Monday, March 09, 2009

Taxing the Essentials

LAST SATURDAY afternoon I drove by a shopping mall, and noticed that, strangely, the parking lot was mostly empty, despite it being a prime shopping day. This once thriving mall, it turns out, is over half vacant, and one of its big anchor stores was going out of business.

Earlier that week I happened to drive by one of the local casinos, and its large parking lot was filled: this on just an ordinary weeknight.

Obviously, this is very, very bad. Consumer goods, even though they are often purchased unthinkingly and excessively, have some lasting and true value to the purchaser. Gambling, although often portrayed by the industry as ‘entertainment’ spending, is nowadays most likely a last-ditch act of desperation for the gamblers, and leads to net loss for most.

A while back I wrote that these casinos had the unintended consequence of a great increase of petty crime, and that large new jails had to be constructed to house a new class of criminals: primarily middle-class women who got into trouble because of gambling. With our current economic crisis, how large will these jails become?

Either the powers-that-be are ignorant, greedy, or perhaps they subscribe to Vladimir Lenin's observation that “worse is better”: revolution will only come if things get really bad.

Now I can only prove greed as a cause. Contemporary liberal politicians are just as greedy as the most predatory and monopolistic of capitalists, and they desire the size of government to be as large as they can get away with. Certainly this is because both groups, seemingly different, are both children of the Enlightenment and share a basic worldview.

A progressive legislator wants to maximize total tax revenue, and this can only be done by shrewdly taxing the right things. Income taxes are an obvious target, as are real estate taxes. Taxing goods and services are more problematic because of the phenomenon called ‘price elasticity of demand’. Sales taxes are fairly reasonable, but excise taxes — additional taxes on specific commodity types — are generally severe.

Most shoppers will attempt to purchase a commodity at the cheapest price available, but are still willing to pay very high prices for certain essential goods. Consumers are willing to pay high prices for essential commodities like utilities and gasoline: these have very low elasticities of demand. So does education and healthcare. Salt, oddly enough, is one of the most inelastic of commodities, but then again it is an essential nutrient, and it was highly taxed by the Roman Empire. Occasionally, a legislature will attempt to tax luxury goods (out of a misplaced sense of outrage): these taxes fail because luxuries have a very high demand elasticity, and consumption drops sharply with even a slight increase in tax, often ruining once-thriving industries, and thereby eliminating the ordinary taxes they generate.

Vices, such as alcohol, tobacco, and gambling have a low elasticity of demand, and a poor person will likely spend nearly all of his income on these if addicted. For governments, taverns and casinos are very likely a better source of tax revenue than are the shopping malls.

Politicians will often state that they impose high taxes on certain commodities in order to reduce consumption, especially the consumption of vices. But the vice of gambling we see today was specifically created by government and was not a grass-roots initiative from the people, and historically governments have encouraged tobacco and alcohol use to generate taxation. Nowadays we should expect severe taxes on energy for the rationale of saving the environment, as well as reinstating the ancient salt tax and a new fat tax for the rationale of promoting good health.  But these rationales are false: due to the low elasticity of demand of these goods, tax revenues will rather rise sharply while consumption will only decrease slightly. Eventually consumers may purchase less, and experience tells us that government will raise the tax rate on those inelastic commodities to make up for lost revenue.  Historically, this kind of high taxation on essential goods has led to widespread poverty and even starvation, as people pay ever higher percentages of their income on the tax for the basics of survival.

Taxing inelastic goods is a reliable way of making a lot of money, but it is cruel.

These kinds of taxes are severely regressive, hurting the poor enormously: consider that a homeless alcoholic effectively pays the highest tax rate of any American. High taxes on inelastic commodities leads to poverty, which increases the demand for increased social services, which requires higher taxes, which ends in a vicious downward spiral of increasing poverty.


  1. Mark, you are a great and wonderful architectural photographer. But sociology is not photography.

    For example, do I really understand you correctly? Are you saying gambling and alcohol are essentials?

    Please -- we both know the Catholic Church is one of the most familiar purveyors of the ancient practice of gambling (bingo, festivals, raffles, etc.). Should we prohibit these activities by churches? Or only when they are operated by Native Americans?

    You say liberal politicians and capitalists both are greedy. Is this news? What group -- or person -- is not greedy?

    Are these not rather old-fashioned sins, extensively and adequately treated by the church fathers? What has the (much later) enlightenment to do with them?

    As for jails, now you are in my ballpark (I spent a long career there). Yes, incarceration rates and numbers are skyrocketing in the US. But gambling is a vanishingly small contributor. Most of the women in our prisons are there for the old traditional crimes -- drugs and offenses related to prostitution. The numbers are increasing simply due to increasingly draconian sentencing laws. If we want the numbers down, go back to the pre-1975 laws.

    Mark, please take some more church photos. They are beautiful, and I really appreciate them.

  2. Irene,

    I have no formal training in photography (although I have tried to learn from the masters). I do have formal training in economics.

    I used the general economic phrase "price elasticity of demand" to differentiate between goods that are luxuries versus "essentials", and I noted that luxuries cannot be easily taxed because the demand for them go down sharply with cost. Other goods can be taxed very highly, and these goods typically are essentials.

    I use the term "essential" loosely, in a subjective manner, which includes both salt, which is absolutely essential for survival (and is indeed the historically most taxable substance), and addiction products like tobacco and alcohol.

    My thesis is that taxes on the "low elasticity" goods are designed to produce government income, and claims that the taxes are intended to reduce demand are largely (although not completely) unsupportable. Aggressive taxation on these kinds of goods, I claim, will lead to poverty and crime.

    Yes, you are right that women continually go to jail for traditional crimes, but my friends tell me that these crimes now are increasingly spurred on by gambling debts. Sociologists will need to do more surveys to determine the effect of gambling on incarceration.

    I am also against strict sentencing rules in the courts, even though I don't like the kind of judges we now tend to have.

    I've voted against the re-legalization of gambling in Missouri every time it came on the ballot, including the very first step of legalizing church bingo. Gambling was legal in the state twice before, and both times it led to widespread poverty, and it was reintroduced by government for the purpose of taxation.

    The industry and the State shrewdly pursued an explicit Fabian (or delaying) method of reintroducing gambling, slowly and by steps; at each step, problems were discovered, or appeals to freedom were made which led to the next step of liberalization.

    Church bingo gambling is relatively benign compared to loss-unlimited casino gambling. There is a vast difference in degree in the opportunity for loss and poverty. Just as there is a difference between having a glass of wine a day versus a pint of whiskey a day, simple fund-raising gambling (done rarely and at small cost to the gambler), is far different than huge 24-hour a day casinos with no loss limits.

    Greed is a common vice. In my opinion, we need to organize society, including the State, to minimize the effects of this vice, which includes making government and economics smaller and more local. The effect of the Enlightenment is far-reaching and is something I'll write about later.

    And thank you very much for your compliment!