There are a variety of clever way to get something by making tax law more complicated. In general, I think we aren't skeptical enough of increased bureaucracy of the tax law and as a result our tax laws are way too complicated.
Whenever one advocates a way to make tax law even more complicated, I think it's important to be explicit about the cost of the increase in tax law complexity.
Hmm. The change here is from "illegal" to "legal but taxed". So it seems to me that people should only ever be exposed to this additional tax complexity of they "opt in" by doing something they previously couldn't?
Kamala campaigned on making more price gouging illegal than currently is illegal. Thinking that this will only ever apply to the type of price gauging that was previously illegal ignores how the politics are likely to play out.
This was one of the places where I really disliked her campaigning was doing (even though I preferred her overall). The basic proposal (though they were vague) was to make a federal law that would act similarly to the various existing state laws, but then she campaigned as if it would do something about current grocery prices. Which doesn't make sense: the grocery price changes really don't look like they're covered by any of the state laws, and a law that did cover them would be a huge (and quite bad) change.
Is your model that what's covered by "price gouging" would end up expanding if a proposal like mine were implemented?
Yes, what's covered by price gouging would likely expand.
Politicians who want to balance the budget will find it easier to argue to expand the revenue through expanding what's covered under price gouging than to raise income or sales taxes. Opposition to the proposal would also be harder than to oppose what's currently covered as evil socialist price setting by the government.
I'd be happy to give you good odds on, conditional on this policy being enacted, it not expanding to comprise more than 0.1% of total US taxation.
If items are only available at "gouged" rates, then this will make them more expensive. That is, this tax will fall only on people in the emergency zone, and specifically those who are desperate enough to buy goods at these elevated costs. Since demand is very inelastic under these circumstances, the tax burden will fall almost entirely on the consumer.
Another approach might be to temporarily raise taxes everywhere except the emergency zone on these goods. For example, if bottled water falls under a temporary excise tax during a hurricane everywhere except the hurricane zone, that incentivizes sellers to bring bottled water to the hurricane victims.
I agree this would certainly be better than an outright ban on price gouging, though I don't understand the advantage over not treating disasters differently.
The larger the tax base, ceteris peribus, the less distortionary the tax, so if you want more money for the poor during disasters, just raise normal sales/income/or property tax rate an amount to equal the revenue needed to help poorer people in disasters, and then don't have the more heavily distortionary high tax that only applies to disasters. As an added plus, doing it this way avoids a high tax when adherance is lower and may be more popular than an onerous tax when goods are at their most expensive.
The thing that I think would be overall better (no price controls) is politically unpopular, strongly socially discouraged, and often illegal. This is a proposal that tries to move us in a direction I think is better, while addressing some of what price gouging opponents dislike.
Called Windfall Tax
Random examples:
VOXEU/CEPR Energy costs: Views of leading economists on windfall taxes and consumer price caps
Reuters Windfall tax mechanisms on energy companies across Europe
Especially with the 2022 Ukraine energy prices, the notion's popularity spiked along.
Seems to me also a very neat way to deal with supernormal short-term profits due to market price spikes, in cases where supply is extremely inelastic.
I guess, and some commentaries suggest, in actual implementation, with complex firm/financial structures etc., and with actual clumsy politics, not always as trivial as it might look on first sight, but feasible, and some countries managed to implement some in the energy crisis.
This is a novel (to me) line of thinking, and I'm happy to hear about it! I'm not sure it's feasible, as one of the things the public hates more than price increases during a shortage is higher taxes any time.
That said, the REVERSE of this - slightly raise taxes in normal times, and make emergencies a tax holiday, might really work. This gives room for producers/distributors to raise prices WITHOUT as much impact on the consumers. Gets some of the good bits of market pricing, with less of the bad bits (both limited to the magnitude of the tax change relative to the scarcity-based price change).
one of the things the public hates more than price increases during a shortage is higher taxes any time
Maybe? Though in this case what we're taxing is the disliked activity--price increases during a shortage. So possibly this would be popular, like taxes on alcohol, tobacco, or gambling?
make emergencies a tax holiday
The main good bit of market pricing this would miss is the demand reduction and reallocation caused by the higher prices. I might be willing to buy 100lb of ice at $1/lb but only 10lb of ice at $5/lb: it's easier for me to just dump a bunch of ice into my fridge, but if I prioritize and put the important stuff into a cooler I can make do with much less. If the government is subsidizing suppliers to keep the price at the pre-disaster rate I don't have this incentive to ice more efficiently.
The main good bit of market pricing this would miss is the demand reduction and reallocation caused by the higher prices
True. The main thing the "tax a price increase" misses is that it mutes the supply incentive effects of the price increase. I'd need to understand the elasticities of the two (including the pre-supply incentives for some goods: a decision to store more than current demand BEFORE the emergency gets paid DURING) to really make a recommendation, and it'd likely be specific enough to time and place and product and reason for emergency that "don't get involved at a one-size-fits-all level" is the only thing I really support.
