• Tuesday, Jan 31, 2023
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OP-ED: Why the high taxes on hygiene?

  • Published at 04:32 pm June 20th, 2021
We are taxing items simply too much, the incentive to smuggle is too high BIGSTOCK

Not quite enough thinking has been done about what we should be taxing and why

A useful guide to at least the starting point of a tax system is to tax everything, but only a little bit. If we begin with that method, then we can avoid the sort of problems where shampoo, soap, gets taxed at perhaps 150%.

Unless we are actually conducting a war upon cleanliness, that is probably not a tax rate that we would reach by thinking properly about what we are taxing and at what rate. But it is what might happen if we start our tax design at the wrong end.

Such tax rates are also rates that do not really work, as that report goes on to note there is massive smuggling of these items into the country. 

It is possible to prove this easily enough — it is possible to buy, wholesale, items at prices that could not possibly have paid the tax. Some of this is large-scale smuggling, some other portion is what the Soviets used to call “shuttle traders,” who are people moving across the border and utilizing their tax-free allowance to bring in a suitcase full of the highly taxed items for resale. 

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A very useful guide to public policy is that if whatever it is that we are doing leads to people behaving in Soviet Union style, then we are doing something seriously wrong. That was, after all, an economic policy which managed, in its entire 70-year existence, not to raise productivity by one single iota. 

As the Nobel Laureate economist Paul Krugman has said, productivity is not everything but in the long run, it is pretty much everything.

So, if we have people smuggling like it is 1970s Russia, we are doing something wrong. What is it?

We are taxing items simply too much, the incentive to smuggle is too high. The result of this is massive law-breaking. Plus, the tax rates are so high that it is not obvious that revenue is in fact being collected — a lower rate would lead to more declared imports and so, possibly, higher revenue overall.  

If we start from the other end, then we might end up in a better place. Currently the Bangladeshi government collects 12% or so of the GDP in tax. By definition, GDP is equal to all the incomes in the country. 

So, if we tax everyone 12% of their income — this includes working income, profits, dividends, rents, interest, everything — then we are done. 

Of course, we are not going to do that for obvious reasons but it does show us how low tax rates could potentially be.

Given that GDP is also all production, or all consumption, by definition, we could simply have a 12% VAT on everything and we would raise the same amount and pay for the government that way. Again, that is not what we actually want to do but it is illustrative. 

We can have low tax rates, amounts that everyone would just shrug and pay, and still get the amount of government revenue that we need to feed that beast.

There are times though that we actively desire, even lust after, the ability to tax things at much higher rates. These are often called “sin” taxes but the problem there is that what is a sin differs across moral systems so it can often be difficult to gain general agreement. 

Economists march to a slightly different beat and argue that we can, possibly should, have those higher tax rates on things where behaviour does not change much as a result of the tax. In the jargon, with a low elasticity of demand with respect to price, if this thing becomes more expensive, then do people change their behaviour much? 

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There are such things, cigarettes and alcohol for example. Land is another example and many economists do say we should tax land.

There are also things that truly are bad, like carbon emissions, and we should definitely tax those. 

So, it is not that high tax rates — like the 400% or so on cigarettes in my native Britain — are necessarily a bad thing. It is that we need to really think about which products we have them upon. 

In general, we want low tax rates on everything so that we get the revenue needed with the least avoidance by the people. Except for those special cases where we do have good reason to have much higher ones. 

This leaves us with trying to gain a definition of “good reason” and it is very difficult indeed to work out why we would want the population to be using less soap. 

So, why is there that 150% tax rate on imported soap and shampoo? The answer has to be that not quite enough thinking has been done about what we should be taxing and why.  

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