“You tax something you get less of it” — it doesn’t only apply to undesirable behavior
On January 26th, Gov. Tim Walz unveiled Minnesota’s COVID-19 Recovery Budget. Essentially the proposal aims to raise taxes and use the revenue to support higher spending on numerous programs. More specifically, the governor wants to raise taxes on corporations and rich Minnesotans so they can pay their “fair share” — whatever “fair” is defined as.
For its ambitious plan to help the poor, the proposal is, however, swelling with taxes that will mostly fall on ordinary Minnesotans. As already illustrated by John Phelan, corporate and income taxes are passed on to individuals through higher prices and lower wages. The Minnesota Department of Revenue has evidence of this.
But what is more surprising in the budget is the plan to include a cigarette and vaping tax hike. Cigarette and vaping taxes are generally regressive- low and middle-income individuals pay more of their income on these taxes. So why are they in the proposal?
According to Walz, these taxes are okay because they are all about incentivizing behavior. As explained by Revenue Commissioner Robert Dorty, raising taxes on cigarettes and vaping is for the good of the public. Taxes raise prices on cigarettes and in turn induce people to smoke less.
There is indeed evidence that taxes/tax hikes on cigarettes discourage people from smoking. Additionally, high taxes on cigarettes do increase smuggling by people who want to escape the tax and pay lower prices. This is not very surprising, and it highly supports the idea that “once you tax something you get less of it.”
When taxes are high people will look for ways to reduce cost, hence reduction in said taxed behavior. But if Walz is familiar enough with how taxes work, why is he pushing for ideas that are harmful to Minnesota’s economy?
By his own logic, taxes on income should have a deterrent effect on economic activity. Tax hikes raise the cost of doing business, starting a new business, expanding business, or just investing in productive activity. Therefore, it is safe to say on some level, raising taxes will curtail some of these activities. To what extent depends on how individuals respond to the tax.
But obviously, Walz would rather let Minnesotans believe taxing the “rich” comes at a zero price. But in the same way that raising the tax on cigarettes reduces smoking, raising the tax on income should also discourage income-producing activities. The logic applies across the board.