I like to work things out for myself, so over the years I have come to the conclusion - moralising aside* - that the least-bad or indeed best kind of taxes are, in the following order:
1. Things where supply is completely unreponsive to price**, whether or not demand is price sensitive (i.e. land and other monopolies),
2. Things where both supply and demand are fairly unresponsive to prices (in particular oil and gas), and
3. Things where demand is particularly unresponsive to prices (addictive things like booze and smoking).
4. The worst kind of tax is one on things where both supply and demand are fairly price sensitive (pretty much everything else, i.e. exchanges of goods and services/labour in a free market).
See for example my post of three years ago. You don't need to have studied economics to work this out, you just look at the world as it is and observe.
* If you chuck morals into the equation, taxes on land and other monopoly rights shoot even further up the list and move from being least-bad to actually good taxes (from place 1 to -1), however the money is spent. The bansturbators argue that taxes on booze, smoking, gambling etc are inherently good taxes, being akin to fines or penalties, with nary a thought as to how the money would be spent. The other arguments for taxing fuel used for motoring are: environmental, depresses imports and crude road pricing.
** The Homeys argue, "Ah yes, but the government could easily increase the supply of desirable land by liberalising planning laws, building more transport links to those areas etc." For sure it could, but that does not increase the amount of land being supplied by any individual landowner, it merely benefits some individual landowners relative to others. LVT automatically claws back some of the benefits to some landowners and compensates the others.
It turns out that Frank P Ramsey formulated this ages ago, using rather convoluted language:
[the] consumption tax on each good should be "proportional to the sum of the reciprocals of its supply and demand elasticities".
So now we know.
Debate Magazine
