Making taxes progressive through redistribution

There are a whole bunch of cases where as a society we decide we want to reduce consumption of something, but it’s difficult to do so through individual choices. This might because of the non-obvious bad effects of something (sugar, alcohol, smoking) or because of negative externalities (atmospheric carbon leading to climate change, water use leading to aquifer depletion, overfishing).

In general I am a big fan of doing this through taxation: Want people to use less of a resource? Make it more expensive. It’s got a pretty good track record of working, even in the face of convincing arguments that it shouldn’t work in this case.

But there’s a pretty bad problem with this approach: It’s deeply regressive. If you raise the price of a luxury then poor people are much more likely to have their life negatively affected by taking that luxury away from them because it represents a much more significant percentage of their budget. Rich people will either slightly adjust their usage down or simply not notice because it’s such a small percentage of their budget.

This sucks for a variety of reasons. As well as generally disliking things that increase inequality, the poor are rarely the biggest consumers (this is particularly important in the case where we’re doing this because of externalities)!

I’ve been prepared to bite that philosophical bullet for sufficiently important things (carbon tax) but not ones that are just speculative health interventions (e.g. sugar) and been on the fence for major public health interventions (e.g. alcohol).

But it turns out there’s a really simple solution to this which significantly reduces the number of bullets in my diet. It’s not original to me, but I’ve clearly not been paying to the right circles because neither I nor the couple of friends I’ve asked have heard of it before. I only heard of it because I independently thought of it and then did the research for prior art rather than assuming nobody else had.

The solution is this: You impose the tax, you collect all the revenue from it, and then you distribute all or some of that revenue equally amongst every resident of your country (or whatever area you’re taxing over).

The result suddenly becomes massively progressive, because anyone who is using a less than average amount of the resource is actually in net profit. Note that because of the power law nature of wealth, a significant majority of the population have a less than average amount of income.

This has been talked about in the context of carbon tax, with e.g. the citizens’ climate lobby lobbying in favour of it in the US, but I think it’s a more general solution which could be applied to a number of problems. This is particularly true because there’s a one-time infrastructure setup cost (how do we send money to every resident of the country every month/year/whatever?) after which adding other redistributive taxes into the system becomes easier.

This infrastructure is actually a big feature of the scheme for me. As well as the intrinsic benefits of it, it becomes a nice transitional step to a universal basic income because they require the same infrastructure. It would be easy to e.g. add a small additional income tax that went straight into the redistribution pot.

All in all, I think this is a great idea. I’m going to be thinking about it a lot more, and I’d like to see more discussion of it.

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