Egalitarianism and Consumption Tax

© Springer International Publishing Switzerland 2015
Helmut P. Gaisbauer, Gottfried Schweiger and Clemens Sedmak (eds.)Philosophical Explorations of Justice and TaxationIus Gentium: Comparative Perspectives on Law and Justice4010.1007/978-3-319-13458-1_8

8. Egalitarianism and Consumption Tax

Daniel Halliday 

School of Philosophical Studies, University of Melbourne, VIC 3010 Melbourne, Australia



Daniel Halliday


Consumption taxes are often used to dissuade citizens from purchasing products that cause negative health outcomes, such as tobacco and alcohol. Such taxes are often criticized on the grounds that they discriminate against the poor: Consumption taxes are ‘regressive’, insofar as they require poor persons to pay a larger fraction of their income per consumed unit of good. After an attempt to spell out exactly what this objection asserts, this chapter attempts to respond to it. The apparently egalitarian complaint about regressive taxation can be countered by other egalitarian worries about the vulnerability of low-income groups to the harms resulting from the type of consumption being taxed. This calls for the redesign of consumption taxes rather than abolition. Further progress can be made by recognizing there are ways of taxing consumption other than the standard model of a sales tax that is typically assumed in these debates. One is to hypothecate the revenues from ways that aid the poor, mitigating the regressivity of the tax burden. Another is to replace sales taxes with licences or permits. Hypothecation and licensing can also be combined in ways that can eliminate regressivity altogether. This contribution attempts to develop these ideas in more detail.

8.1 Introduction

Consumption taxes are often used to discourage the consumption of products that cause harm. Familiar examples concern products that result in bad health outcomes for their users. These include sales taxes often attached to alcohol and tobacco products, which have been around for some time, as well as more recent attempts to tax food products linked with obesity. Other examples feature in proposals to extend the use of consumption taxes beyond the traditional focus on goods that harm their consumers. Taxing air travel, for example, might be defended in the name of reducing environmental harms that are absorbed by the global population (including persons yet to be born). There is also growing interest in the role that taxation might play in combating wasteful sorts of positional consumption. Examples of this phenomenon include the purchasing of suits for job interviews, and private tuition to help children prepare for important exams. Much of this consumption is competitive, as consumers are essentially trying to ‘out-consume’ each other. Although the moral case for taxation here is sometimes described in terms of preventing harm to others, such cases can perhaps be better distinguished by appealing to the way in which positional competition can instantiate a costly collective action problem.1

Differences between these cases2 suggest that different moral justifications (or combinations thereof) might be at work in different cases. Often a justification for consumption tax might be straightforwardly paternalistic. Other times it might depend on principles for protecting third parties, and sometimes it might draw on the morality of using coercion to save people from conflict or coordination failure.3 A proper separation and comparison of the force of each of these justifications, and of which justifications have which force in which cases, would take up a good deal of space. I don’t have time to do this. What I want to address here is not really part of the positive case for attaching consumption taxes to harmful products, but part of the negative case against. Here’s the problem in brief. Consumption taxes tend to be ‘regressive’ taxes. What it means for a tax to be regressive is for its real burden to be unevenly distributed across the persons who pay that tax, so that persons who are badly off pay a higher effective rate than persons who are better off. So the idea of a regressive tax, then, is the opposite of a progressive tax, where the effective rate goes up only when the person paying that tax is better off. Consumption taxes, when attached to particular products, have the tendency to be regressive insofar as they are insensitive to the circumstances of whoever’s paying them. When the government imposes a tax on (say) a pack of cigarettes, this tax tends to stay the same irrespective of how rich or poor someone is when they buy this pack, and irrespective of how many packs they might have already bought. But poor people have smaller amounts of disposable income (or wealth) than wealthier people. So, a poor consumer who pays tax on a packet of cigarettes effectively pays more (understood as a fraction of their total financial resources) than a wealthier person. This is what it means to say that the higher the effective rate of such taxes is, the worse-off the person is who must pay it, and the poorer a person is, the higher the effective rate of any flat marginal-rate tax they must pay.

A bit of interpretive work is required to make sense of what this objection really says. An immediate problem is that regressivity is not strictly a moral concept. It is really just a mathematical one about one variable being inversely proportional to another—in this case, a person’s effective tax burden being inversely proportional to their level of income or wealth. It is sometimes said that regressive taxation is unfair. Certainly, the moral force of objections to regressive taxation is often construed in this way. According to Liam Murphy and Thomas Nagel (2002, p. 13, 112), those who complain about the regressivity of consumption taxes are attempting to make a “vertical equity argument”. Classically understood, vertical equity is just “what fairness requires in the tax treatment of people at different levels of income (or consumption, or whatever is the tax base)”.4 On this understanding of vertical equity, fairness might be something like a proportionality requirement whereby taxes should be extracted in ways proportionate to a taxpayer’s ability to pay. Regressive taxation violates this sort of requirement. Insofar as it appeals to some idea of discrimination or unfair distribution, this way of formulating the concern about regressive taxation gives it an intuitively egalitarian air.

