack, it seems.
This line-drawing comes up all the time. It produces weird and embarrassing results for those of us who support some kind of taxation, but it’s manageable.
What’s not manageable is different excise tax rates based on hidden characteristics of the purchaser. No one I know suggests having the rich and poor pay different sales taxes when they buy the same item, like shampoo (we may get some progressivity anyway if the rich buy costlier stuff). But some proponents of medical marijuana contend that when marijuana is legalized for all, medical users should pay no or less tax. That would be weird.
(For a more comprehensive discussion of this issue, go to http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741735.)
The process of initiative and referendum that California and other, mostly Western, States use is a weak instrument for creating a new system of taxation and regulation .
California’s Proposition 19 reflects the wishes of the powerful forces in the marijuana community. For instance, it doesn’t even tax marijuana: it allows localities to tax or not tax.
This one-sided drafting is a recipe for backlash. In a deliberative process, by contrast, if marijuana becomes legal, opponents of marijuana won’t necessarily be convinced it’s OK, but some of them may cut a deal if they see enough benefit from the revenue gain.
The American way of the Founders is not the victory of one faction over another, but accommodation. Meaningful taxation of marijuana is the middle ground we may get to one day.
Proposition 19’s revenue is so speculative and ephemeral that even if it passes, all the tax thinking remains to be done.
Mr. Rangel, lauded here in a previous post, is an example of the reason people don’t want to pay taxes. He treated himself better than most people could treat themselves, thanks to the power of his office. His success came thanks also to his friendliness and love for people, to be sure, but he broke the rules.
So people distrust their representatives who write Federal tax laws and want to keep their power down.
Our work is cut out for us. The Democrats could gain a lot of credibility by trying Mr. Rangel and voting against him not on friendship but on the merits.
As the public resists taxation, end games for our democracy are foreseeable, though the timing is beyond me. The military leads the list of institutions that Americans have confidence in (76 percent) followed by small business (66 percent) and the police (59 percent). The Presidency and the Supreme Court tie at 36 percent, while Congress brings up the rear with 11 percent. http://www.gallup.com/poll/141512/congress-ranks-last-confidence-institutions.aspx
So here’s the result: eventually unable to borrow and still unable to tax, States and the Feds cut spending to the point where passable roadways, crime-free neighborhoods, and then clean water go missing. The military steps in for the benefit of the public. The Constitution is suspended. The military takes what assets it needs to fund a government. Police units help out.
Another end game is conflict with China as we renege on our debts, maybe by fast or slow devaluation. The military will need all the confidence it can get in that scenario, too.
I’m for balancing the budget, like many Republicans from the middle of the 20th century were.
[An updated version appears as part of http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741735.]
While marijuana helps some people with illness, I am very wary of exemptions, lower rates, or special rules for marijuana when it’s said to be medicinal. No proscription, no prescription.
First, any special rule puts the government in charge of making decisions about individual people. The government can distinguish, however awkwardly, among substances, so as to tax wine with an alcohol content of 13.9 percent at a lower rate than wine with an alcohol content of 14.0 percent. But putting human beings into categories can be more difficult. To be sure, there are easy cases, like the extra Federal tax exemption for individuals 65 and over (you just produce that birth certificate or otherwise prove your birth date as Mr. Obama has done to the satisfaction of most). But even the extra tax exemption for blindness on the Form 1040 creates a regulatory tangle and even a few disputes. Deciding whether someone has some ailment as subjective as chronic pain is a task that I hate to see government taking on. Folks who are distrustful of government ought to be especially careful about this kind of official categorization of individuals.
Second, any special rule rewards hypocrisy with a special right. Folks who pretend to be sick get something that honest folks won’t allow themselves to get.
Third, providing even any perceived benefit, even a placebo, to folks who say they are sick encourages people to think of themselves as victims. (The argument back is that we all may have chronic pain in our souls: it’s the human condition.) Having people think of themselves as victims has a positive aspect: it encourages them to seek help (and it encourages others to try to get them help). But such thinking tends to weaken the thinker.
Fourth, any special rule adds complexity.
Finally, any special rule diminishes the tax base.