Gregory Mankiw is a gutsy economist. He defended outsourcing while still serving in the Bush administration. He is a also a good economist. He could make a living on textbooks alone. He is now advising Mitt Romney as he campaigns for the presidency. In an interesting op ed, he lays out some simple principles for the design of systems of taxation.
TAX BADS RATHER THAN GOODS A good rule of thumb is that when you tax something, you get less of it. That means that taxes on hard work, saving and entrepreneurial risk-taking impede these fundamental drivers of economic growth. The alternative is to tax those things we would like to get less of.
Consider the tax on gasoline. Driving your car is associated with various adverse side effects, which economists call externalities. These include traffic congestion, accidents, local pollution and global climate change. If the tax on gasoline were higher, people would alter their behavior to drive less. They would be more likely to take public transportation, use car pools or live closer to work. The incentives they face when deciding how much to drive would more closely match the true social costs and benefits.
Economists who have added up all the externalities associated with driving conclude that a tax exceeding $2 a gallon makes sense. That would provide substantial revenue that could be used to reduce other taxes. By taxing bad things more, we could tax good things less.
I can agree with him on gasoline. The decision makers in most South Asian countries appear to agree as well. They tax the hell out of gasoline.
My gripe is re mobile telephone user charges. Why are they being taxed excessively? Therefore, they are being consumed less. Why? Do the governments think the use of mobile phones is a bad? No need to say it is good; just be neutral. Treat it like anything else.