What makes a good taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. ? Economists teach that taxes with broad bases and low rates are usually best. Why? Because while every tax creates deadweight losses to society, taxes that are low and neutral tend to minimize that economic distortion.
So what are the worst taxes? For the same reason, many economists argue they are selective excise taxes—taxes that single out certain goods like cigarettes and cell phones. Why? Because they discriminate against certain kinds of economic activity, tend to have small bases and high rates, and make for highly distortionary and unstable revenue sources.
So why are more states moving toward selective excise taxes—this time on plastic surgery operations—to boost revenues? From the Wall Street Journal:
A number of states are considering taxing certain cosmetic surgery procedures, including face-lifts, tummy-tucks and Botox injections…
New Jersey passed the first cosmetic surgery tax law last summer. Since then, lawmakers in states including Texas, Illinois, Washington, Arkansas, Tennessee and New York have introduced bills or budget proposals to install similar taxes, although none of those states has passed the taxes into law.
Proponents of the efforts say that since the taxes are levied on elective procedures, they are relatively painless ways to raise money for state programs.
Selective excise taxes on cosmetic surgery may be a politically painless ways to boost short-term revenues, but that doesn’t make them good long-term tax policy. For a more general and rigorous case against excise taxes, see our classic paper “The Use and Abuse of Excise Taxes,” by economist Dwight R. Lee:
Share[E]xcise taxes are conspicuously at odds with the goal of reducing tax distortions: they are the most distorting of all taxes per dollar raised. Instead of spreading the tax burden as neutrally as possible over a broad tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , excise taxes single out a few products for a high and discriminatory tax burden that motivates consumers to avoid that burden by shifting away from products that provide them with the greatest value per unit of production cost. (Full paper here.)