Thursday, September 16, 2010

How to raise government revenue: tax bling bling, but subsidize hip hop?

Lost in the debate on how governments could be raising much needed revenue in our difficult times is that there are some goods that are just begging to be taxed: diamond goods. These goods are valued solely because they are expensive. The money spent on these goods is independent of their price. Thus taxing them all the way to infinity makes them even more attractive, as very little of the diamond good needs to be produced for the same satisfaction. Thus, everybody should agree diamond goods must be taxed heavily: the buyers because of the prestige of the high sticker price, the others for the tax revenue.

Per Engström adds a little nuance to this argument. Suppose there is a strong complement to the diamond good, like hip hop music is a strong complement to bling bling. As the diamond good constitutes a free lunch for the social planner, the latter would want to subsidize it. But that beats the purpose of taxation. However, one can subsidize the complement, which encourages the consumption of the diamond good.

Engström mentions other pairs of goods. Entry to the Sex and the City should be free and designer shoes should be taxed to the hilt. The same for James Bond movies and champagne. Any other examples?

1 comment:

Kansan said...

Keep up the good work. This week's papers have been simply awesome.