In a recent Vox article, Matthew Yglesias argues for punitive income and inheritance taxes. His logic is that these taxes can have benefits beyond just raising government revenue – by deterring the high pay and large bequests that encourage socially harmful inequality, they can be beneficial even if nobody pays them.Yglesisas repurposes the reasoning that underpins excise taxes, such as those on tobacco or gambling, and applies it to income and inheritance:
Tax T discourages behaviour B, which contributes to social problem P
Where T can be tax on cigarettes, behaviour B smoking and P the public health cost of smoking-related disease. Or in Yglesias’ argument, T is income tax, B is high corporate pay and P is income inequality.
An interesting question is whether this line of thinking can be used to justify rises in other existing taxes. I have previously discussed the possibility that income tax could be used as a means to reduce working hours – Rupert Read claims that “high tax rates are a good thing inasmuch as they discourage the culture of overwork which grips societies like ours”.
Another interesting application would be to increase sales tax (eg VAT) on ‘positional goods’, such as luxury fashion items and jewellery, which are bought primarily to increase the owners’ social status. Besides the direct negative effects for those who have to endure the other people’s wealth being shoved in their faces, the purchase of these goods also leads to an ‘arms race’, where households spend more and more in an effort to best each other, with more of their money diverted from things that they will genuinely enjoy. Higher sales tax on luxury items would mean fewer purchases of positional goods, lower status anxiety and help defuse the consumption arms race.
Robert Frank has gone further and advocated scrapping income tax and replacing it with a progressive consumption tax for these very reasons. Under Frank’s scheme, households would have to disclose their incomes and savings to the tax authorities, and would be taxed on the remainder. This is an interesting idea, but I have a couple of reservations. First, this seems an unnecessarily bureaucratic system involving a lot of paperwork and scope for errors. Secondly, it is clearly the case that not all consumption is on positional goods. Frank would tax spending on food and rent, money spent on meeting basic needs. By contrast, a positional goods tax can be targeted at more expensive goods that are more likely to be for display, rather than being intrinsically valuable.
However reformed, income tax and sales might just be the tip of the iceberg in terms of Yglesias’ argument – what other existing taxes can be reconsidered as excise duties?