Taxing ‘public bads’ and investing in ‘public goods’: Constructive tax policies can help prevent harm and help promote progress

30 June 2016

To tax, or not to tax? That is the question that preoccupied a thought-provoking panel at a recent World Bank Group conference on “Winning the Tax Wars” – along with such pragmatic policy questions as: What products and behaviors should be taxed, aiming to discourage their use? How heavily should taxes be imposed to penalize socially destructive behaviors? If far-sighted, behavior-nudging taxes are indeed adopted, where should the resulting public revenue be spent?

Before memories start to fade about a stellar springtime conference – at which several of the Bank Group’s Global Practices (including those focusing on Governance and on Health, Nutrition and Population) assembled some of the world’s foremost authorities on tax policy – it’s well worthwhile to recall the rigorous reasoning that emerged fromone of the year’s most synapse-snapping scholarly symposia at the Bank.

Subtitled “Protecting Developing Countries from Global Tax Base Erosion,” the conference focused mainly on theinternational tax-avoidance scourge of Base Erosion and Profit-Shifting (BEPS). Coming just one week after a major conference in London of global leaders – an anti-corruption effort convened by Prime Minister David Cameron of the United Kingdom – the two-day forum in the Preston Auditorium built on the fair-taxation momentum generated by the recent Panama Papers disclosures. Those leaks about international tax-evasion strategies dominated the global policy debate this spring, when they exposed the rampant financial conniving andmisconduct by high-net-worth individuals and multinational corporations seeking to avoid or evade paying their fair share of taxes.
The Bank Group conference, however, explored tax-policy issues that ranged far beyond the headline-grabbing disclosures about the scheming of rogue law firms and accounting firms, like the now-infamous Panama-basedMossack Fonseca and other outposts of the tax-dodging financial-industrial complex. Conference-goers also heard intriguing analyses about how society can levy taxes on “public ‘bads’ ” to promote investment in “public ‘goods’ ” – as part of the broader quest for broad-scale tax fairness.

The panel on incentives and disincentives, opening the second day of the conference, featured Nobel Prize-winning economist George Akerloff, a University Professor at the McCourt School of Public Policy of Georgetown University. The ideas offered by Akerloff and his fellow panelists opened the door to considering a broader approach to energetic Domestic Revenue Mobilization (DRM): an approach that could raise much-needed public revenue, which could then be channeled into R&D efforts to reduce the threats posed by many types of social dangers.
Now, before Washington’s phalanx of free-market fundamentalists recoils in horror (and starts stuffing my in-box with denunciations) upon hearing an idea for taxing various forms of anti-social and destructive behavior, let me remind those anti-tax absolutists that the inspiration for this type of “nudging” taxation comes from an advocate of impeccably market-based policies: the late Jack Kemp, a onetime U.S. presidential candidate (and vice-presidential nominee) who was second to none in championing the power of market forces to cure chronic social problems.

One of Kemp’s market-driven dictums, in support of tightly targeted taxation, resonates to this day – and probably wins the support of conservatives and progressives alike: “When you tax something, you get less of it. When you reward something, you get more of it.”

Following Kemp’s market-sensitive logic, one can envision a constructive role for an activist and interventionist tax policy that helps discourage harmful behaviors and helps encourage healthy investments.
The specific focus of the Preston panel was taxing tobacco. As Patricio Marquez, a lead public-health specialist in the Bank Group’s Health, Nutrition and Population Global Practice, declared to the audience: “There is irrefutable scientific evidence nowadays. [There is] not just a simple association but a cause-and-effect relationship between tobacco use and ill health, premature mortality and disability. We are dealing with a product that kills.

“Therefore, one of the things that we are advocating, from a public-health platform, is tobacco taxation,” asserted Marquez, “in order to make these products unaffordable, and in order to protect the population from the negative impact of [a product that inflicts] very high direct and indirect economic costs on individuals, families, communities and society at large.”

“Besides the public-health benefits from tobacco taxation , . . taxing tobacco can represent an important source of Domestic Revenue Mobilization that could be used . . . to finance priority investments and programs for the benefit of the entire population,” said Marquez. “Tobacco taxes are a win-win, not only for public health but also for fiscal revenue mobilization.”

The idea of raising public revenue by taxing destructive products, Marquez noted, has entered the international tax-policy mainstream, especially since last summer’s United Nations conference in Addis Ababa that approved a long-range Financing For Development action agenda. Several jurisdictions, pursuing that logic, have taken action – including the city of Philadelphia, which recently became the first major city to impose a tax on sugary soft drinks. The vast revenue stream that will be tapped by that Philadelphia levy will be used for pre-kindergarten initiatives and early childhood education.

But why stop at deadly products like tobacco and nutritional vices like sugar? Many of the conference-goers readily took the logic of this tax-policy reasoning – tax “public ‘bads’ ” to invest in “public ‘goods’ ” – one bold step further.
Why not impose some sort of well-focused tax on the worst of all the harmful products that plague the planet? Why not impose a substantial levy on carbon emissions – which are known to aggravate global climate change and thus pose an extinction-threatening peril to humanity? After all, carbon emissions meet the criterion that Marquez outlined, since they inflict “very high direct and indirect economic costs on individuals, families, communities and society at large” – and endanger the very survival of homo sapiens.

There are many suggestions for how to impose such a levy on carbon emissions, and there is certainly no consensus on the precise mechanism for doing so. Yet the principle is sound: By “putting a price on carbon” by some means – perhaps by imposing a straightforward tax on carbon emissions, or by a creating global cap-and-trade system – a well-designed international tax policy could make positive use of Kemp’s dictum: “When you tax something, you get less of it.”

And the second half of Kemp’s market-based insight applies, too: “When you reward something, you get more of it.” By raising substantial amounts of revenue, and then by channeling those funds toward additional public investment in clean-energy technologies, innovators would be given an incentive to pursue next-generation breakthroughs in clean-tech industries.

There’s one additional hurdle to overcome, in aiming to fulfill the logic of “taxing public ‘bads’ ” in order to invest in “public ‘goods’ ”: the mantra, endlessly intoned by never-say-die taxophobes, that all tax-policy interventions should be strictly “revenue-neutral.” Until the obsession with “revenue neutrality” – a holdover from the cynical “government-is-the-problem” era of reckless budget-slashing – is at last rejected, there’ll be a continuing roadblock that impedes the Financing For Development imperative of “moving from billions to trillions.” Humanity certainly needs to raise and invest trillions in new revenue to advance the Addis Ababa agenda and to achieve the United Nations’ ambitious new Sustainable Development Goals – so the quicker that policymakers quash the “revenue neutrality” canard, the better.

Taxing things that you don’t want (thus reducing tobacco use, sugar consumption and carbon emissions) – and then using the resulting revenue to invest in things that you do want (thus strengthening public health, early-childhood education and clean-technology innovation) – is an enduring insight that distinguishes the recent “Winning The Tax Wars” conference. Thanks to the long-term logic of the Domestic Revenue Mobilization priority, the anti-investment incantation of “revenue neutrality” seems destined to be discarded – opening the way toward wiser revenue-raising strategies that can sustain vital public investment.

Somewhere up there, perhaps the supply-side spirit of Jack Kemp might be smiling at the staying power of his more pragmatic tax-policy ideas – while, down here, advocates of public-spirited investment can put the more progressive aspects of those ideas to good use.