Taxing Drugs

A sensible tax policy considers value and costs, from production to consumption

Economic Libertarians hate taxes, in all their forms. They prefer a conspiracy of Capital to a conspiracy of the state, when it comes to capturing value from the market. Taxation is theft goes the bumper sticker, and perhaps so, in a zero-sum game. Outside of an if-I-win-You-must-lose paradigm, thinking like this makes less sense though.

Taxation captures value.

The salient question is: From where in the economic process? Is it at the point of the production of value, at the point of the consumption of value, or at points in between?

Taxation at the point of production takes the form of all taxes on Capital (real estate, extraction rents, capital gains, and employment (labor-purchase) taxes). It also includes a tax on Labor via their sale of labor-power—what is experienced by most people as an income tax.

Taxation at the point of consumption take the form of taxes solely on Labor. When a business purchases the supplies for an office party, that is not a consumptive act. As with all business activity, the purpose behind the action is to produce greater profits. While employee morale is difficult to calculate and expenses laid out for it do not produce immediate and tangible returns, it is a “cost of doing business.” Whereas the same expenditure for a family birthday party is not.

Thus, one party may be “written off” in tax reporting while the other may not be. The difference between a personal and a business expense is regularly blurred come tax time, but only in one direction. This is true, regardless of whether the taxpayer is a Libertarian. Culturally, American accountants, attorneys, politicians, and economists follow the mantra of “Try to pay the absolute least tax possible.” To the degree society is a zero-sum game, this makes sense. To the degree one distrusts the government, this sensibility is amplified.

I have a different take on taxation—If value is not corralled it is immediately captured by Capital. They are going to get it anyway, but a redirection through social expenditure, first, will improve the General Welfare. Capital already captures 100% of surplus-value, which is mostly suspended from taxation because it is reinvested in production. Corporate income tax rates are far lower than the taxes on the labor-power used to fuel those value-production machines.

Here’s a trick to understanding how wealth stratification impacts you. You have seen the charts that show how much wealth has gone to the very wealthiest.

To translate from the static representation to the dynamic action of wealth distribution—When the top 1% claim ownership of 30% of all wealth, that means that 30 cents of every dollar of value produced by the bottom 99% of wealth-holders has gone to them. As stratification increases, that means today more than 30 cents of every dollar of value produced goes to billionaires. And for the bottom half of Americans, 97.5 cents of every dollar of value they produce goes upward, to someone else. As for the folks in the 50th to 90th percentiles (40% overall)—the 30.5% of total wealth they hold is mostly in the form of the houses they live in.

I believe we have the financial wherewithal as a nation to capture and redirect value in ways that mitigate the market’s drive to concentrate value in fewer and fewer hands, without collapsing society. The very wealthy will just have to get along with a smaller share, as we tax Capital more heavily at the point of production and reduce the load on the sale of labor-power. We should still tax consumption, and more heavily in some respects. I’ve explained this more fully in terms of cannabis:

Drug use incurs costs to society, in terms of public health, in terms of lost productivity, in terms of accidents related to manufacture, distribution, and consumption, and in terms of resources lost to the production of necessities. These costs need be covered in some way, and the fairest method available at the moment is to pass them to consumers, distributors, and producers of certain drugs. If we were willing, we could calculate the cost of consuming a gram of marijuana flower and assign a corresponding tax.

Note that this tax rate will not be established by the price of the product per se, but by the social costs of the product, so while the product might cost $1 a gram at retail, it is possible its consumption incurs 50 cents or a dollar or even two dollars’ cost to the public. Setting a tax rate based on retail cost alone may or may not cover the actual costs of consumption.

Taxing cannabis based on the costs of consumption is a fair and reasonable approach. Over-taxing is one means by which consumption may be discouraged, and should the over-tax be large enough relative to the cost to produce and distribute the products, an untaxed and unregulated market will emerge. This was the case in the US from 1937 - 1970, as marijuana use grew from a few tens of thousands of subcultural users to more than 2 million annual initiates. The tax rate was $100 per ounce—the plant itself was not criminally prohibited—and so great that people avoided establishing legal markets.

We presently tax cannabis because the consensus is that recreational drug use should be taxed. However, that is too broad a position to effectively defend. What we need to establish is the actual social costs of manufacture, distribution, and consumption, and assign *that* as the tax rate. It is not the place of the state to generate surplus revenues through taxation.

We should tax cannabis, but history shows we should be cautious not to over-tax it.