This simple appeal to fairness has some plausibility. After all, people often think that progressive taxation tends to be fairer taxation. Given this, it is tempting to think that regressive taxation is (therefore) unfair taxation. However, the relation between unfairness and regressive taxation is complicated in ways that reveal some reasons to resist this temptation. First of all, there is scope for questioning quite how easy it is to rely on appeals to vertical equity so long as these depend on more fundamental principles connecting fairness with ability to pay. A general problem here is that a person’s ability to pay is, in large part, a consequence of tax policy rather than something that exists prior to it.5 Possibly this concern has less force against highly localized elements of tax policy, such as the consumption of specific products. One might think that a person’s income ‘prior’ to a tax on alcohol is more robust than the idea of their income ‘prior’ to the set of tax laws as a whole. These considerations suggest that more work needs to be done than to simply make a naïve appeal to vertical equity.

Second, it is not obvious whether views about the fairness of progressive income tax can be extended to support the unfairness of regressive consumption taxes very easily. The most influential arguments connecting progressive income taxation with justice or fairness rest on detailed theories of distributive justice. These include ideas about one’s income being an output of participation in some cooperative process, where one’s talents (in the economic, salary-commanding sense) are largely a product of other persons’ contributions to such cooperation. One other influential view is that the distribution of such talents is largely a matter of brute luck, whose effects should be reduced, if not wholly extinguished. These claims support the view that progressive income taxes represent a form of reciprocity between talented and not so talented co-operators, and/or some attempt to make distribution less sensitive to the effects of differential brute luck. But the morality of taxing harmful consumption is not obviously part of the morality of fair terms of cooperation or an application of any principle about eliminating a relation between social rewards/disadvantages and differential brute luck. As such, the justice of progressive income taxes does not entail the injustice of regressive consumption taxes. Third, paternalistic motivations for tax policies may even support the introduction of elements of regressivity into the tax policy, depending on which persons are deemed the most suitable candidates for paternalistic treatment. There is nothing incoherent in the idea (for example) that poor persons have more to gain from being deterred, and so can be fairly burdened by higher (effective) taxation. If the aim of a consumption tax is to prevent harm to others, or prevent coordination failure, then one might think that differential tax burdens are easier to defend if they are effective ways of realising these goals. I would like to stress that I am not defending these claims. But the fact that they are not obviously false suggests that the morality of taxation depends on all sorts of details regarding whatever bit of tax policy is under examination. So, we should hesitate before relying on very general claims about what makes for just or unjust taxation.6 All of this suggests that the problem with regressive taxation is not so immediate that regressivity, in the cases being discussed, should be seen as constituting unfair treatment of poorer taxpayers.

The concern with regressivity is not that regressive taxation is, in itself, anti-egalitarian. Nevertheless, some sort of concern still exists. This emerges, I suggest, out of a more general concern that egalitarians have about the overall situation faced by the least advantaged members of society.7 Regressive taxation can compound existing patterns of disadvantage. What might bother us, about taxing the consumption of the poor is that, for example, poor consumers may forego important purchases in order to find the money to purchase the taxed product. To pay for tobacco, a poor person might forego purchasing food, or even food for their children. In short, the reason egalitarians should care about regressive consumption tax is that they should be seeking ways to relieve poor persons of unnecessarily burdensome aspects of their lives. Regressive consumption taxes tend to hit poor people harder because poor people are already vulnerable. This, I think, highlights a concern about taxing consumption of products that are consumed by poor people, even if it merely coincides with the way in which such taxes are formally regressive, and does not depend on any general moral concern with regressivity as such.

