“Call it a consumption tax, a luxury tax, or whatever. The name doesn’t matter. It’s a tax on buying more than you actually need. Taxing for the sake of taxing is bad, but taxing items with externalities on the surrounding world may not be a bad idea. The best example of this, especially in the US, are cars.”

That’s what I said yesterday when I made the case for a consumption-like tax. Basically, when someone buys a big, gas hogging vehicle, everyone suffers as a result. Gas is more expensive due to inflated demand, everyone has to buy more expensive cars with required safety features to handle a hit from the big cars, and they take up more space in parking lots and freeways. Should this be taxed? Yesterday I explained why it should, today I’ll take a different approach. Primarily…

There already are taxes on all these things. A new consumption tax would be redundant. Let’s start with gas. At the federal and state level gas is already taxed. More fuel efficient cars pay less of this tax, subsidized by the gas hogs. A car that gets 30mpg compared to one that gets 15mpg pays half the taxes for each mile driven. And the ultimate gas hogs are charged a Gas Guzzler Tax*.

Other taxes impact larger and more expensive vehicles too.  Though regulations are set by local governments, I would posit that most everyone pays a yearly tax based on some kind of value for the vehicle; it’s a property tax.  If you have a car worth $50k you’re going to pay a lot more in taxes than a car worth $15k.  This revenue could (directly or indirectly) offset the damage done to streets and subsidize parking lots for cars that pay lesser taxes.  In generic economic theory, it wouldn’t have to directly go to road funding.

But what about those bigger cars making roads more dangerous for everyone?  Once again you have to look at the flow of funds.  Bigger and more expensive cars have more profit built into them.  Most manufacturers make small cars too, with slimmer margins.  The more expensive cars subsidize the R&D needed to make a safer small car.  And the increase in safety needed to deal with the impact of a larger vehicle may not be all that significant.  Other factors, such as speed and shape of the vehicle may be more important in an impact.

Besides, by people buying more than they need they subsidize the price for those that need it.  Trucks would be so much more expensive if only businesses that needed them bought them.  The people that buy trucks for commuting subsidize the price for others.

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So that’s the case against the tax.  Which side am I on?  Since I’m not an elected official I can safely say I’m somewhere in the middle.  It doesn’t really matter what side I’m on.  But there is one clarifying point about consumption taxes I’d like to make.

Most people that support such taxes wouldn’t disagree with anything I said above.  And most people against it would make the argument above I just did.  Where’s the argument?

Aside from the Gas Guzzler Tax (which SUVs and trucks are exempt from), all the taxes are essentially linear.  Everyone pays the same rate.  So a richer person can easily afford the tax they are paying.  A real consumption tax would be progressive.  A good example of such a tax would be a property tax based on EPA fuel economy estimates.  If your cars gets 30MPG the rate might be 1%, one that gets 15mpg might pay 2%, which is twice as much regardless of the value of the vehicle.

Only taxes like that really drive behavior that is better for everyone.  That would push people into smaller and more fuel efficient cars.  It’s something about making taxes exponentially more expensive that actually drives behavior.

Whether such taxes are good policy or effective in reality are unknowns to this author.  We’d have to see real numbers on whether the existing taxes really offset the increased damage caused, and if a consumption tax would change the behavior.  Also keep in mind that I used cars as an example, and every idea may not translate to other goods.  I imagine a consumption tax would have different levels of effectiveness on other products.

*It’s a bit crazy, but the MPG ratings used to charge the gas guzzler tax haven’t changed since 1991. Probably time to update those and make them a bit more strict.

Image: KayOne73 (this is a BMW M5 from 2000, aside from being my dream car it is a guzzler.  Gas guzzler taxes are only paid once, at initial purchase.  Buying used gets you around it)

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categories: business, cars, economics, environment