Karl raises some good points in his response to my post. Namely, just because right now there is a lot of obvious low-hanging fruit in terms of efficiency and addressing externalities; that is not always going to be the case.

However, I would like to keep pointing out that for a given level of taxation, taxes on consumption are likely to raise more revenue than taxes on production. In reality, it is likely that as we institute a broad-based tax on carbon (I still think the financial services tax is wrong on merits), we could probably trade off by relaxing income taxes, instead of removing them. And, due to irrationality, it’d most likely end up being the personal income tax that is the target. It is definitely easy to envision how both converting emitting rights (and other environmental rights) into property combined with taxes could come to dominate Federal revenues in a short amount of time — allowing for even the abolishing of income taxes (although again, personal would likely have to come before corporate or capital gains).

However, beyond the well defined area of VAT, Payroll, and Carbon taxes, it the landscape does become quite gray. Pigouvian taxes are meant to deal with externalities, but what many progressives identify as externalities are hardly so. Smoking, for instance. Or “unhealthy” food. Neither of these things, under careful cost-benefit analysis, cost the public any money at the margin. Indeed, both may actually save the public money in the long run. These are cases of (wishful?) paternalism masquerading as externalities.

However, as I’ve argued in a post that I can’t seem to find anymore, you could easily raise 8-10% of GDP while making the Payroll tax more progressive (i.e. exempting the first $25,000 of income, removing the cap, and raising the highest rate to around 20% [total]), and I can imagine that a VAT+Carbon tax could easily raise another 10% (at a BOTE 20% combined rate)…and you are already at the historical trend.

Thus, there is quite a bit of room to maneuver from simply these three taxes alone. Perhaps these are the only taxes that the Federal government will need (even with the inevitable public health care)…and we can leave it to the states to fight about what “paternalalities” to go after.