Taxes fund the essential services of society; education, infrastructure, public safety, defense – all things that underpin our daily lives. These programs aren’t discretionary in an ordered and civil society, and are not easily replicated as individuals or small groups; they’re the supports for our well-being, just like a foundation of a building. A strong society needs a sturdy foundation, and similarly, we shouldn’t take government services for granted. Paying taxes is our contribution to the collective good, ensuring a safe and civilized society.
Evolving Tax Landscape
However, the tax landscape is evolving from taxes that support general purpose basics that serve all citizens as public services to some focusing on specific behaviors1. Tax levies on things like soda, cigarettes, alcohol, single-use bags, gambling, recyclable packaged goods, luxury goods, disposable items, etc. These taxes have a dual purpose: generating revenue and influencing behavior by making certain options less attractive. This raises a critical question: how do we balance the need for essential services funded by traditional taxes with the potential infringement on personal freedoms associated with behavioral taxes and who gets to decide? A fundamental question at the basis of the Social Contracts that form the basis of each country’s constitution (see article on Social Contracts).
Correcting Negative Externalities vs Directing Behaviors
A British Economist named Arthur Pigou described in The Economics of Welfare2 that markets don’t always optimally allocate resources on their own. These “negative externalities” that the market does not include in the price, like a factory polluting a river, don’t cover the cost of the negative health outcomes that may be born from the manufacture and sale of these goods. Hence the term later applied “Pigouvian taxes” illustrate this tension perfectly. Therefore Pigouvian taxes designed to address negative externalities make producers pay for the societal costs of them through taxation, like the aforementioned pollution. While they promote public good, they do so by using the market to influence individual behavior through price changes and market forces. Pigouvian taxes and Behavioral taxes often act the same, by using price and tax mechanisms to influence behavior. However, unlike Pigouvian taxes where you may be able to draw a clear line between correcting for negative externalities like Climate Change by charging a Carbon Tax, behavioral taxes like the Soda tax put into question the government’s role versus individual liberties. It can be said that for example soda leads to weight gain and a higher risk of diabetes, and other health issues and that those increase the cost of healthcare to all, therefore the government has a role in incenting you to stay healthy. However, is this tax really correcting a negative externality or incenting a behavior alone? There is little evidence in cities like Philadelphia that the revenue generated from the soda tax is used to correct the negative externalities by investing in greater health outcomes for soda drinkers3, but to raise general fund revenue for the city. If you want to eat Bacon and Eggs, and smoke three packs of cigarettes, near no one else, a day, while it may not be the best life choices, if you’re paying your own healthcare costs and these choices bring you joy then should the individual be able to make that choice, good or bad?
Choice and Two Tiered Societies
This raises concerns about individual freedom and a potential two-tiered society where only the wealthy can afford certain “vices.” So while some Behavioral taxes are Pigouvian taxes attempting to correct, and direct funds to remediate negative externalities, others are clearly not and just designed to incent behaviors and raise revenue. These types of taxes clearly incent folks economically, potentially limiting choices individuals would make naturally. While we may be doing good, we should question if that is something we wish to regulate ourselves on. Not only does it regulate choice, but most of these behavioral taxes are highly regressive. Soda taxes, Cigarette taxes, Alcohol taxes all have higher impacts on those on the lower social economic scale, impacting a larger percentage of their income. Do we want to create a society where only wealthy people get to choose their vice while everyone else is effectively economically locked out, or should everyone be able to choose the type of drink they want, the bag they want to use, if they want a straw for their drink, etc.
The Sweet Spot
The heart of the issue lies in finding the sweet spot between government intervention and individual liberty. It’s a balancing act. On one side sits the government’s role to promote public health and well-being, while the other represents our individual rights and freedoms. Behavioral taxes aren’t meant to be a direct attack on our choices. They’re designed to “nudge” us towards healthier or more sustainable options. Imagine a parent encouraging their child to eat fruit by making vegetables less appealing – that’s the basic idea. Behavioral taxes aim to make the less desirable option less attractive.
However, the potential for a two-tiered society is a valid concern. When only the wealthy can comfortably afford a sugary drink, it creates an equity issue. The challenge is designing these taxes effectively without disproportionately burdening lower-income individuals. Solutions like using tax revenue to subsidize healthier alternatives can ensure that everyone has access to better choices, not just those who can afford them.
Optimally, we want to create an environment where healthy and sustainable choices are the most attractive option for everyone, but through their own choice. It’s not about imposing a nanny state, but about gently guiding society towards a better future. As we navigate this complex landscape, careful consideration is crucial. Behavioral taxes should be implemented with a keen eye on their broader impact. Only we as individuals can strike the right balance between funding essential services and safeguarding our individual liberties.
