Thursday, 21 July 2011

Taxation and Moral Values – the Case of Conspicuous Consumption

Everywhere, politicians advocate public policies to foster virtues (e.g. philanthropy) and discourage vices (e.g. smoking) through both the revenue and the spending side of the budget. However, they frequently treat them differently by failing to measure separately the costs of tax breaks and surcharges applied to achieve such policies.

Free markets do not require neutrality in the rates of taxation on property, income and consumption. Indeed, they should not be neutral in relation to the taxation of consumption for the satisfaction of basic needs (food, healthcare, etc.) and the taxation of luxuries and conspicuous consumption. Fiscal neutrality is often defined as in the FT Lexicon: “when the impact of taxes and of government spending cancel each other out, with demand neither boosted nor curbed”. Others add the requisite that it does not cause distortions. Besides, to some extent, the use of taxation for policy purposes goes against the principle of budget unity, and the repudiation of earmarking specific revenues for given expenditures.

However, in general, when it comes to differentiating between different classes of conspicuous consumption there is a strong case to advocate the rule of fiscal neutrality. We will exemplify with a choice between spending on impressionist masters and trophy wives, because the first may have some cultural value while the second may be morally degrading.

Imagine for example an ostentatious billionaire who is considering spending 50 million on a master’s painting or in marriage to a super-model under a pre-nuptial agreement that grants her the same amount if the marriage lasts three years. Since he is neither an art lover nor is he in love with his trophy wife both types of investment are morally questionable.

Yet, most countries will treat differently the two investments when he decides to file for divorce or sell the painting. Assuming that he cannot earn transfer fees on his wife and makes a capital gain in the painting, some tax codes will give him a tax credit on his divorce settlement and charge capital gains in the sale of the painting. As a result, he will be rewarded in the most degrading investment and will be punished in the cultural investment. This is exactly the opposite of the proclaimed objective of encouraging virtue and discouraging vice.

Not only is the taxation of virtues and vices difficult on practical grounds. For instance, it is impossible to distinguish between a genuine and a convenience marriage. But it is also impossible to make a distinction between capital gains and losses on ethical grounds. Therefore, taxation should be kept away from policies based on moral judgments. Its concerns should be based mostly in a fair sharing of the funding and the minimization of the government revenue collection costs.

You do not need to agree with James Buchanan and other libertarians that a moral order is preferable to moral anarchy and moral communities because it only requires a minimal intervention of the Government. Simple common sense tells us that governments are not apt to judge on the basis of moral merits, without becoming an easy prey of vocal interest groups.

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