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April 15 is tax day, which is quite possibly the worst day out of the year for a number of people hit hard with income taxes. But this week’s topic has nothing to do with the current income tax structure, but rather, a viable alternative source of revenue for the government.

Remember several years ago when fiscal conservatives were touting the benefits of a national sales tax in lieu of our complicated income tax system? The concept was infinitely more simple: slap on a federal sales tax of anywhere between 8% – 10%, but exempt certain “goods of necessity,” such as milk, bread, some meats, medicine, etc. Not surprisingly, many argued against this plan. But only two camps proffered a solid rebuttal. First, the number crunchers pointed out that a federal sales tax would be revenue negative compared to the current system – despite its simplicity, the sales tax would simply not raise as much revenue to support the federal government. Second, the commercial interests pointed out that overall consumption would decrease, making it more difficult for American businesses – with their primary markets in the U.S. – to compete on a global scale due to the loss of revenue at home. It’s a good thing that cooler heads prevailed, and this idea of a national consumption tax never took off.

But as is so often the case, the detractors never bothered to look at the utility of the fundamental principle behind the sales tax: taxes can affect patterns of consumption. An additional 10% tax would make everything 10% more expensive for consumers. This in turn means that consumers can simply buy less.

So what has surprised me is why no one is giving serious thought to two seemingly obvious offshoots to the sales tax, which though not substitutes for an income tax, can still be used. The first would be legalization and taxation of currently illegal consumption habits. The second would be a wider use of targetted consumption taxes to curb what is destructive consumption patterns of consumers.

As to the first idea, the best example is pot. There is a segment of society that will work all day just to be able to have enough cash to purchase a dime bag. The profit from the dime bag goes to suppliers in an illegal market. The purchase price reflects not only production costs, but also the risk assumed by the supplier of stiffer legal penalties. So why doesn’t the government simply legalize a number of drugs and tax them enough to result in roughly the same amount of consumption occurring today? The government can eventually use the added revenue from taxation to actually win the drug war by applying those funds to rehab and anti-addiction programs. Essentially, tax pot enough so that the cost of a dime bag stays the same (not more, because if the cost increases, a wide spread illegal market will still exist), but the government essentially takes part in the profit. The government would also benefit by reducing the resources needed to police the current system.

This idea could work for a number of other illegal habits. For example, legalization and taxation of prostitution could result in a decreased risk of the spread of STDs as well as additional revenue to the government. I won’t go into the full list here, but this idea can work for a number of different habits.

The second offshoot idea is quite similar. Currently, a number of perfectly legal types of consumption are really bad for you or for society. Some of them – like cigarettes and alcohol – are taxed, but just not taxed to the point of having a drastic impact on consumption patters, in part due to the addictive nature of smoking and drinking. Other types of consumption are not really that addictive, and so even moderate taxation can have a significant impact on consumption patterns. You want brand new plastic or paper bags for your groceries? Ok well then the government will tack on an extra 5% tax on your purchase. You don’t want to pay that? Well then bring your own plastic or paper bags and reuse them. You want to eat at McDonald’s every day for lunch? Well what if a value meal cost $7 instead of $5, and you could go to a mom and pop Thai restaurant and get a quick order of vegetable curry and steamed rice for $6?

Essentially, non-addictive consumption patterns can be shaped much more successfully by consumption taxes. The revenue raised from consumption taxes can either be used to decrease income taxes or for other government programs. The point of this discussion, however, is not what the government will do with its extra money, but whether the “legalize and tax” and targetted taxation ideas should be seriously considered at the federal level.

So what do you think?