Regulatory taxation is developing, but not yet mainstreamed.
Yonah ’11 [Reuven Avi; 2011; Irwin I. Cohn Professor of Law and Director of the International Tax LLM Program at the University of Michigan Law School, PhD in History from Harvard University, AM in History from Harvard University, JD from Harvard Law School; Accounting, Economics, and Law, “Taxation as Regulation: Carbon Tax, Health Care Tax, Bank Tax and Other Regulatory Taxes,” vol. 1]
Taxation has two well-known goals.5 Undoubtedly, as suggested by the first quotation above, the first and most widely accepted one is to raise revenue for necessary government functions. Although there is a broad debate about which governmental functions are truly indispensable, most commentators would agree that raising revenue is an indispensable feature of governments and that a government that is unable to collect taxes, like the Russian government almost was in 1998, is unlikely to survive.
The second and more controversial goal of taxation is redistribution. Most developed countries see the tax system as a way to redistribute income from the rich to the poor. The desirability of redistribution has been controversial, but most commentators agree that if redistribution is a legitimate government goal, then taxation may be the most effective way to achieve that goal.
But taxation has a third goal, which has not been noticed as widely: a regulatory goal. In most developed countries governments use the tax system to change the behavior of actors in the private sector, by incentivizing (subsidizing) activities they wish to promote and by disincentivizing (penalizing) activities they wish to discourage. This is the point of the second quotation above.
This regulatory function of the tax system is quite well established. Indeed, it can be argued that some types of taxes, such as Pigouvian taxes (designed to deter certain activities by forcing private actors to internalize their social costs), are entirely regulatory in nature. In other cases, such as the corporate income tax, much of the complexity of the current tax structure stems from the government’s attempting to use it to achieve regulatory aims. If the US income tax was purely a revenue raising and redistributive tax, most of the complexity of the current tax code could be eliminated.
Precisely for this reason, most commentators have decried the use of taxation for regulatory purposes. Regulation, they argue, should either be done directly, or if it is desirable that it be done via subsidies or penalties, those should be delivered directly as well by other government agencies. The IRS should be left to its proper role of collecting revenues, with a possible side role in achieving redistribution.