Comments on Possible Tactics

Summary:
    If tax penalty is imported on goods that are price inelastic, consumer will be the victim instead of the innovation


In The Future of Technological Civilization, Prof. Woodhouse introduces a way for government to steer the pace of innovation by tax-paying: 
    1. Leave the tax credits in place for the highest-priority innovations;
    2. Continue allowing tax deductibility of expenses associated with medium-high priority innovations;
    3. No tax deduction for development, manufacturing, and distribution costs of unimportant innovations; 
    4. Import tax penalties for especially destructive or anti-social innovations.

I was amazed when reading this part. This strategy, so practical and detailed, was the federal steering policy that I wanted to come up with but wasn't able to. In this week's discussion section, we brainstormed about who should be selected in determine the priority of a innovation, which is one of the crucial parts of this tactic. Here I am going to talk more about the tax penalty part, using some model I learned in economics class. 

Tax burden is distributed between buyer and seller. The graph above shows when demand for a product is relatively elastic (means if the price of a product has a slightly change, the demand for it will change significantly. e.g. housing, luxury clothing, cars). In this case, tax penalty goes largely to the seller, in other words, the innovation, and therefore the business will pay considerable additional taxes for each dollar devoted to innovations considered undesirable. 

For example, if a company wants to design a sports car that is not environmental friendly, it will receive a serious tax penalty which the company has to afford the most of it. After balancing the tax costs and the future benefit from the car, the company may decline this project, which is the initial goal of Woodhouse's tactic. 

The graph above shows another case when demand for a product is relatively inelastic (means even if the price of a product change significantly, the demand for it will not be influenced a lot. e.g. gasoline, cigarette, food). If tax penalty is placed to this product, consumers will be the victim because they will have to pay the most share in price increased. The destructive itself, as a result, will not suffer very much from this penalty. 

All kinds of accessories can exemplify this situation well. Suppose a gasoline company wants to upgrade its ground shipping device at the expense of bearing a chance of letting an undesirable chemical penetrate into gasoline. Mixed chemicals in gasoline might accelerate the aging of engine. It could even lead to some serious engine problems, causing accidents on the road. If tax penalty is added to this company, which will proportionally slightly increase is cost of operation, drivers and car owners will be the victim. The gasoline company will just simply raise the gas price to cover its loss in penalty; however the consumer will still buy it, same amount with a proportionally higher price, because they need gasoline to drive to work, to home, regardless of the price. 

In conclusion, putting the price elasticity of demand into consideration, Woodhouse's tactic would be even more complete, practical and efficient.