Even Potheads Care About Taxes

With more States legalizing recreational and medicinal marijuana I find it interesting to see the unforeseen consequences and results occurring therefrom.  As a libertarian I believe that most people should be able to make up their mind on most decisions.  Like most things, I am not an extremist in my view and think all laws should be abolished, but there are certain instances where I just don’t get why people care.

For example, I can’t for the life of me figure out why people are against prostitution.  Two consenting adults entering into a contract for services.  If they aren’t adult or its not consulting then you would have laws and penalties just like we do today (hell they may be even more effective if the policies didn’t have to stop the former situation).  Similarly, I never understood why marijuana was illegal.  It seems relatively harmless when compared to what someone can do with a legally purchased bottle of booze.  I always thought, legalize it and tax the hell out of it!  Well, as of this blog post two States have gone that way (Washington and Colorado although the laws regarding marijuana legality are changing at a rapid pace).

Well it turns out, the “legalize it and tax the hell out of it” mantra that I often spouted may have some problems!

What is Tax Neutrality and How does it Apply to Marijuana?

There is an economics doctrine known as Tax Neutrality which is explained by Jason Furman much better than I could ever imagine in his testimony to congress about general tax reform a few years ago,

The primary purpose of the tax system is to raise the revenue needed to pay for government spending. As such, the goal is to raise this revenue without distorting the decisions that individuals and firms would otherwise make for purely economic reasons. For example, an efficient economic system people would choose between chocolate chip cookies and oatmeal cookies based on their own personal tastes and the costs of these products. If policymakers imposed a tax on chocolate chip cookies but not on oatmeal cookies the result would be that and possibly end up consuming the less desirable cookie because it was cheaper.

neutralities in the tax system also lead people and firms to devote more socially wasteful effort to transforming the form or substance of their activities to reduce their tax payments, for example by hiring lawyers and accountants to structure financial transactions in a manner that minimizes tax liability.

In some cases deviations from a neutral tax system are unavoidable. It is widely agreed that tax payments should increase with some measure of well-being, like income, consumption or wages. One inevitable consequence of this agreement is that the market consumption of goods and services will be taxed, either directly (as in a consumption tax) or indirectly (as in an income or wage tax, both of which tax the money used to purchase consumption goods). Time spent is not taxed. As a result, people will which is equivalent to a reduction in labor supply. Whether this is a quantitatively large or important effect is another question, but at a conceptual level this is a way that the tax system departs from the neutral ideal.

In other cases, deviations from a neutral tax system reflect the goals of policymakers. The tax system is designed to encourage home ownership, contributions to charity, health insurance, and higher education and to discourage smoking and drinking alcohol.

Well, Colorado’s recent experiment has brought the idea of tax neutrality truly front and center.

Imagine if you will, you are a regular user of Cannabis in Colorado, and you already had a prescription to obtain your drug of choice.  Every time you went and bought said legally prescribed drugs you paid a tax of 2.9%…would you really rush out to change your purchasing habits to pure recreational which carries a 25% tax?  Probably not and that is what Colorado is finding out.

According to CNN Colorado,

expected to raise $22.7 million before July from special sales taxes on recreational marijuana, but state economist Larson Silbaugh is skeptical. About $3.4 million was raised in January and February, the only months for which sales have been reported so far.

***

The forecast was cut because fewer people switched from buying medical marijuana to buying recreational marijuana than was first expected, Silbaugh said. Medical marijuana users need to get approval from a doctor to buy the drug, but the state taxes those sales at just 2.9%. Recreational marijuana is taxed another 25%.

The article was written in March 2014, and it looks like March was a good month for pot sales, but the problem of unintended consequences is still readily apparent when you try to control a population through taxes.

8 Responses to Even Potheads Care About Taxes

  1. Congrats on saying a few things that are true but some people may find “offensive” or disagree with. I think we should all be able to talk or have opinions about controversial subjects and receive positive or negative feedback and learn from it.

    With that in mind in response to your first paragraph, who decides on the decisions that are not included in your “most decisions” comment? That can be a big problem. As you mention you are a Libertarian”, you must know a gentleman named Bill Mahar and his show “Real time with Bill Mahar”. When a person like him is the one making these decisions for others that’s a big problem. He himself for example comes out and says sometimes “smarter” people need to make little white lies because “the great unwashed” doesn’t really know what’s best for them. His “progressive” values are the only ones that are right and screw everyone else. That can also be dangerous. I think we need a whole new way to elect governments and take the “right and the left” out of it. Find a common sense based common ground way of governing.

    I totally agree on your prostitution statement. As long as its not forced and a minimum age is strictly enforced. Is it really worse that someone lives in poverty or has a under the table below minimum wage job working quite like a slave possibly in horrible conditions in many jobs? (sometimes subjugated into working slaves by their own countrymen) They can usually make a full days pay in 1 hour, some depending on ability, far more then that? In the real world not everyone can have a $75,000.00 a year job, so their are alternatives… Contrary to popular belief they are also treated very well by most of their clients? You only hear about the bad stories from a small group of the people in this trade. Rarely the other side.

    As for your last comment about taxation. Too much taxation leads to tax avoidance. Proof of that is the growth of “underground” businesses. The more they tax cigarettes for example, the more people run to illegal brands. When you see blatant forms of government waste and inefficiencies, and handouts to people who don’t really seem to deserve them, it also drives you to avoid paying taxes in any way you can. How do you find a practical balance? Tax pot too much, people will grow their own or find other suppliers at a better price. Isn’t that again simply common sense supply and demand?

    This was a great post from you today.

    • Paul N – you are correct, sir.

      True libertarianism is quite literally everyone makes their own decisions about EVERYTHING, as long as it does not directly impact another (see non-aggression principle).

      Can’t believe they thought to tax pot at 25%. Typical progressive bulls***.

      • Dividend Warrior,

        You are 100% correct that is tore libertarianism. I can’t go that far, I tend not to get too extreme with almost anything in my life…politics included.

      • I just read the “NAP” Wiki. Well sort of…

        I feel more confused then when I woke up this morning. It kind of explains a few things though why no one can make a decision.

    • Paul,

      A ton of great points, so I hope you don’t mind the extra long response.

      “Congrats on saying a few things that are true but some people may find “offensive” or disagree with. I think we should all be able to talk or have opinions about controversial subjects and receive positive or negative feedback and learn from it.”
      – It is one of the reasons I chose to keep this blog anonymous from friends, family and ABSOLUTELY WORK for the past 5 years. It feels like the one place I can come and just put whatever I want out there with little reprisal.

      “who decides on the decisions that are not included in your “most decisions” comment? That can be a big problem”
      – Isn’t that always the problem with every democratic or republic? Currently we have a system where it just feels wrong…we have the far right telling gays they shouldn’t be allowed to get married while the far left says its okay to redistribute every dollar they can. But that isn’t a new problem…every free-type gov’t since the dawn of Greece has had to deal with similar type issues of what “most” means.

      “I totally agree on your prostitution statement.”
      – Most arguments against my prostitution feelings are either religious based or go right to the illegal sex trade neither which I feel have a place in the discussion. Legalize it and tax the everything hell out of it!

      As for your last comment about taxation. Too much taxation leads to tax avoidance. Proof of that is the growth of “underground” businesses.
      – Completely agree. It is simply a balancing act and always will be. Is a 25% tax, I am not even sure it is. I just think they need a new crop (see what I did there?) of smokers that find that 25% is better than seeing a doctor and lying. Alternatively, all they would have to do is start questioning doctors that are a rubber stamp. One crack down of this sorts and tax revenue would SOAR.

Leave a reply


+ 9 = 10