How taxes undermine progress

Start with the obvious: Follow the money.

Then consider how money motivates action: Academics will study anything that has research money attached; thieves go to banks “because that’s where they keep the money;” prostitutes “spend time” with clients who “spend money;” California has endless retail stores because cities — starved of property taxes due to Prop 13 — can collect local sales taxes.

So that’s why we should pay attention to how governments “earn” their money, e.g., oil royalties (leading to a democracy deficit because the government doesn’t need to tax citizens), income taxes (so encourage work to get more taxes), cigarette taxes* (please smoke so we can fund schools), or consumption (sales or VAT) taxes that leads governments to encourage consumption.

But what if you want democracy, less work, less lung cancer and/or less consumption? Then you want to tax in a way that does not change behavior (see this post) but still raises revenues. A property tax (read this post) or wealth tax (property is a good proxy) does that because both are “fundamental” (everywhere) and “good” (in terms of social progress), and neither change your decisions “on the margin”

Nobody ever says “Gee, I want to be poorer today,” but plenty of people say “Gee, I don’t want to work today” or “maybe I should’t smoke that next one.”

My one-handed conclusion is that government policy should encourage what we want, not what we don’t.


* Arjen Lubach explains [in Dutch] how the Dutch government won’t ban cigarettes because it wants to save money from smokers dying

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Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

One thought on “How taxes undermine progress”

  1. Agreed, except that we don’t want to tax the sort of wealth that can lead to entrepreneurial activity (and thus future prosperity).

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