Topic 2022

How can we set Taxes, instead of Lockdowns, in order to Reduce Deaths during Pandemics?

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Governments have a large role to play during pandemics given that disease transmission leads to an externality problem. Simply put, viruses like SARS-CoV-2 can be spread easily from one person to another. The mechanism is exactly the same as in the case of climate change: an externality problem exists with carbon emissions since such emissions from one factory can endanger the lives of many, even though they may not have received any gains from the emission activity or chosen to undertake it themselves.

In the presence of negative externality problems, economists prescribe two standard tools: taxes (price instruments) or quotas (quantity restrictions). As a result, a carbon tax is a price instrument and a ceiling/cap placed on the quantity of CO2 emissions is a quota or quantity restriction. When it comes to pandemics, lockdowns are therefore quantity restrictions because Governments can use them to restrict the quantity of social interactions among people. However, an important policy tool in the fight against pandemics can be to induce monetary costs on social interactions with the help of taxes. An important benefit of such taxes is that Governments can collect the funds and then redistribute them among people. A recent paper from economists at the University of Chicago, Princeton, and the London School of Economics looks into the technical and theoretical aspects of such a tax.

The objective of this YES! Team would be to work on a design for a tax on social interaction during pandemics. As a first pass, the team would consider disease transmission data from COVID-19 and focus on a country level case study, for example Germany or the United States.

Our main task would be to arrive at a policy design that Governments can use to levy taxes on externality generating behavior such as social interactions during pandemics, for example going to the cinema or restaurants, meeting friends, attending sporting events at stadiums, etc. Some ideas for generating taxes in this context can be designing taxes through bluetooth tracking via apps such as the Corona-Warn in Germany or taxing those goods which enable recreation and social interaction, such as meals in restaurants, tickets to sporting events, or airline tickets. Another important task for the YES! Team would be to arrive at an estimate of how much tax revenue can be collected under different scenarios and different levels of social interactions. This would allow for quick analyses on how well the tax revenue can be redistributed.

The team would have to address public attitudes to taxes on social interactions. At face value, lockdowns can economically hurt the poor much more than the rich. The same goes for taxes. Taxes can be more easily paid off by the rich than by the poor. Moreover, people can also have questions on data security: therefore, this has to be very seriously taken under consideration too.