This is the sixth in the series, A Soft Landing, which explores how we might achieve a more just, equitable society without violent revolution.
Taxes are a most effective form of behavior modification. Every kind of tax, no matter how seemingly universal, affects our actions. When we tax a product, a service, a piece of land, we shrink its net value by jacking up its opportunity costs, thus driving people to either pay more, find alternatives, or do without.
A simple example. For five bucks and change in tolls, I can drive from Cambridge to Albany in three hours on the Mass Pike. Or, I can drive Route 2 for free. Route 2 is more scenic, but the journey takes over four hours. Which route I follow depends on how much time I have. If my time is worth more than five dollars an hour, I take the Pike, correct? Actually, it’s not so simple. A deeper level analysis changes the calculation. If the weather is bad, the Mass Pike is safer. In addition, Route 2 requires more gas and vehicle wear, so that route actually costs more than the Pike, despite the toll. However, like most humans, I am more sensitive to direct pay costs (a toll) than deferred costs (maintenance), so I don’t properly factor the real cost of my trip. As this simple tax example grows complex, we see that although taxes modify our behavior, the causation is neither linear nor direct.
A more extreme example. The State of Colorado extracts a 39% cumulative tax on recreational marijuana. That’s a lot. If I live in Colorado, I have three options: buy pot legally and pay the tax, purchase it illegally, or forgo getting high. For many, the third choice is not an option, and so Colorado collects an impressive amount of tax on marijuana because the other alternative, the black market, comes with significant downsides.
Similarly, tax credits and deductions modify behavior by reducing opportunity costs, thereby increasing economic activity accordingly. When Massachusetts offered credits for installing residential solar panels, we became a national leader in residential solar, despite our cold and grey weather. When the credits expired, the solar market shrank, as reduced utility bills alone were insufficient incentive for many people to convert.
How government distributes tax revenue also affects behavior. The Mass Pike is essentially a do-loop. Tolls are used to maintain the Pike, which keeps it the premier highway in our state, thus promoting more use. Colorado’s marijuana taxes are more complicated. Some revenue is recycled into drug rehab and prevention programs, but more goes to education, building schools and affordable housing. People who do not participate in the legal marijuana market benefit from its proceeds, which contributes to Coloradan’s overwhelming support of legalized marijuana.
There are so many ways we get taxed, but most of us confront three forms on a regular basis: property tax, sales tax, and income tax. All three are general levies assessed across a broad population, and though there is some inherent behavior modification (tobacco is taxed at a higher rate than milk), we are wary of using taxes to guide behavior. Witness the uproar against New York Mayor Bloomberg’s proposed soda tax.
This fear is wrongheaded. First, because our existing tax structure already encourages specific behaviors. It promotes consuming over saving, driving cars over public transit, purchasing a house over renting. Only when we acknowledge how deeply taxes influence behavior, can we restructure them to promote the kind of long-term objectives that are so difficult for us short-term humans to apply (why we bristle at tolls yet dismiss costs like maintenance and deprecation). We need to move beyond taxing income, property, or goods. We need to tax impact; to use taxes to encourage our better natures.
In America, the so-called land of opportunity, every person ought to be able to do whatever he wants and buy whatever she can afford, so long as it does not impinge directly on others. We cannot abide ‘Thou shalt not…’ However, the more expansive, intrusive, and unsustainable thing a person wants to do or own, the higher he or she should be taxed for the privilege.
A 5,000 square foot house on five acres should be taxed at a much higher rate than a 2,000 square foot house on a two-acre lot, which should be taxed at a higher rate than a 1400 square foot townhouse on a transit line. There might even be certain forms of housing (maybe less than 1200 square foot, net-zero, in urban areas) that are not taxed at all. A second house ought to be taxed at a higher rate than a primary residence. The tax rate on a foreign-owned condo that sells for $4000 per square foot (all too common in New York, and San Francisco; coming soon to Boston) should be taxed higher still.
We can reframe property taxes to reflect the true impact of development. Similar shifts can also occur for sales taxes, maybe even income tax.
Is this a practical idea? Not yet. A country that can’t grapple with carbon cap and trade (a straightforward impact tax) is far from being able to assess people’s private consumption in a balanced manner. It will be fractious, it will be complicated, but if we decide that we want our taxes to do more than fund our government, they can also reflect our values, promote long-term interests, and extend our habitation on this planet.