Lisa — I do understand your surprise, especially considering the way the argument was framed: Mr. Obama, you need more revenue; here is where to find it.
That discomfort aside, I think the argument is still valid and libertarian.
As everyone knows, I am not wild about taxes (no matter what their purpose is). That being said, I understand that taxation is a byproduct of legalization. In other words, it’s the political price we have to pay for legalization of activities that are taking place anyway.
One can be in favor of legalization without being in favor of the activity itself, or while being aware that there is a cost (sometimes very high) to engaging in the activity. I am more conservative on social issues that some libertarians in that I don’t see drugs, gambling, and prostitution as good things per se. However, as an economist, I understand the tremendous cost we pay by banning an activity.
Back in March, Harvard University’s Jeff Miron had a very good article spelling out the costs of prohibition. He wrote:
Prohibition creates violence because it drives the drug market underground.
This means buyers and sellers cannot resolve their disputes with lawsuits, arbitration or advertising, so they resort to violence instead.
Violence was common in the alcohol industry when it was banned during Prohibition, but not before or after.
Violence is the norm in illicit gambling markets but not in legal ones.
Violence is routine when prostitution is banned but not when it’s permitted.
Violence results from policies that create black markets, not from the characteristics of the good or activity in question.
As Miron also noted, legalization is the right policy for many other reasons. Among other things, prohibition often corrupts law enforcement and breeds disrespect for the law because, despite the penalties and extensive enforcement, huge numbers of people still violate prohibition.
More interestingly, I am surprised that conservatives aren’t in favor of legalizing these activities for the sake of taxing them. As it is now, there is a tax advantage in buying illegal drugs over buying legal goods. Logically, taxing drugs should drive the demand down (even though I am not sure what the exact elasticity of the demand for drugs would be). The same is true for prostitution and gambling. At the very least, taxation through legalization would create a level playing field with legal activities that doesn’t exist now. And it would increase people’s opportunity for choice, which is always a good thing.
Also, if what we really want is to keep the government’s reach into our pocketbook as small as possible, shouldn’t conservatives advocate smoking bans, food bans, and all sorts of bans? When all of these activities are banned, they won’t be taxed, either. Yet conservatives don’t advocate making most things illegal. It must be that they understand that there is a cost to prohibition and a benefit to more choice.
The question then boils down to whether we are in a freer and better society if more activities are legal (including the ones we dislike) — even if it means that more activities are taxed as a consequence. Unless the taxes are totally confiscatory, I suspect most people would choose legalization with taxation over the alternative.