Sunday, September 16, 2007

Musings on Taxation

I posted a version of this post in answer to a question about the "Fair Tax" on Dr. Hurd's blog. The questioner asked whether voluntary taxation is feasible. If not, is the Fair Tax a good alternative?

A cultural sea-change must occur first that will make limited government politically feasible. Then, voluntary financing of government could emerge. It is a worthy topic to consider now, but it is a backburner topic given that it will be many decades before it could even be attempted.

Regarding the idea of a Fair Tax, it is a contradiction in terms. No tax is fair because it involves the forcible taking of one person's property to give to another. Moreover, a more efficient or "fair" form of taxation (if it were possible) will not make government smaller. Quite the opposite is likely. It will be viewed simply as another source of revenue by government officials. Currently, there is no federal consumption or sales tax. Impose one as the Fair Tax would do, and the other taxes will not go away. Government will simply have obtained a new method of extracting money from us, with the result that they will find it easier to spend more of our money.

Government will get bigger, not smaller. I think it is important to resist any new mechanism of taxation. If our current system of income taxation is inefficient, great. That inefficiency in collecting taxes will limit the size of government. I would rather government were truly limited on a principled basis. Until that is possible, even a crude check on government from an inefficient form of taxation is desirable.

Getting back to the idea of voluntary financing of government (I hesitate to use the word "taxation" since it implies coercion), there are two important points to remember:

(1) A small government that focuses on protecting our rights -- i.e., the police, the courts, the jails and the military, and nothing else -- would be very small indeed. Even in today's messed up world where our military and prison systems are unnecessarily large, all of these functions probably consume under 5% of GDP. If we had no irrational laws such as the drug laws that account for more than half of our prison population, and if we had an assertive defense that vanquished our enemies instead of appeased them in endless, expensive wars, these expenditures in a laissez faire society would be much less. I suspect that all of this apparatus of government would consume less than 2% of GDP. This is a very tractable amount to be voluntarily financed by Americans.

(2) Without coercive taxation, destructive regulations, and the theft of our incomes for welfare payments, Americans in the future will be far, far wealthier than they are today. Just as today's technological achievements, such as antibiotics, the internet and jet travel, would be barely believable science fiction to an American of the 19th century, America of the laissez faire capitalist future would be even more highly unimaginable science fiction to Americans today. (Note that all of the achievements I mentioned happened despite a high level of government intervention in the economy. Imagine the unleashing of human ingenuity that would occur if government stayed out of the economy.)

Financing the essential functions of government for such wealthy people of the future would be an afterthought that Americans would voluntarily and easily do, without any sacrifice to themselves.

Finally, I will add a third point. Voluntary financing of government does not necessarily or exclusively mean donations of money to government. Most, if not all, of the expenses of government could be financed through the payment of fees for certain services where that would be practical. In particular, I could imagine a fee paid if parties to a contract want government to stand behind it with their enforcement powers. For example, if you sign a contract to buy a house and you want access to the courts for enforcement, you pay a 2% fee on the transaction. This is a voluntary payment for an essential government service. This principle can be extended to cover many other activities and functions of government.

Also, in a free, entrepreneurial society, imagine the ingenuity that could be applied to solving the problem of financing the (small) government. One idea I particularly like is corporate or individual sponsorship of pieces of government. Sponsor a jail, and you get to name it. Better yet, sponsor a battleship or a missile and you get to put your name on it. Heck, if I knew our missiles would be used to defeat the Muslim terrorists, I would love to have my name on that missile (assuming I could afford it!). I would be a good Dr. Strangelove. I would not be on the missile, but my name would be, as it arced across the sky on its way to Tehran or a terrorist training camp...

Okay, enough dreaming for now, but today's dreams are the beginnings of tomorrow's reality.

3 comments:

Ian said...

Thank you for the thought-provoking post.

I contend that the FairTax Act represents the very "cultural sea-change" that you speak of. It lays out a practical ideal of voluntary payment, based on a substantial level of taxpayer choice that the plan affords. Since FairTax untaxes basic necessities (up to socially-accepted levels of poverty-level spending), what is taxed is marginal, and/or desired or preferred, on a broader base of retail products and services. This is to say that the taxpayer may, under the FairTax, choose to purchase used products and avoid paying the tax. And, to the extent desired, the taxpayer may choose to self-perform certain services rather than pay for them. This could stimulate do-it-yourself education, improve citizens' self-reliance; indeed the FairTax represents the possibility to usher in a new can-do, citizen psychology that would accrue to greater demands for government accountability - truly, a cultural sea change.

People call the idea of a "fair tax," an oxymoron - without thinking. It sounds catchy, but it is not true. The reality is that government is the "necessary glue" that enables the the social fabric to cohere. It does this by effecting "rules" that ostensibly provide members with equitable access to wealth and resources. It also must provide ostensibly equitable enforcement of those rules in order to mitigate threats to the social fabric. It is unrealistic to believe that the structures of a national government can be voluntary, thus the need for funding. The idea of fairness has to do with equitable sharing in the cost by all members who depend upon the social fabric for food, shelter, clothing and post-necessity economic enterprise. And, because of the shift of power discussed above, government will find it more difficult to both enlarge the government, and implement a dual system. FairTax strategist, Dennis Calabrese, discusses how the FairTax repeals the income tax, how it does away with the IRS, and how it addresses other aspects of frequent concern to skeptics.

The FairTax has a much greater opportunity for success to operate as a "self-regulating" mechanism because of increased visibility. One finds that the current system, ostensibly regulated by the Tax Code, is in fact poorly regulated because of continually increasing complexity (tax favors from politicians through lobbyists to corporations and other special interests) stemming from the desire by those holding government position to steer public behavior using tax code "carrots." We have seen how 100 years of this type of behavior has eroded the nations currency and the purchasing power of working family incomes. "Visionist," Tom Frey believes the current tax system will simply collapse; and economist Laurence Kotlikoff heralds an unavoidable economic breakdown given the latitude granted to government power under the current system. Kotlikoff believes that passage of the FairTax can stave off the economic ruin we're facing, but would be surprised to see it happen.

Frey and Kotlikoff may be right on both counts, and we may not be able to successfully evoke change; but shall we not try?

Galileo Blogs said...

Without establishing the proper role of government, the "Fair Tax" becomes just another mechanism for the government to expropriate our wealth. Observe that the income tax was originally instituted as a temporary tax to fund the cost of World War I. When that temporary tax proved so useful in financing government, it was never repealed. Instead, it has been expanded greatly over the years.

No tax scheme will address the real problem, which is the violation of our rights by government. Absent the establishment of that principle, the Fair Tax will not be fair. It will become just another tool for the government to take our wealth.

The context of my viewpoint is that laissez-faire capitalism is the only proper political system, because it is the only system that acknowledges man's right to his own life. I suggest reading works by philosopher-novelist Ayn Rand to understand the context of my argument, in particular her non-fiction collection of essays entitled, "Capitalism: The Unknown Ideal." I also recommend her great novel, "Atlas Shrugged."

In today's mixed economy where the power of government is unchecked, the Fair Tax most likely will be like the income tax in the early 1900s. By adding a new tool of taxation, a consumption tax, the Fair Tax will increase government's power over our lives, not subtract from it.

softwareNerd said...

Ian's notion of "choice" (in the comment) above is dangerously incorrect.