As faith in big government programs has waned in the past two decades so has the ability of the government to raise revenues through income-tax increases. Until recently, deficit spending has been the route around the public’s resistance, but the people have caught on to that deception. What are revenue hungry congressmen and bureaucrats to do? The answer: give taxation a greater purpose. Use it as the weapon of righteousness against the forces of evil. Make it taxation, not to raise revenue, but to ward off the devil. The tax of the 21st century is the sin tax or, more appropriately, the “choice tax.”
Taxing Choice: The Predatory Politics of Fiscal Discrimination, edited by William Shughart, economics professor at the University of Mississippi, is a collection of essays that looks comprehensively at selective excise taxes through the lens of public choice theory, or what can be called the economics of interest-group politics. As Shughart points out, the argument for those taxes actually finds support in the economics literature. He writes in his introductory article, “The Economics of the Nanny State,” that according to standard economic theory, an excise tax is justified when “the economic agents interacting in an unfettered market do not bear the full social costs . . . of their own decisions or choices. . . . [T]he consumption of certain products, such as alcohol and tobacco, imposes costs on society that the consumers do not themselves bear and which they consequently do not take into account when making decisions about how much to consume.”
This quotation calls forth my one criticism of the book: it does not refute the theory of market failure and the case for social-cost taxes. In fact, the theoretical arguments against the theory are scarcely recognized by any of the authors.
The book is divided into four sections, each covering a different aspect of the issue. Section 1, “The Political Economy of Excise Taxation,” features three articles examining the economic “justification” for excise taxes and presenting a historical look at the use of these taxes in the United States.
Section II, “The Politics of Excise Taxation,” examines how political decision-makers craft such taxes with an eye toward appeasing special-interest groups and diffusing taxpayer resistance. This section gets to the heart of public choice analysis. Professor Randy Holcombe states the premise: “arguments on both sides of the tax issue are almost always made by individuals who personally have something to gain from winning the argument. People choose to favor or oppose taxes based on the costs and benefits of the taxes to them.” Thus, the crafting and implementation of the tax is a function of the political influence of the various winners and losers from the tax.
In addition, politicians are aware that they can buy their way to a new tax by earmarking revenues for popular causes—education, children’s health care, for example. But as Dwight Lee points out in “Overcoming Taxpayer Resistance,” money is fungible and new revenues from earmarked taxes simply free up other money. In other words, earmarking is simply a ruse to draw in supporters of the tax who might not otherwise have an interest in the issue.
The remaining two sections—“Alcohol, Tobacco, and Drugs” and “Constitutional Liberties and Excise Taxation”—are more case-orientated. Mark Thornton’s “Prohibition: The Ultimate Tax” and Bruce Benson and David Rasmussen’s “Predatory Public Financing and the War on Drugs: 1984-1989” are especially interesting. Benson and Rasmussen argue that even though illegal drugs cannot be directly taxed, the drug war is being driven by what amounts to a tax on illegal drugs, namely, asset forfeiture and confiscation. Indeed, the authors argue that what lured local law-enforcement agencies into accepting the Washington-driven “war on drugs” was the possibility of reaping some of these gains.
Professor Shughart and the Independent Institute are to be commended for assembling this collection of essays on what is likely to be the most important fiscal policy issue of the coming decades.