Wednesday, May 02, 2012
Taxes and Inelasticity of Demand
The article Rolling back the nanny state: Live free and
pay more tax, featured in the Economist, focuses on the government loosening its grip on liquor stores,
gambling and fireworks as a response to its dire need to raise revenue. Instead
of increasing income or sales taxes, some state and local governments have
focused on obtaining extra revenue from excise taxes and fees. In Washington
state alone, the licenses to 167 state-run liquor stores will be auctioned off
into the private business sector by June 1, 2012. Several other states are
minimizing alcohol regulations. For example, more states have recently lifted
bans on liquor sales on Sundays. Several counties in Texas that were previously
“dry” are now “wet”, meaning that it is now legal to sell liquor in these areas.
Nearly half the states in the U.S. now allow casinos. Several states have
lifted restrictions on the types of fireworks that may be sold and some states
that previously banned the sale and possession of all fireworks now allow
consumers to buy and sell certain fireworks.
It makes more efficient
for governments to gain revenue through excise taxes and fees than through higher
income and across-the-board sales taxes. There are two main reasons for this.
First, the inelasticity of demand associated with liquor, gambling and
fireworks (among other things) provides a relatively guaranteed source of
income, with few consumers cutting consumption when changes in prices occur,
even when the changes are due to rises in the taxes or licensing fees for the
distribution of these products. There is also, of course, the fact that by
increasing income and/or sales taxes, consumers have less money to circulate
through the economy via personal consumption and for investing.
Not only do these
measures allow for a more sensible and economically efficient way for the
government to raise money, but by loosening regulations, the free market is
allowed to operate in a manner more aligned with the ideals of a capitalist
society. This is sure to bring about a more appropriate market equilibrium with
each good in the affected areas than exists when government is heavily
involved.
It may be a bit of a
stretch, but by loosening regulations and raising more revenue through taxing larger
amounts of inelastic goods instead of raising income and across-the-board sales
taxes, we may be moving toward an era of raising government revenue through
consumption taxes, rather than income, and perhaps even sales, taxes. The
excise taxes could even remain in place in this case, which may help lower the
consumption tax paid by individuals/households every year. The idea of paying consumption taxes instead
of income taxes is more economically efficient, as it does not discourage
individuals from obtaining higher wages and potentially being placed in a
higher tax bracket, which can sometimes make an individual’s net income less
than it was at the lower wage.
