Taxing Consumption, Not Production: Ethical Foundations

A small community of people on a desert island would probably ration its resources very carefully, but would surely allow anyone who so volunteered to put as much time and effort as he wished into being productive, for whatever compensation he could negotiate with the others. The principle applies to any community living within a closed system – mankind, for example, living on the planet Earth: Public resources belong to the public, and an individual’s time and energy belong to the individual. This is the justification for collectively establishing the value of resources – in contrast to collectively establishing the right of the individual to work and produce any given product (a.k.a. communism). The present system of taxing income and production penalizes people and corporate entities for being productive. Consumption of wealth, not production of it, is what should be taxed. It is perplexing if not amusing that even hard core conservatives, even while quarreling about the numbers, have put up with the concepts of corporate and income tax for so long.

Taxing consumption of natural resources, rather than labor, would not only be smarter economics, it would be fairer. As the original owners, the people have the right to decide how much of their natural resources they want to sell to the private sector, how much pollution of public water and air they wish to tolerate, and for whatever reasons (environmental concern, profit, esthetics etc…).

Consumption tax, whether by auction of a fixed amount, or by a fixed rate tax, maintains free market principles, as opposed to the “cap-and-handout-and-trade” system that European nations adopted following the Kyoto Protocol. Handing over marketable carbon credits to some players but not to others is not only unfair, it is ineffective. One reason that the Kyoto Protocol failed to achieve its goal (justified or not) of curbing CO2 emission is that, by allocating carbon credits without hosting a fair competition for them, it avoided establishing a true value for fossil fuel.

The argument mouthed by some that taxing consumption would slow down the economy is inapplicable here. We are talking about shifting from income and corporate tax to consumption tax, so the public has at least as much money to spend as before.  By making exhaustible resources more expensive to the individual, the tax would generally increase the amount spent on labor. (Why? Because if a material-intensive method of producing something costs less, before the tax is invoked, than a less material-intensive method, then the latter costs more because it spends more on labor.) The tax thus stimulates employment.

Why is replacing at least some of the existing tax burden with a fossil fuel tax so taboo that it is hardly even discussed in the media, even in the throes of what is widely perceived as an economic cataclysm? Apart from the usual reasons (denial, numbness, self-delusion, stupidity, powerful interest groups intimidating politicians and news media, etc.), there may be an additional factor at work – low self-esteem among the public. Americans have been taught from birth that a tax is something they have to pay, not receive. And they have been taught that oil is something that oil companies sell to them. So they end up fearing both high oil prices and high taxes. The view that they own the fossil fuel in the public domain, and that the revenue collected from an energy tax belongs to them, might make them keener on such a tax.

Wouldn’t the cost of a fossil fuel tax on the energy companies simply be passed along to the consumer? Of course it would be; that’s the point. But the point is also to simultaneously return those revenues to the public. A $100 per barrel tax, while raising current prices from the present value to those of June 2008, would provide the American family of four over $25,000 annually (tax free). This would easily cover most income taxes and the added energy costs. And that would be just our oil revenues. There is plenty more exhaustible wealth in the world. A nation’s citizenry could rake in further revenues for all the metals mined from public territories, and for allowing public land, water and air to be used as dumps.

Would powerful energy and mining companies lobby to quash the establishment of a natural resource tax? If they were smart and honest, they would see the tax as a benefit for themselves too. The added cost of the tax would in any case be passed along to the public, their private holdings would become worth more, and risk entailed by future ventures would be lowered. Currently, corporate bids on, say, drilling rights are surely limited by uncertainty. They can’t be sure of how much they can extract from any given site, so they have to either take a risk or assume the worst in deciding how much they are willing to bid. On the other hand, if they are paying for the drilling rights in exact proportion to the amount they eventually extract, nothing is left to chance.

This is yet another advantage of a natural resource tax: It is harder for corrupt civil servants and other insiders to evade the tax than to evade public scrutiny. Bids can be rigged, government administrators who award drilling rights, etc., can be bribed, but a tax fills in the difference – on which corruption could otherwise thrive – between true value and production costs.

If the word “tax” is too painful, let’s at least demand the right to keep our hard-earned income as well as our natural resources. Then we can spend the former on what we truly desire, and sell the latter for what they are truly worth.

David Eichler

March 19, 2009

David Eichler is a professor of physics at Ben Gurion University in Israel. He received his Ph.D. in 1976 from the Massachusetts Institute of Technology. Further biographical information can be obtained here.