One (more general) way to spell this out is to say that regressive taxation coincides with situations in which the poor are burdened in an absolute sense, not just in the sense of being burdened more than their wealthier counterparts. It is worth noting that the regressivity objection only has substantial force when consumption taxes actually aim at deterring consumption among poorer members of society. Many other harmful products tend to be consumed in significant quantities, or in the most harmful ways, only by wealthier consumers. This is true of many forms of environmentally harmful consumption, such as air travel in first or business class.8 This does not make taxation any less regressive in the formal sense, since the effective rate at which an air ticket is taxed will still vary with the financial circumstances of the consumer. However, these cases suggest that, the worry about regressivity has more force when applied to taxes on products like alcohol and tobacco than it does on some other sorts of consumption. It also has some force when applied to certain types of positional consumption, since competition for positional goods can often impose greatest costs on poorer competitors.9

As I shall explain (see the end of the next section), the concept of regressivity remains helpful as a way of describing proposals for addressing the problem as I am now describing it. However, the moral worry about taxing consumption is ultimately a worry about imposing non-trivial tax burdens on persons who are vulnerable due to their low absolute position.

8.2 An Egalitarian Dilemma

Egalitarians should not respond to concerns about regressivity by abolishing consumption tax, at least not for the sorts of cases being discussed here. This is because, while there is some sense to the idea that egalitarians should dislike regressive taxation, the moral reasons for deterring harmful consumption can still be of an egalitarian sort. So, the problem posed by regressive taxation may be viewed, here, as one of how to resolve a conflict between competing egalitarian concerns. This suggests that egalitarians should at least hesitate before abandoning the taxation of certain products. Of course, there is much scope for suggesting ways in which the state might simply do more to combat whatever the antecedent causes are of inequality among consumers.10 However, this is not the only way of responding to the problem. Solutions, or partial solutions, may yet be found that are internal to the practice of taxing consumption itself. Egalitarians should also seek proposals for redesigning consumption taxes so that their regressive tendencies might be reduced (or mitigated), in ways compatible with retaining their deterrent force. The rest of this chapter is largely an attempt to discuss ways in which progress might be made along these dimensions.

To make the dilemma a bit clearer, it is worth emphasising some ways in which the poor are especially vulnerable to the harms of certain sorts of consumption. To begin with, there is some general evidence that certain harmful products tend to be consumed in larger quantities by poorer consumers. Tobacco consumption is particularly high among those at lower income levels.11 Obesity rates are most prevalent among the poor, particularly when they live in societies that contain rich people (Wilkinson and Pickett 2009, Chap. 7). In economically deprived urban areas, junk food outlets are often conspicuously more common than healthy food outlets. Of course, the facts vary for different kinds of goods. Alcoholism, for example, is certainly not absent at higher income levels. Nevertheless, evidence suggests that poorer people are more prone to excessive alcohol consumption, and that they are likely to begin alcohol consumption at an earlier age (Karriker-Jaffe et al. 2013).

I am not claiming that poor people are excessively harmed simply because they consume harmful products in larger quantities than wealthier people do. More significant is the fact that harmful products can compound pre-existing disadvantage. While it is true that alcohol and tobacco bring harms such as premature death, cancer, and other health outcomes that are bad for anyone, the range of harms widens for consumers occupying a low economic position. For example, workers at low income levels often benefit less from flexible working conditions or access to sick-leave. Often, poor people need to make a living from performing unskilled or manual labour that becomes impossible, or more burdensome, in cases of illness. In some countries, poor persons do not even have access to healthcare, or can gain access only in ways that leave them with large financial debts. In contrast, wealthier persons might work in ways where performance is less dramatically impacted by becoming ill (for example, it may be possible to work from home). Disadvantaged persons may even be more likely to find themselves in situations where they are punished for having engaged in certain sorts of consumption.12 Skilled workers are better placed with respect to health insurance, sick leave, and so on. Wealth can also subsidize time out of the labour market. These points bear importantly on how we should understand the problem posed by the egalitarian objection to consumption taxes. They underscore the way in which regressive taxation may not be problematic simply because of the way the tax burden is distributed, but due to the ways in which disadvantaged persons stand to be hit harder by it.

What this shows is that the egalitarian objection to consumption taxes should be construed, at least in certain cases of paternalistic taxation, as merely one half of a dilemma. Although the objection itself seems to occupy the egalitarian high ground, there are ways of responding to it that draw on, or at least are compatible with, egalitarian ideas about what society owes to the least advantaged. The remarks in the above paragraph are meant to give a sense of this, just by pointing out that, although consumption taxes are regressive, there are reasons for imposing them on poorer members of society in particular. Since some of the effects that harmful consumption can impose on poor people form part of systematic patterns of disadvantage, the desire to see these effects mitigated might be viewed as part of a general egalitarian view. Note that I am not trying to downplay the way in which harmful consumption can still harm wealthy people. The point is rather that physiological harms can exacerbate non-physiological harms linked to occupying a low socio-economic position. This fact should lead us to acknowledge a greater diversity of ways in which certain forms of consumption harm the poor.