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Column: Not all taxes are created equal

 
Times file
Times file
Published July 22, 2016

For at least 30 years, conservative politicians have been signing the no-new-taxes pledge crafted by Grover Norquist, president of Americans for Tax Reform. It does not matter to them whether the tax proposed is an income tax, a sales tax, a property tax or some other form of taxation; their objective is to shrink government by denying it revenue.

However, blind opposition to every type of taxation distracts from understanding the unique market impact that each form of tax can have. They are fond of saying: "If it walks like a duck, and squawks like a duck, it is probably a duck." Translation: User charges are just another tax to be opposed.

Contrast the different impacts imposed by income taxes versus user charges: Both raise government revenues and shift purchasing power to government. However, they impose markedly different incentives on the people who pay them.

The key difference is that the income tax does not change the relative prices of the goods and services that we buy, while the user charge does. User charges are levied on purchases of specific goods and services; they induce buyers to shift their purchases away from the taxed good or service toward other ways to spend their money.

For example, a tax levied on the purchase of cigarettes helps to discourage smoking while generating revenue to finance antismoking advertising. Similarly, a gas tax encourages motorists to be more efficient in their road usage while generating revenue for maintenance and repair of the roads.

Fact-based conservatives will recognize that user charges embody another conservative principle: People should pay for what they use or for the damage they inflict. Revenue from user charges can be used to supply the service or defray the cost of damage that the good or service imposes on the society; it can also be used to cut other taxes.

Not all public services can be financed with revenue from users. Only when the users of a public service can be identified and their individual usage measured can we implement user charges. Such is the case for water consumption, airport landing fees, road use and the emission of pollutants such as sulfur dioxide, carbon dioxide and methane. By contrast, user charges cannot be used to finance police protection or homeland security since the amount of these services that an individual uses cannot be easily measured.

User charges are particularly well-suited for regulating the amount of pollution that a firm emits in the process of bringing its goods to market. Unlike the firm's internal costs, pollution is an external cost that will not be passed on to the consumers in the price of the goods sold to them. Consequently, the market will operate with both buyer and seller ignoring those costs, so the market will underprice and overproduce the good whose supply is accompanied by pollution.

When the pollutant is a carbon-based greenhouse gas, the user charge is dubbed a "carbon tax." For example, when a coal-fired power plant generates both beneficial electricity and detrimental carbon emissions, the unregulated market provides an incentive to sell the benefit and ignore the harm. Rather than accept this outcome, a carbon tax would incentivize reduction in the harm while generating revenue that can be used to finance any number of public initiatives.

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Water provides another opportunity to employ user charges. The usual response to water shortages is twofold: seek out other sources to transport via pipeline to the point of its use and then to underprice it. When we keep the price too low, even our gigantically expensive pipelines, dams, reservoirs and desalination plants cannot provide the amount people will demand. If public policy were to mimic the market, water prices would rise, encouraging a reduction in the amount used and generating revenue for public purposes or for reduction of other taxes.

If we are to return to robust economic growth in this country, we have to invest in our public infrastructure — bridges, roads, school buildings and broadband — and we must cut back on pollutants as well as our use of depletable resources like water. Somehow all of this must be paid for. At present, we are hamstrung because so many politicians, believing that they gain conservative kudos by opposing taxes, are unwilling to support public investments. A greater understanding of well-targeted user charges might dislodge them from their position that is so clearly damaging the economic well-being of the nation.

William L. Holahan is emeritus professor of economics at the University of Wisconsin at Milwaukee. Charles O. Kroncke, retired dean of the College of Business at UW-M, is also retired from USF. They are co-authors of "Economics for Voters."