Taxation issues

Two interesting things about taxes.

1. There is a NBER working paper E-ZTAX: Tax Salience And Tax Rates, which claims that reduced salience and visibility of tax collection lowers resistance to tax collection and even higher taxes. It studies the automated toll collection systems and argues that "because these electronic systems automatically deduct the toll as the car drives through the toll plaza, and the driver therefore need no longer actively count out and hand over cash for the toll, electronic payment arguably reduce the visibility of tolls." Further, this reduced visibility also comes at the cost of higher tolls, and passes off without much resistance. The study concludes that "drivers who pay the toll electronically don't notice price hikes as readily as manual-toll users do. So public resistance to toll increases lessens as more and more drivers pay electronically, and thus transportation authorities are able to push through more toll increases."

Other taxes where there is possibility of reducing visibility of tax collection include user charges on garbage collection (on an electronic tag attached to the bin), congestion pricing etc. Further, the amount of tax collected should be reduced by increasing its periodicity (this increases transaction costs, but should be overcome by making the collection electronic). Interface between the assessed and the assessee should be minimized or even eliminated.

2. In his latest blog post, Billionaires, Gary Becker has argued that a very heavy tax on the very wealthy may not produce too many distortions. He writes, "I believe that individuals with wealth in excess of hundreds of millions of dollars would tend to work about just as hard when their estates would be heavily taxed as they would without estate taxes, as long as they would still have a very large after-tax estate." In anticipation of attempts at tax eavsion he also writes, "One justification for such high taxes that has some appeal even when only modest sums are collected is that high taxes have encouraged the very wealthy to create large tax-exempt educational and charitable foundations in order to reduce their taxes."

I am inclined to believe that Bill Gates or Warren Buffet, would not lose their incentive to work just as hard and amass wealth if their incomes are taxed at 50% (in fact, Mr Buffet, himself claims that he pays only 17% of his income, mainly dividends and other capital gains, as income tax), instead of the present marginal tax rate of 35%. In otehr words, given the massive amount of wealth that would still be remaining after the tax, those very rich may be "indifferent" to the marginal tax rate. This new dimension to taxation comes in the context of the sharp rises in the wealth of the very rich in the recent years and the increasing of the very rich. (All of the world's 100 richest individuals are worth much more than $7billion.)

Previously, with smaller base and smaller levels of wealth, it may not have been efficient to tax them at very high marginal rates. Now, even with all the transaction costs and the possibility of evasion, the figures involved are too big (The total wealth of the Forber Top 10 being $600bn) to raise a handsome tax revenue, with limited misallocative effects.