Discouragement Taxes - a solution to current problems


Tax revenue raised from penalties and taxes designed to discourage certain societal behaviour is problematic. Government has learned to rely upon these revenue streams in order to fund certain government activities (like law enforcement). This allows the toleration of some level of illegal, unhealthy and/or dangerous behaviour in society in order to fund government spending. Raising these taxes and penalties is therefore problematic as it both reduces a potential revenue stream while raising political issues with voters who see such rises as merely revenue raising. If this revenue is directed towards the central bank for money destruction, instead of government treasuries for spending, then these penalties can be raised with less political fallout.

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Within our society today there are many "discouragement taxes" - taxation or penalties imposed by government for the public good. I'm not certain what the actual economic term is, but when governments (like ours in Australia) impose higher tax levels on cigarettes, they do so for the public good. If cigarettes were cheaper, there would be an increase in their demand.

A similar concept exists when it comes to things like penalties and fines for law breaking. If a company dumps a thousand litres of used motor oil down the toilet, chances are that they will be fined by government as a result. Fines are also the main deterrent for unsafe driving - if you go too fast, you not only lose "points" (as we have in Australia), but you are also fined a sizable sum too.

The major problem with discouragement taxes is that there is a temptation for government to use them as an important revenue source. There is no doubt that the NSW State Government raises millions upon millions of dollars in traffic fines which it then uses as a way of funding the police department.

But is this a problem? Why shouldn't the fines of traffic violations be used to fund the police service? Isn't that a proper use of resources?

No, actually, it isn't. And the reason is because when governments get used to certain revenue streams, they are loathe to remove them. More than that, their dependence upon such revenue streams can be so important that the actual level of tax or amount of money fined is determined in the same way as a market determines the price of goods.

Let's take speeding fines. According to current rates, a driver in NSW is fined $79 for exceeding the speed limit by up to 15 kph and given three demerit points. Despite the use of the term "penalty", the fact is that NSW drivers can actually "buy" faster travel time as a result. Not everyone who speeds gets caught, so a driver has to weigh up in his/her mind the risks of driving faster (potential accidents; potential reduction in demerit points; potential loss of $79) with the benefits (getting to a location quicker; enjoyment of driving vehicle fast). There is, in fact, a market in breaking the law.

The way to change this would be to increase the penalties. If a driver is fined $160 for exceeding the speed limit by up to 15kph then the government is essentially increasing the potential cost for drivers to speed.

But then the government itself may find this a problem. If this new $160 fine was imposed then the natural reaction of the marketplace would be less demand - ie less drivers exceeding the speed limit. Because of the relationship between supply and demand, the increased cost of the penalties would actually reduce the amount of revenue going to government. But, of course, there is also the obvious savings involved in less fatalities, less injuries and less damage - but those are savings that the government cannot account for on its books.

The result is that governments the world over have set similar discouragement taxes at a level that is determined by a marketplace because of their reliance upon these taxes as a revenue stream. While it does some level of good, the potential savings resulting from obedience to the law are not experienced because these tax rates are set too low.

My argument is, essentially, that the reasons discouragement taxes exist are nullified by their importance as revenue streams for government. Moreover, I would also argue that the amount of revenue that governments gain would be less than the cost to society by allowing some level of lawbreaking or poor health-related activity (such as smoking).

The solution, I believe, is to increase these discouragement taxes while, at the same time, eliminating the need for these taxes as government revenue. This is where the central bank comes in handy.

Rather than the revenue going to government (either federal, state or local), the revenue is given to the central bank where it is essentially "destroyed". This obviously has a deflationary effect upon the economy, but the central bank can simply create more money and buy bonds back as part of its normal actions to ensure price stability.

By removing this revenue stream, government can then enact laws and penalties for certain activities with less political damage - after all, the lawmakers and politicians have nothing direct to gain.

There is no doubt in my mind that heavier penalties and taxes are required to limit certain forms of damaging activities. Personally I think that $320 for traveling up to 15kph over the speed limit is maybe too small, but I also believe that it will serve as a massive deterrent to anyone who would consider speeding. This, in turn, would lead to a general slowing down in traffic speed, resulting in lives saved, less injuries, and less car accidents for insurance companies to pay for. In the same way, considering our current problem with oil supplies, imposing a large tax on petrol will encourage society to drive smaller cars and use public transport.


Discouragement taxes are a way in which government can kerb destructive practices in society without resorting to outright banning (and the problems that that can cause). Raising these taxes and penalties will encourage society to obey the law and reduce the costs associated with this activity, thus saving more money in the long term. Channeling the revenue from these penalties and taxes to the Central bank for money destruction allows government to freely expand penalty rates without benefiting directly from them or relying upon them for important revenue.

© 2007 Neil McKenzie Cameron, http://one-salient-oversight.blogspot.com/

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