This can be effectively implemented by the government accumulating tax revenues (largely from the rich) in good times and spending them on disaster relief (largely on the poor) in bad times. It lets price remain a signal while also expanding supply.
I'm never sure if people do not see the logical case for price control in a crisis, or if they see it but believe it doesn't apply.
In any case it's probably worth it to share what I think is the (rationalized, sanewashed) reasoning against price gouging. The central example to keep in mind while reading this is a peasant during a famine in 15th-century France.
I think the above reasoning mostly holds for the central example it's meant for. It seems obvious that all the differences between 15th century France and 21st century America push in the direction of making it less likely to be correct. But it's not obvious (to me) that these differences are enough to invalidate the argument entirely - I haven't really try to model it properly, so I don't have a strong opinion one way or another.
But I'm not sure it matters politically, since it's not like this is what price control enthusiasts think when they argue against price gouging, the logic has been baked into cultural expectations of 'fairness'.
Back to your proposition, I think if anything it would make things worse. From the point of view of someone on the streets during a disaster, the state would just be another rich and powerful actor driving up the cost of basic goods.
Taxation is better than a ban, but in this case it remains an attempt at price control. "Documented" cost increases is doing a lot of work. Better than "vibes about price," but it is the same deal: the government "knows better" what prices should be than what is revealed by the market. I'd argue that if the government doesn't like what the market is yielding, it can get involved in the market and help expand supply itself, which we see governments attempt during disaster relief already.
There is a very good Rationally Speaking podcast episode about this - one solution that is proposed by economist Ami Glazer is to not restrict pricing, but then issue vouchers or cash to those who need it. Glazer brings up that this is how the food stamp system works at present
That episode goes into other topics around this issue, like hoarding, rationing, positive externalities (eg. face masks protect not just the wearer but those around them)
Just to make the math easy, let's suppose the gouging tax is 50%.
The air purifiers problem seems like not a big problem? If they are normally "worth" $150 and you value having them at $300, you could post them up for sale at $450. Then, if someone really needs them, you get your $300, they get their air purifier, and $150 goes to disaster relief. This tax only prevents the trade if the buyers would buy them for $300 but not for $450, which limits the amount of deadweight loss here to a maximum of $149, rather than potentially unbounded deadweight loss under current policy.
A new air purifier is $150, but mine have been hanging around my house collecting dust and viruses; I don't think a used air purifier would have gone for $150 pre-emergency. Let's say the used value was $75. To get the same benefit as selling for $300 with no surcharge I'd need to charge $525: 2x my $300, less the $75 used value.
But I agree: the air purifiers situation is still improved when moving from the status quo (illegal) to the proposal (taxed). My point with that footnote is that the proposal still does some to discourage supply increases relative to a world without this regulation.
If you're interested in this problem you should check out this preprint, written by a former colleague of mine:
https://bpb-us-e1.wpmucdn.com/sites.northwestern.edu/dist/1/2465/files/2025/02/Price-gouging.pdf
It gives a nice economic model of price gouging, elasticity, and inequality, and presents a rigorous argument for why the typical utilitarian welfare theorems do not hold in the price gouging setting.
Their definition of "Price gouging occurs in a competitive market when lowering the price from the market-clearing level would increase total Utilitarian welfare" is a bit sneaky: it means that any time I say "here's an example of where price gouging helps improve disaster response" they can just say "but that's not real price gouging, since a lower price wouldn't increase welfare".
It also doesn't look to me like the paper's approach gives a good framework for thinking about long-term investment incentives and preparation for future disasters, or people selling/renting possessions they wouldn't normally put on the market sell (air purifiers, renting spare rooms).
The paper's division of circumstances into price gouging vs not isn't a good match for the real world, and leads them to support policies like the current ones that normally don't do anything and then suddenly make large impacts in a disaster. Instead I'd like to see recognition that it's hard to determine welfare-maximizing pricing in real time and that price signals can reach very far, and instead use a mechanism that allows price increases to occur but redistributes some of the profits.
The windfall tax is counterproductive for a few reasons:
We can do better if we throw away the notion that money person A spends trying to buy disaster relief should directly fund disaster relief for person B. It's a disaster, we should not be taxing disaster relief!
The recent energy crisis in Germany offers a good alternative. When Russian energy imports were disrupted (because of the Ukraine war) the government:
1) Allowed the market to set energy prices
2) Made direct cash transfers to energy consumers, based on their pre-crisis energy consumption
3) Let consumers keep cash even if they reduced their energy usage
If you could reduce your usage effectively you received a reward for helping ease the shortage. If you couldn't you had some extra cash to help you cope with the shock. And the market's price signals were left intact. In the end those who could most cheaply reduce energy usage did so, those who could not were able to smooth their income, and the invisible hand worked hard to get Germany more energy.
