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The (Unnecessary) Annoyance that is Tax Day

April 15, 2010

April 15th is finally here, which means that most Americans will have hired someone to navigate the byzantine structure that is the 70,000 page tax code, the IRS in the coming months will send out billions upon billions of pieces of correspondence, and the proverbial debate will rage between the tax protesters, and the tax apologizers.

In the end, the government’s operating revenues will fail to meet costs, and we will have another year of the morally reprehensible, utterly inefficient income tax under our belt.

The standard libertarian argument against the income tax is that it assumes that your income is the property of the government, which systematically (and rather arbitrarily) decides how much income you are “allowed” to keep. And, of course, libertarians are quick to point out that incredibly confusing structure of the tax code exists to buoy interest group politics and keep tax professionals busy for four months out of the year. I’m inclined to stand behind both of these criticisms. However, I’ll step off the boat when the argument boils down to “taxes are theft”.

Instead of targeting leftist-liberals, as I do so often on this blog (sorry Matthew, Ryan, and Ezra), I would like to take today to criticize (mostly) conservatives, and also my fellow right-wing liberals.

The Goose and The Axe

It is common among right-wing groups to view the market as the producer of wealth, and the government as a consumer. In this light, it is easy to see the image is of a government that taxes too heavily “killing the goose that lays the golden egg”. To be clear, economics does state, correctly, that taxes do involve (sometimes large) market distortions and (sometimes high) transaction costs. Unfortunately, there is a nary a lack of demand for ideological justification of vulgar charachtures of these principles. The left likes to point to the concept of a “fully reflexive Laffer curve” to make this point. The predictions of the Laffer curve are quite sound…but unfortunately, conservatives have made some pretty strong claims about the concept that obviously don’t bear out in reality.

In fact, neither the “market” nor the “government” create wealth. To quote from Eric Bienhocker, wealth is information, and its origin is evolution. To be less abstract — people create wealth. Markets and governments are simply organizational structures by which people contract with other people to share the enormous gains from division of labor and economies of scale.

If it weren’t for the finance structure of government (noted above), it would be rather confusing for right-wing groups to drum up a lot of fanfare about “tax freedom day”, the day in which you have earned enough money to pay your taxes for the year. Why? Well because taxes serve to finance our own consumption of the products and services that governments purchase — referred to as “club goods“. Why is there an important caveat to the finance structure? Because of the lack of possibility high costs of exit.

Fortunately, or unfortunately (depending on your perspective), the welfare state is unlikely to be overcome. To be perfectly clear, it is an evolutionary “good trick” we have stumbled upon (exactly like markets), which serves our interests fairly well. Regardless of what textbook economics says, many people are perfectly happy giving up some efficiency for more economic security, even if that causes lower growth levels. While it is imperative that economists make it known that there is a limit to this trade-off before it becomes actually detrimental (both the US and Europe have flirted with this level), the nature of democracy states that public policy broadly reflects the will of the median voter — and the median voter will likely continue enjoying the welfare state.

So, it is well worth it for right-wing liberals to articulate policy which allows people to get what they want, in a more efficient, or “right-wing liberal” way (or, what Mattew Yglesias calls failure).

Work Smarter, Not Harder

Unfortunately in the United States, we are fond of using the tax code to play fiscal tricks to buy votes. Also, and also unfortunately, we have the an aversion to simply giving people money. Consequently, we end up with confusing Rube Goldberg machines to achieve goals which would be similarly achieved, more efficiently, by simple transfer. Of course these things aren’t unique to the US alone, but they are relatively big problems in the US…and I blame the right, and specifically, Republicans.

Republicans are not exactly doing anything to help abate the encroachment of the welfare state, and from a pure electioneering standpoint, they probably shouldn’t. However, Republicans have no shortage of ideas about creative funding schemes for their “ideas”. The fact that this has prevailed for so long has ingrained in our culture that this is the way government works, with utter inefficiency, when that need not be the case.

This is in effect making us work harder toward whatever goal has been politically set. Far from their commitment to “smaller government”, Republicans add fuel to the fire. What we should be doing is working smarter to get what we want out of our club goods.

Thus, many economists advocate Pigouvian taxes to tax externalities (not to be confused with sin taxes). These kinds of taxes are very efficient, but there needs to be hard rules governing the level of paternalism we dole out through these kind of taxes (I’m personally rather opposed to sin taxes). Another category of taxes that are very efficient are “value-added taxes“, which have been in the news as of late. All of these are better alternatives to taxing income and capital (as we do now). And, contrary to what you may read from the leftist-liberal blogosphere, they can be made highly “progressive” through very simple income targeting schemes and means-tested benefits.

Although we never hear it, we should replace income and capital taxation (both personal and corporate) with these taxes, along with keeping a payroll tax. We would be able to meet our obligations, broaden the tax base, and raise more income for the goods which we decide are best delivered through the “club of everyone”. And as a bonus, H&R Block and other “tax professionals” that exist solely due to our current tax code can find a more productive business plans.

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Addendum: Tax Day Freebies!

3 Comments leave one →
  1. April 15, 2010 8:33 am

    Medicare and Social Security, two of the biggest liabilities the country has ahead of it, are so resilient as far as public opinion goes that they programs will be around even after the cockroaches in a post-nuclear world die off. Polls have shown that hardly anyone wants their Medicare/SS touched when spending cuts are offered. Suffice to say, a public option–or perhaps even single-payer–is not avoidable in the future. The status quo is simply unsustainable and strong, paternalistic cost controls must be put in place.

    I do agree we need to get rid of the completely restrictive income tax (and I’d agree it’s, in a way, theft). Ironically, I recognize the problems with capital taxes even though I’ve argued for them in the past (a guy can have some fun arguing where he disagrees, no?).

    Your last paragraph is where I want to be: no income tax, capital tax; with a VAT, payroll tax and, as you mentioned in the past on Twitter, a carbon tax.

    I’d love to see a purely mathematical assessment on how much revenue such a combination can produce.


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