A spoonful of sugar helps tax revenues go up

By DAVID MOON, Moon Capital Management, LLC
May 31, 2009

In 1998 the U.S. tobacco companies agreed to pay more than $246 billion to 46 states in exchange for protection from all sorts of future lawsuits. Prior to that, when states needed some new revenue, it was simple to tack a little extra tax onto a pack of smokes.

The moral justification was easy. Smoking is unhealthy. The increased costs caused by tobacco use create an economic drag on society, especially the government which, according to the American Lung Association, funds 69 percent of the $75 billion in smoking-related healthcare expenditures.

When Phillip Morris and its heathen brethren agreed to the mafia-like lump sum protection money plan, most people didn’t object to the extortion because only 24 percent of the people smoked. It was a tax on the minority, justified by an air of moral superiority. Only partially tongue-in-cheek at the time, I wondered how people would react when the government began taxing other, more popular vices, such as soft drinks.

The Wall Street Journal reports that the Senate Finance committee has entertained proposals about offsetting the cost of comprehensive health care finance reform with a federal excise tax on sugary drinks, including sodas, certain fruit drinks and sports drinks.

Kelly Brownwell of the Rudd Center of Obesity at Yale estimates that a one penny per ounce on sugar drinks could lead to a 10 percent reduction in soft drink consumption. She calls that a “public health home run.”

OK. So let’s tax Dr. Pepper and Full Throttle.

But did you know that a Harvard study concluded that women who eat five tablespoons of peanut butter a day reduce their risk of developing type 2 diabetes by 20 percent? I’m not sure if that’s creamy or crunchy peanut butter, but we clearly need to remove all taxes on peanut butter.

Some doctors and dieticians argue that the quantity of food we eat has as much to do with our health as anything else. Perhaps the government should make it difficult to consume large quantities of food, such as requiring that all tableware break after consuming a certain number of calories.

Maybe we should waterboard anyone who sells ice cream.

Outrageous? Silly? Five years ago would you have predicted that a taxing authority would need to examine the sweetener in a Diet Coke to determine its taxability?

There is a simple reason that politicians play complicated games with imbedded taxes that have little apparent financial impact on the majority of people – and it has nothing to do with protecting us from ourselves.

Here’s the dirty little secret: the only way to raise significant amounts of tax revenue is to increase taxes on the lower and middle class. There are more of them. Increased tax rates on the highest five percent of wage earners (who already pay 60 percent of the federal income tax) have a rapidly diminishing impact on total federal tax revenue.

The simplest way to significantly increase tax revenue is to spread new taxes across a huge tax base. And while it is political suicide to propose higher income tax rates on the middle class, it is easier to selectively tax the middle class – one vice at a time.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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