There are a number of ways to raise money to pay for the various and sundry functions of government. Here in the United States we use many different taxes. At the local level, say county and city, the emphasis seems to be on real and personal property taxes and sales taxes. At the federal level income taxes predominate. There are many variations on these taxes such as luxury taxes, estate taxes, capital gains taxes and special exceptions, i.e, tax deductions, but a common theme runs through them all. In addition to raising money for the operation of the government, taxes are aimed a social policy.
Progressive income tax rates, dependent allowance for income taxes, sales tax exemptions for food and drugs, deductions for mortgage interest and child care to name just a few. The result of all this is a rather arcane web of taxes that keep certified public accounts and tax lawyers in the the tall cotton. It could be simpler, for example we could get rid of all deductions and exemptions.
Much of Europe uses a VAT or Value Added Tax. Basically this is a sales tax on the increased value of an item. Iron ore is minded to make steel, which is used to make pipe, which is used to lay an natural gas line. At each point the value of the product increases and that increased value is taxed. A similar tax has been proposed in the US called a “fair tax.” This is a 30 % tax on sales of goods and services. The rate is set to be revenue neutral, that is it would replace other taxes but neither increase or decrease net revenue.
The flaw with any tax is that it punishes some activity. Some are intentional such as sin taxes, those on the sale of tobacco and alcohol, but others aren’t meant to punish but do just the same. Income taxes punish income (work), sales taxes punish sales (business), and capital gains taxes punish savings.
We have to collect taxes and that collection inherently punishes some activity. An alternative promoted by environmentalists is a pollution tax. The tax rate could be calculated to be income neutral, and the tax rate of a polluting activity could be based on the importance of the pollutant. The most mature of these pollution taxes is called a carbon tax, actually a tax on Carbon Dioxide released on combustion of fossil fuels. Over ninety per cent of of fossil fuels go to the generation of energy (do work), the remainder being used for the manufacture of plastic bags and axle grease.
The carbon tax would embed an additional cost for heating your home, fueling your car (and the trucks and trains that move the goods across the country,) and keep the lights on in your home, as long as this work was done via fossil fuels.
An most important added value of this form of taxation is the favoring of clean energy production. Solar, wind, and geothermal processes do produce useful work but don’t pollute so wouldn’t be taxed. This would greatly stimulate the adoption of sustainable energy for our future.