Taxing the Future to Finance the Present

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The answer to John Holbo’s riddle is that the tax base should be oriented much more toward natural resources and consumption than it currently is. Taxing investment is in effect a way of taxing the future to pay for the present in a way that doesn’t make a ton of sense when you think about compound growth. Taxing pollution and resource-consumption is the reverse. The atmosphere, for example, has a limited capacity to absorb greenhouse gas emissions without creating dangerous consequences for the planet. So people who want to use up some of that capacity should pay for the privilege. Taxation of this sort helps bolster what will be available for future people rather than reducing it. Similarly, the land area of the United States is more or less fixed so taxing the value of land in the present doesn’t have any implications for what will be available to future people.

And more generally consumption taxes have the right feature here.

Traditionally the “left” position has been that taxing income is good because it’s progressive and that regressive consumption taxes are bad. But there’s really not much of a logistical barrier to levying a progressive tax on a consumption base. And compound economic growth is good from both a “left” and “right” perspective anyway, while for the truly vulnerable the most important thing is simply that the revenue base needs to be adequate to finance public services.