Let’s Slap a Tax on that Puppy

by MaxPower

You practice a mildly socially unacceptable activity – whether it be drinking, smoking or driving an SUV. So what? The government and many activist groups support eliminating these ‘freedoms’ for whatever reason. How do these activist groups and the government respond? ‘Let’s slap a tax on that puppy and see how many people buy it then!’

So I was thinking, has any tax ever decreased the incidence of a certain action? I highly doubt it and I would challenge anyone to show me a tax that does. Point in case, the tax on cigarettes. Back in the mid-90′s someone in the government said, lets decrease the amount of people smoking. Good idea right? But rather than impose harsh smoking restrictions nationwide (for example the non-smoking restaurant), this genius policy advisor is like “Let’s slap a tax on that puppy”. Result? The cost of a pack of cigs skyrocketed, but did people stop smoking because of the higher price? Uh no, see they are addicted, and it seems anyone who wants their hit of a drug, whether that is nicotine, heroin or caffeine will pay the extra price. In fact, that tax increased another problem, the smuggling of cigarettes from the US. So rather than collecting a higher amount of money because of the tax, the market was now flooded with cheap US cigarettes.

But it didn’t stop there; look at the most hated tax of all in Canada – the GST. Did this tax on goods and services slow consumers buying things? Nope, not at all. Who out there has gone out and said, whoa I really want that new game, but man, the GST is on there, so I guess I won’t get it. No one, that’s because you take into account the price of the tax on everything. Consumers are extremely resilient to price increases; the best example of all on this is gasoline prices. When I was in University, I conducted a multiple linear regression on the price of gasoline over the past 30 years versus the incidence of driving and using public transit, and looked at what would happen if an (even higher) gas tax were imposed. The result? There would be almost no one who would stop driving, or get rid of his or her car even if gas prices were to double tomorrow. People would just bitch and spend more per month on gas. The effect that would have on the economy is that people have less disposable income because they see driving (and smoking and drinking) as a need, not a want. The spending of money on gas comes before the spending of disposable income on such things as movies or dinners out. Thus an increase of tax on gasoline will in no way stop people from driving, but will decrease the amount of consumer spending overall in the economy.

This brings me to the latest policy genius working for the Feds in Ottawa, who came up with the brilliant idea that they want to stop people from driving SUV’s (and thus destroying the world I guess) by imposing a tax. Yay, what a fool. This has been tried in California. They have a gas-guzzler tax on cars with a lower fuel mileage than a pre-determined arbitrary number. If it’s got worse mileage, a tax goes on top of the price. And everyone can see how well that did; there are almost no sports cars or SUV’s in California! In case you didn’t notice my biting sarcasm, it is yet another example of taxes not being effective in diverting consumer purchases. If I am going to go out and buy a sports car for 150K, do you think I care if it has a 5000-dollar gas-guzzler tax? Uh no. Just as like I don’t care about the gas mileage, who cares if it gets 1 mile to the gallon. I’m cool.

To make an effective deterrent to SUV purchases, the tax would need to be a massive amount of the total cost, like 50%. But who is that hurting really, not the consumer because they just won’t buy the automobile, but the manufacturer who is just responding to consumer demands. However, when you think about it, the government might as well just make SUV’s illegal rather than put on a 50% tax, apparently they need to protect us from ourselves. Just like when the US government tried to make alcohol illegal, and we all know how well that turned out. In fact, in my opinion the best case for the legalization of marijuana in Canada is the fact that you can license sellers, regulate quality and slap a HUGE tax on it and make billions. Think of all of the Americans who would all of a sudden view Canada as a vacation destination!

So to all of the government policy makers and environmental activists who are reading this column, please don’t try and protect me from myself. Negative reinforcement doesn’t work; you can’t just ‘slap a tax on that puppy’ and expect consumers to run screaming. If you really want to make a difference on gas consumption, give tax breaks to fuel-efficient cars. Then consumers can talk with their money. If someone wants a fuel-efficient car, they have more disposable income to spend on movies and the like, but if they want to try to be cool with an SUV so be it. I don’t like the government making consumption decisions for me.

MaxPower