Tax Efficiency, Fairness & Effectiveness
Sales taxes are not the only controversial forms of taxation. How do other taxes measure up against the three criteria of effectiveness, efficiency, and fairness?
Property taxes are based on the assessed value of a person’s property. They are one of the oldest forms of taxation, rooted in the belief that property values correspond to a person’s overall wealth and ability to pay. Is this still true? Does the size of a person’s home or the amount of acreage that they own necessarily correspond with their wealth and ability to pay?
What if a person buys a home, only to have its value appreciate dramatically, causing her property tax bill to rise just as quickly? What if she's retired and can't afford the new tax bills? Should she be forced to move out of her home? That exact scenario has led many states to pass property tax limitation laws (California's Prop 13 is probably the most famous). But capping property taxes tends to lead to holes in state budgets, forcing them to find other sources of revenue in sales taxes, income taxes, and so on.
Excise taxes are imposed on specific goods. Often the commodity taxed is linked to the intended purpose of the revenue collected. For example, the federal tax on gasoline raises money that is earmarked for highway construction. Is the logic sound? Do people who use a lot of gas necessarily benefit the most from the highway system?
Some excise taxes – so-called "sin taxes" – are imposed on goods deemed bad for society. Smokers pay a $1.01 per pack federal tax on cigarettes, in addition to state taxes ranging from 7¢ a pack in South Carolina to $3.46 a pack in Rhode Island. Beer drinkers pay a federal tax of about 58¢ per gallon (5¢ a can), as well as state taxes ranging from 2¢ a gallon in Wyoming and 8¢ a gallon in Colorado (thanks to Coors) to $1.07 in Alaska (thanks to the nation’s highest rates of alcohol consumption and abuse). Defenders of higher "sin taxes" argue that these behaviors may be rigorously taxed because they impose social as well as individual costs. Do you agree?
Why It Matters Today
Do you think that "sin taxes" are a good idea? Smoking has serious costs to society; is it fair, then, for smokers to have to pay an extra tax to help offset those costs?
One reason why you might think that a cigarette tax is a good idea: as a simple matter of supply and demand, raising the price of smoking will reduce the number of smokers. And studies have shown that teenagers, especially, are sensitive to the cost of a pack of cigarettes. High taxes will cut the number of teen smokers. That's good for public health.
One reason why you might not think it's a good idea: most habitual smokers are deeply addicted to nicotine. An addict will do what he has to do to get his fix; studies show that adult smokers tend to be pretty inelastic in their demand for cigarettes. In other words, if someone just can't quit, the state will now be punishing them by taxing their addiction. Depending on how you look at things, that might not be fair.
And a strange twist to consider: once a state makes "sin taxes" a significant part of its revenue stream, it has an incentive to keep people smoking and drinking! If everyone quits smoking, the state doesn't get any cigarette tax revenue... Is it really a good idea to fund public services on the back of citizens' addictions?
What do you think? Do the advantages of sin taxes outweigh the drawbacks?
Sometimes, a Song Says it Better: Carnival Wolrd, by Jimmy Buffett
“There’s no free ride” and “the tax man’s always knocking at your door.”