Would You Rather Pay Fees or Taxes?

A little over a week ago, Matt Yglesias wrote a post on Slate about how to balance the budget while slashing taxes. The solution: call everything a fee.

Well we could solve an awful lot of problems that way. For example, I’d love to see us impose a greenhouse gas emissions fee to internalize the social cost of carbon dioxide. On top of that, I think a small additional fee on the use of gasoline would be justified. And of course road congestion fees on crowded highways. I used to think we should raise the alcoholic beverages tax, but now I think we should eliminate it entirely. Instead, let’s put an “alcohol fee” in place that just happens to be higher than the current tax. Do the same for cigarettes. Legalize marijuana, but subject its sale to a rather hefty fee. It actually turns out that we could replace most taxes on labor and capital with a land occupancy fee, especially if we call it a “land occupancy fee” rather than a “land value tax.”

After reading this post, it made me think of Michael Sandel’s chapter about fines versus fees. Maybe some of the things that Yglesias is talking about in this post should actually be labeled fines and not fees. For instances, if we’re talking about internalizing the social cost of carbon dioxide, isn’t there a moral piece to it? That is, shouldn’t we call this a fine, then? You may disagree, but the nomenclature in this case does matter.

It seems a bit absurd to think that people would be more amenable to paying money for something merely by changing the label from ‘tax’ to ‘fee,’ but labels matter.

While it’s certainly a creative idea to start charging fees and lower taxes, there is an important bit to consider here. Namely, the control of these fees. Have you ever had to pay a fee to get your license renewed? Do you know how much it costs the government to ‘actually’ renew your license? I don’t. But I know that I get charged close to $100 to renew it. Josh Barro solidifies the point:

Politicians tend to regard fees as more palatable than taxes, and more focused too. If a state needs to finance an infrastructure to oversee fishing, why shouldn’t fishermen foot the bill? But groups like the nonpartisan Tax Foundation in Washington worry that governments are now using fees to shore up budget shortfalls rather than cover specific costs incurred by specific users.

“When it comes to paying for bananas, you’ve got the market as a mechanism to make sure you’re paying a fair price,” says Josh Barro, a staff economist at the Tax Foundation. “But when it comes to getting your driver’s license renewed, the government has a monopoly, and you have no idea what it costs the state or what it’s doing with the money.”

The moral of the story: maybe taxes aren’t so bad after all.