Most taxes discourage economic vitality — taxing sales reduces consumption; taxing wages discourages work; taxing interest reduces savings — and so on. There is one exception to the impact of taxation: taxing a base with an inelastic supply. Such taxes engender growth and economic vitality.1 Here the greater the tax the more the economic vitality. Recently Professor Joe Stiglitz has written that
One of the general principles of taxation is that one should tax factors that are inelastic in supply, since there are no adverse supply side effects. Land does not disappear when it is taxed. Henry George, a great progressive of the late nineteenth century, argued, partly on this basis, for a land tax. It is ironic that rather than following this dictum, the United States has been doing just the opposite through its preferential treatment of capital gains.But it is not just land that faces a low elasticity of supply. It is the case for other depletable natural resources. Subsidies might encourage the early discovery of some resource, but it does not increase the supply of the resource; that is largely a matter of nature. That is why it also makes sense, from an efficiency point of view, to tax natural resource rents at as close to 100% as possible.
Those are the opening paragraphs of Bill's December, 2012, testimony in Albany, New York. The rest can be found here. It is 6 pages, and worth your time.
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