Taxation as Behavioural Engineering: In which Fiscal Nudging Becomes Coercion

Taxation as Behavioural Engineering: In which Fiscal Nudging Becomes Coercion

Introduction

The justification of taxation in the past used to be mostly based on the fact that it was a means of revenue collection. Over the last several years, it is increasingly being used as an instrument of molding behavior. The governments charge more taxes on tobacco to curb smoking, charge on the prices of carbon to change the consumption of energy and sweetened beverages to change the diet. The fiscal policy is therefore becoming such a behavioural architecture.

This change is supported by two well-known intellectual trends: Pigouvian economics, the theory of taxation that justifies the internalisation of externalities (Pigou, The Economics of Welfare, 1920), and the behavioural economics, the most famous one of which is the libertarian paternalism theory by Thaler and Sunstein ( Nudge, 2008), which advocates the possibility of influencing decisions without a reduction in formal freedom. However, with taxation moving towards a behavioural controller rather than a revenue generator, a question of interest is: When will fiscal nudging be coercive governance?

Sin Taxes: Regressive Cargo or Corrective Cargo?

Classical corrective taxes are the excise taxes levied on tobacco and alcohol. Governments can target to internalise the costs of health-care and discourage damaging consumption by price increases.

High GST rates accompanied by compensation cess are applied in India to tobacco products, in line with deterrence purposes. World health organization also records that price increases are one of the most effective ways of curbing tobacco use. Similarly, the Soft Drinks Industry Levy (2018) in the United Kingdom also encouraged companies to redesign drinks in order to reduce the sugar level even before the tax came into effect.

On the behavioural perspective, such measures seem to be effective. However, consumption taxes are regressive in nature. The poorer populations are allocating a higher percentage of income to taxed products. When addiction does decrease price elasticity, the nudge is rather an economic punishment than a behavioural stimulus. In addition, states tend to be fiscally reliant on this kind of revenue, which creates tension between deterrence and dependence. Therefore, sin taxes work in a precarious state between the policy of public health and the paternalistic fiscal intervention.

The Carbon Taxes: The Necessity of Environment and the Political Reality.

The use of carbon taxation is an example of behavioural engineering on a macroeconomic level. Through pricing, governments are attempting to push whole industries and consumer behaviour to a sustainable path.

A well-known case that is often cited as an effective incorporation of environmental pricing into welfare protections is Sweden which in 1991 introduced a carbon tax and has since then cut down on emissions and at the same time maintained economic growth.

By contrast, the 2018 rise in fuel tax in France sparked the Yellow Vest unrest, which exemplifies how environmental taxation may be politically disastrous in the absence of distributive effects.

It is clear as the lesson goes that the only way in which carbon taxes can be a politically and normatively sustainable practice is through the implementation of revenue recycling, social cushioning, and trust of the people. Without these protective measures the environmental nudges would be seen as forceful economic impositions.

Luxury Taxes: Symbolism and Distortion of the Market.

Luxury taxes are intended to tax conspicuous consumption and bring about vertical equity. But policy history warns against blind use. In 1991, the luxury yacht tax in the United States brought in very little revenue and destroyed domestic production and was ultimately repealed. This episode shows that symbolically motivated behavioural taxation may cause unintended economic inefficiencies.

Fiscal signalling is not an alternative of careful incidence and elasticity examination.

The Expansion of Behavioural Taxation.

Besides traditional evils, behavioural taxation is now being applied to include:

– Plastic packaging levies
– Urban congestion pricing
– Processed food and sugar taxes.
– Taxation of platform ecosystems-digital services.

Taxation is no longer a fiscal infrastructure, but it is a default regulatory tool that could determine the ways of consumption, ethics towards the environment and social norms. The danger is in slow normalisation. Once the fiscal tools are used systematically to rectify life style, nearly all the socially undesirable behaviors become a taxed issue instead of being discussed democratically.

Nudging over Coercion: A Normative Framework.

An acceptable behaviour tax ought to meet five criteria:

1. Proportionality -this implies that the tax should be proportional to demonstrable harm.
2. Transparency: the objectives of the regulation should not be a secret of revenue.
3. Distributive fairness- it should be mitigated against regressive impacts.
4. Empirical grounding – effectiveness of behaviour should be evidence based.
5. Democratic legitimacy – policy should not be subject to criticism or avoiding responsibility.

Once good alternatives disappear under the pressure of over-fiscal liability, persuasive manipulation turns into force. The market manipulation that gets rid of meaningful choice is incompatible with the assumption of libertarian paternalism.

Constitutional Implications

Behavioural taxation involves the involvement in core constitutional values that include equality, non-arbitrariness and proportionality, although the legislatures have wide discretion over fiscal matters. The judicial review will be normatively warranted when fiscal actions have a disproportionate impact on vulnerable groups or act as a proxy prohibition. The authority to impose tax is not theoretically unlimited even though the power is broad.

The fiscal government of any constitutional democracy should be attached to a rational nexus and distributive fairness.

Conclusion: The Fiscal Power of a Behavioural State: Its Limits.

Taxation has always been an influential factor. But in its behavioural form it is transformed into a power.

Personal habits are realigned by the Sin taxes. Carbon taxes reform the economies. Luxury taxes give an indication of redistributive morality. Fiscal policy in all cases goes beyond state funding to mould citizen behaviour.

Behavioural tax is not necessarily illegitimate. Being evidence-based with distributive safeguards, it can address market failures and improve the common good. The example of Sweden with its carbon model and the UK with its sugar levy can serve as an explanation of this potential.

Nevertheless, the broadening of financial means to the use of life, consumption, and morality requires virtuous self-control. A democratic state should distinguish between pricing externalities and pricing disapproved behaviour. Where taxation replaces prohibition, where fiscal responsibilities practically drive meaningful choice out of business, the boundary between nudge and coercion becomes blurred.

The ongoing dilemma facing policymakers then is not on whether taxation can influence behaviour its ability is not debatable but to make fiscal power proportional, transparent and accountable rather than being covertly ductile. Under behavioural government, the question has changed to be not how much revenue can be raised by taxation but how far must the power to raise taxes enter the domain of human choice?

References

• Arthur C. Pigou, The Economics of Welfare (4th ed. 1932).

• Richard H. Thaler & Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness (Yale Univ. Press 2008).

• World Health Org., WHO Report on the Global Tobacco Epidemic (latest ed.).

• Julius J. Andersson, Carbon Taxes and CO₂ Emissions: Sweden as a Case Study, 11 Am. Econ. J.: Econ. Pol’y 1 (2019).

• OECD, Taxing Energy Use 2019: Using Taxes for Climate Action (OECD Publishing 2019).