My last post contained a diagram suggesting that no tax is both popular and efficient. On twitter, Matt Cowgill suggested the diagram was wrong. Taxes on resource rents are both popular and efficient. Michael Kushnir suggested carbon taxes as another possibility. If Cowgill and Kushnir are right, then the set of efficient taxes interesects the set of popular taxes:
No tax is completely non-distortionary. Bev Dahlby, for example, estimated that the cost of generating an extra dollar of government revenue, once efficiency impacts are taken into account, is $1.11 per dollar of federal GST revenue, but $40.83 [sic] per dollar raised by the BC corporate income tax. In terms of the diagram above, Dahlby's analysis suggests that sales taxes are in the green, efficient circle, but corporate income taxes are not.
Few taxes generate enthusiastic popular support, but some are more popular than others. Those are the ones that fill the red circle.
The area labelled "both" in the diagram above includes two types of taxes. The first is the tax that produces concrete, tangible benefits, but does not distort people's behaviour in undesirable ways. For example, carbon taxes are popular - polls (or, at least some polls) suggest that the majority of Canadians support them - because they produce benefits, in the form of a cleaner environment. To the extent that they distort people's behaviour, they do so in desirable ways. Taxes introduced during wartime have also had widespread support (their efficiency may be more debatable). Their popularity was achieved, as this Disney propaganda film shows, by framing them as part of a patriotic war effort: "taxes will keep democracy on the march."
A second type of efficient and popular tax is one that the majority of people do not have to pay, and the minority cannot avoid. The incidence of cigarette taxes falls on the minority of Canadians who smoke, grow tobacco, or own shares in tobacco manufacturing companies. The tax is popular with the majority (for US poll numbers, see here, here, or here) because they do not have to pay it. Unless cigarette taxes are very high, they are also relatively efficient: because nicotine is so addictive, smokers often would rather pay the tax than change their behaviour. (To the extent that cigarette taxes induce behavioural change, this may be a good thing).
Taxes on resource rents are also, I would argue, a tax paid by a minority within the population - the owners of the corporations that extract those resources (Andrew Leach has a primer on Alberta oil tax royalties here). Why? As a general rule, the economic burden of a tax falls on whoever cannot change their behaviour to avoid it. A tax on call centres can be shifted to call centre employees, because call centres operations can make employees a take-it-or-leave-it-offer: "accept these wages or we'll move to a lower-tax jurisdiction." Resource extraction companies, however, have to stay where the resources are if they wish to keep on extracting them. They have few alternatives to just paying up.
Any tax that falls on the owners of corporations - despite the inevitable rhetoric about pension plans and seniors - is a tax paid by the minority. The ownership of wealth is highly concentrated - Jim Davies has estimated that, globally, the top 10 percent of the world's population owns 71 percent of its wealth. Taxes on wealth, with the notable exception of property taxes, are popular because they take from the minority and give to the majority. In those cases where the source of wealth is immobile, they are efficient too.
In sum, there is a good case for saying that some taxes are both relatively efficient and fairly popular.
The thing is, most governments can't raise enough revenue to cover their expenditures using only popular and efficient taxes. (They can't raise enough revenue to cover their expenditures, period. The federal government, and most provincial governments, are running deficits.)
A democratically elected government that seeks to express the will of the people, and also to run a reasonably efficient economy, should fully exploit any taxes that are both popular and efficient before looking to any other source of revenue. If new taxes are either inefficient or unpopular, that's a good thing, because it probably means that the taxes that are both efficient and popular are already part of the government's tax base, as shown in the diagram above.
The only time that new taxes can be both efficient and popular is when the government is not fully exploiting that small set of taxes, as shown in the diagram below:
The question is: why would a government find itself in this situation? Why would it ever raise revenue from relatively inefficient and unpopular taxes when it could be raising revenue from efficient or popular taxes?
One possible explanation is that changing the tax system is costly, so taxes cannot and should not fluctuate in response to short-term changes in the economic and social environment. In the case of carbon taxes, for example, public opinion has changed over time. From a political point of view, it make make sense to ignore poll results suggesting that carbon taxes have wide-spread support if that support is perceived to be weak and easily eroded.
A second explanation is that, in Canada, it is possible to form a majority government with support from a minority of voters. It doesn't matter if only 40 percent of Canadians (say) oppose a carbon tax - if those 40 percent are the ones that have put the present government in office, that government is not about to turn around and introduce a carbon tax.
A third explanation is that governments do the right thing by protecting the rights of a minority against a majority. Historically, Canada imposed a head tax on immigrants from China. The tax had widespread popular support. It might even, at low levels, have been efficient, in the sense of not distorting people's behaviour. (Impoverishing people isn't inefficient.) But popularity and efficiency are not the only criteria for judging taxes: the head tax was a bad tax because it violated horizontal equity, by discriminating against one group of people.
A final possibility is that the premise I began this post with - that introducing a carbon tax would be both popular and efficient - is wrong. There are various estimates of the social cost of carbon. The number used by the US government is rising to $36 per tonne of CO2 emissions. The BC carbon tax is based on a price of $30 per tonne of CO2 emissions, which works out to a tax of 6.67 cents per litre of gasoline. Right now the average Canadian pays federal and provincial gasoline taxes of 25 cents per litre - over and above provincial and federal sales taxes on gasoline. These gasoline excise taxes are much higher than a carbon tax based on widely accepted estimates of the cost of CO2 emissions would be. I don't particularly like this conclusion, but I can't, in all honesty, say that, given present levels of taxation on gasoline, and current estimates of the cost of CO2, that I can make a strong efficiency case for a carbon tax.
But that's a good thing. When any new tax is either inefficient or unpopular, it means that governments doing their job: deriving the maximum possible revenue from popular and efficient tax sources before tapping into unpopular or inefficient sources of tax reveue.