You can read more about the shortage on marginal revolution.
It's trickier to set this sort of transfer up for a natural disaster (how much should you transfer, what if it's unexpected, what if payment rails are down) but perhaps it's a capability FEMA look into.
In the aftermath of a disaster, there is usually a large shift in what people need, what is available, or both. For example, people normally don't use very much ice, but after a hurricane or other disaster that knocks out power, suddenly (a) lots of people want ice and (b) ice production is more difficult. Since people really don't want their food going bad, and they're willing to pay a lot to avoid that, In a world of pure economics, sellers would raise prices.
This can have serious benefits:
Increased supply: at higher prices it's worth running production facilities at higher output. It's even worth planning, through investments in storage or production capacity, so you can sell a lot at high prices in the aftermath of future disasters.
Reallocated supply: it's expensive to transport ice, but at higher prices it makes sense to bring it in from much farther away than would normally make sense.
Reduced demand: at higher prices people who would normally buy ice for less important things (ex: drink chilling) will pass.
Reallocated demand: if you have a chest freezer full of food, you get more benefit from a given quantity of ice than I would with a mostly empty fridge. All else equal, you are willing to pay more for ice than I am.
On the other hand, raising prices in response to a disaster is widely seen as unfair:
Allocation by price is never great for people who have less money, but a disaster makes this existing inequality more painful.
Store owners are on average richer than customers, so profits here are moving wealth from poorer people to richer ones.
Normally prices are kept in check by people shopping around, either by observing prices in a range of places or by talking with friends. These are both disrupted in disasters, which would likely allow sellers to charge more.
So raising prices in emergencies is generally strongly socially discouraged and often also illegal. Stores quickly sell out, there's no increase in supply, and allocation is relatively arbitrary.
Is there a way to get the benefits of keeping prices responsive, while mitigating some of the unfairness?
Consider the introduction of congestion pricing in NYC. Charging money to keep people from overusing a common resource is a traditional economics solution, reducing traffic jams and allowing streets to move more people in less time. While this even helps people who can no longer (or never could) afford to drive, by speeding up buses, it is still often considered too unfair to implement. The NYC approach, however, of charging drivers but then using the money to fund public transit, resolves enough of the unfairness to be put into practice.
What could something similar look like for disasters?
Sellers can, as in normal times, choose what prices to offer their goods and services at.
Price increases beyond documented increases in the cost of doing business are taxed at some high rate. Something in the range of 65%: high enough that most of the profits are going to the public, but where it's still worth sellers putting in serious effort to increase supply.
This tax money goes to help people affected by the emergency.
While this still has some of the downsides of existing price gouging laws [1] I think it's quite a bit better than the status quo.
The biggest advantage is that if the government disagrees with you about how much of your price increase is due to increased costs, it can be sorted out later. There are famous cases where someone tried to increase supply in a disaster by doing something unusual (ex: renting trucks to drive generators or ice hundreds of miles into hurricane-affected areas) and then were prevented from selling. Much better to have a system where we all agree they're good to go ahead and sell, and tax disagreements can be worked out afterwards. It still doesn't fully remove the risk that the government will disagree with you and make your efforts not worth your while, but at least you're arguing with a judge in a courtroom where you can present evidence, and not a cop in front of a mob.
It also:
Gets us some of the benefits of flexible prices, at least to the extent that sellers believe they'll be able to convince a judge about their increased costs.
Helps shift culture in a direction of accepting and expecting prices to change based on conditions.
Transfers money from rich people (who pay inflated prices) to poor people (who receive disaster relief).
Would people be more ok with responsive prices in emergencies if the money were primarily going to disaster relief?
[1] I've previously written about discouraging
investments, but another issue is not handling cases where people
might be convinced to sell something they wouldn't normally. For the
latter, imagine an empty nester couple living in a 3BR in LA. They
prefer to have the house to themselves, but for $5k/month would be
willing to rent out their guest room. In normal times no one would
pay $5k, so they don't bother putting it on AirBnB. With the
emergency, however, there might now be people willing to pay this
much. There's no way for the owners to demonstrate increased costs,
though, so it would probably be illegal for them to list it for $5k
both under current laws and with my proposed change above.
Similarly, say I have a bunch of $150 air purifiers because I'm especially concerned about infectious aerosols, and then with a nearby wildfire stores all sell out. By default I would keep them and enjoy my clean air, but I'd be willing to sell a few for $300 each. That would benefit both me and the buyers, but same issue.