Taxing the Essentials

LAST SATURDAY afternoon I drove by a shopping mall, and noticed that, strangely, the parking lot was mostly empty, despite it being a prime shopping day. This once thriving mall, it turns out, is over half vacant, and one of its big anchor stores was going out of business.

Earlier that week I happened to drive by one of the local casinos, and its large parking lot was filled: this on just an ordinary weeknight.

Obviously, this is very, very bad. Consumer goods, even though they are often purchased unthinkingly and excessively, have some lasting and true value to the purchaser. Gambling, although often portrayed by the industry as ‘entertainment’ spending, is nowadays most likely a last-ditch act of desperation for the gamblers, and leads to net loss for most.

A while back I wrote that these casinos had the unintended consequence of a great increase of petty crime, and that large new jails had to be constructed to house a new class of criminals: primarily middle-class women who got into trouble because of gambling. With our current economic crisis, how large will these jails become?

Either the powers-that-be are ignorant, greedy, or perhaps they subscribe to Vladimir Lenin's observation that “worse is better”: revolution will only come if things get really bad.

Now I can only prove greed as a cause. Contemporary liberal politicians are just as greedy as the most predatory and monopolistic of capitalists, and they desire the size of government to be as large as they can get away with. Certainly this is because both groups, seemingly different, are both children of the Enlightenment and share a basic worldview.

A progressive legislator wants to maximize total tax revenue, and this can only be done by shrewdly taxing the right things. Income taxes are an obvious target, as are real estate taxes. Taxing goods and services are more problematic because of the phenomenon called ‘price elasticity of demand’. Sales taxes are fairly reasonable, but excise taxes — additional taxes on specific commodity types — are generally severe.

Most shoppers will attempt to purchase a commodity at the cheapest price available, but are still willing to pay very high prices for certain essential goods. Consumers are willing to pay high prices for essential commodities like utilities and gasoline: these have very low elasticities of demand. So does education and healthcare. Salt, oddly enough, is one of the most inelastic of commodities, but then again it is an essential nutrient, and it was highly taxed by the Roman Empire. Occasionally, a legislature will attempt to tax luxury goods (out of a misplaced sense of outrage): these taxes fail because luxuries have a very high demand elasticity, and consumption drops sharply with even a slight increase in tax, often ruining once-thriving industries, and thereby eliminating the ordinary taxes they generate.

Vices, such as alcohol, tobacco, and gambling have a low elasticity of demand, and a poor person will likely spend nearly all of his income on these if addicted. For governments, taverns and casinos are very likely a better source of tax revenue than are the shopping malls.

Politicians will often state that they impose high taxes on certain commodities in order to reduce consumption, especially the consumption of vices. But the vice of gambling we see today was specifically created by government and was not a grass-roots initiative from the people, and historically governments have encouraged tobacco and alcohol use to generate taxation. Nowadays we should expect severe taxes on energy for the rationale of saving the environment, as well as reinstating the ancient salt tax and a new fat tax for the rationale of promoting good health.  But these rationales are false: due to the low elasticity of demand of these goods, tax revenues will rather rise sharply while consumption will only decrease slightly. Eventually consumers may purchase less, and experience tells us that government will raise the tax rate on those inelastic commodities to make up for lost revenue.  Historically, this kind of high taxation on essential goods has led to widespread poverty and even starvation, as people pay ever higher percentages of their income on the tax for the basics of survival.

Taxing inelastic goods is a reliable way of making a lot of money, but it is cruel.

These kinds of taxes are severely regressive, hurting the poor enormously: consider that a homeless alcoholic effectively pays the highest tax rate of any American. High taxes on inelastic commodities leads to poverty, which increases the demand for increased social services, which requires higher taxes, which ends in a vicious downward spiral of increasing poverty.