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The Case for Lower Taxes


This question was asked elsewhere on the internet:  How would you explain it to a 5-year old why higher taxes on the rich doesn’t fix everything?  This is my attempt to answer it.  He will judge.

There are two aspects to money: having it and spending it.  Taxing merely moves the money from one hand to another, and arguably not to the best hand when it comes to decide how to use it.

Imagine you have $5.  You can spend them on an amusement park ride and they are gone; or you can invest them in a neighbourhood lemonade stand, provide others with a valuable service and maybe become rich.  Once you are rich you no longer need to beg daddy for more pocket money.  Which is better: begging for more pocket money or earning your own money?

If you come back asking for more pocket money, daddy can refuse.  Unless you are the government.  Then it is called tax.  Government has the power to take money away.

Now, imagine a classroom friend with $5 and the same choice: the joyride or the lemonade stand.  While you choose the lemonade stand, your friend chooses the joyride.  At the end of the day, you are rich and you have provided a useful service to the neighbourhood.  Your friend just had a good time.  Your teacher asks the class to contribute to a class trip.  Because you have invested your money wisely you have the means to contribute.  Your friend does not.  When the teacher asks for money, you can refuse.  Unless she is the government.  As government she can take your hard earned money away and use it for a joyride.  Is this fair?  Under such circumstances, wouldn’t you be tempted to choose the joyride in the first place?  But if everybody chooses the joyride, there will be no money left to tax and most important, there will be no neighbourhood service.

6 Responses

  1. Tax in my opinion is the better option of raising revenue for the Ruler than borrowing money. There is only a limited pot of meny available to pay for services, and of this a chunk is lost to interest payments and paying back loans. A harsh choice is made between tax or cuts. An alternative is that the Ruler goes into business themselves to raise revenue but that would undermine private business.

  2. @Alex: The alternative is that the Ruler stays out of business that is better provided privately. Then the Ruler does not need to raise revenue in the first place. Best example is education: the general public believes private schools are expensive. On a per-student basis public schools are actually much more expensive, but the bill does not come home with the grades report and so parents (and the general public) do not notice.

    I agree with you that tax is better than borrowing. The Ruler should never be allowed to borrow long term, for this is simply a way to tax future generations for the spending of the current one, with the added burden, as you remark correctly, of compound interest.

  3. I completely disagree with your premise. The old argument that if you get something for nothing, you will not value it. Probably true, but that’s not what taxes are for, we raise taxes to do things individuals and businesses can’t do, build roads, fight wars, raise the collective good of the country. You are coming to this from a selfish ‘me’ perspective instead of a ‘we’ view. Don’t know where you live, but if you live in an industrialized country it got that way through the majority if it’s citizens deciding they wanted to raise all boats, become educated, healthy, have clean water, etc.
    Sure, governments are not efficient, so are companies, so are you, I know I am not.

    The rich should just pay their fair share, the whole idea is the education, and infrastructure of a country has helped them get where they are. A flat tax would be great, let’s do that right after we eliminate all tax breaks for religions, corporations, etc.

    We certainly need more citizens that care about the WE to help make our governments more efficient, it’s not happening because of the ME attitude of most populations, but people really want the same things the world over, a better life for their kids, meaningful work, opportunity, etc.
    You speak about the government like it is someone else, in America, we are the government, last I checked it was not being run by foreigners.

    Gary

  4. @Gary: Your preconceived notions are wrong.

    (1) My argument is not what you assume. My argument is that monopolies are bad and government is by definition a monopoly on its territory. In some rare occasions a monopoly is the lesser evil, but in most cases the monopolist natural tendency to abuse its position of power must be reined in. The power of taxation is the ultimate representation of that monopoly.

    (2) I am not coming from a ‘me’ perspective and can make an argument for lower taxes from both a ‘me’ and a ‘we’ point of view. The problem with ‘we’ is that in the vast majorty of cases it is a subgroup of the overall population, such as ‘we the union’ or ‘we the civil servants’, or even ‘we the rich and powerful’. And because the ‘we the people’ is an utopian concept (communism), the next best thing is to break the ‘we’ into its smallest component, to make sure that no interest group is too strong.

    (3) The problem is not inefficiencies, it is (lack of) competition. Competition takes care of inefficiencies in the long run. An inefficient business will go bankrupt. Government does not have competition and this is the root of the problem.

    (4) In my opinion you are looking at western civilization through pink glasses. The majority of the citizens in any industrialized nation has absolutely no saying in how the country is run. Here in Canada the government is elected with less than 40% of the votes, and vote participation is in the low 60%.

    (5) I never argued against the rich paying their fair share. I argue that tax should be low for everybody. High tax does not dent the rich’ lifestyle, it kills the middle class.

    (6) I am also not arguing, as you may be suggesting, for a change from progressive to flat taxation, although from a purely theoretical perspective I would prefer to see some sort of “total lifetime tax”. The progressive taxation currently applied in all Western countries penalizes the person who makes one million dollars in one year over the person who makes $50,000 per year over 20 years. They both make the same amount of money, but they pay different amount of tax. Is this fair in your opinion?

    (7) I am with you in doing away tax breaks. The tax code is too complex, and its complexity feeds non-productive jobs: a whole industry of civil servants to administer the tax code; and a counter-industry of tax-avoidance-consultants. Those bad jobs would not exist if the tax code was simpler. Unfortunately these kind of pork barrel will never go away, it is the oil that makes the political machine tick.

    (8) Why change people from ME to WE? Accept them as they are and design the system so that it prevents bad (monopolistic) behaviour. Good can be found in ME behaviour, and bad can be found in WE behaviour.

  5. You forgot one thing: This is not a simple question of A and B. Its more than A, B, C: Whereas A is the government that gets taxes from B (Companies ans rich ppl.) and C (the general ppl.). Whereas B exploits C. So that the money that B earns is really Cs money. So if A decides not to tax the rich it really is not fair play. This is because C is not in the position to get what it deserves.

  6. @Vinci: You are making an ideological point: In your opinion the rich (B) are exploiting the general public (C) and the tax burden is unfairly distributed. From this idealogical point of view you come to the conclusion that high taxes lead to more fairness because “C is not in the position to get what it deserves”.

    Assuming that your ideological point is right, the distribution/fairness can be changed independently of the level of taxation, e.g. by giving an income tax break in the lower income bracket (benefiting C more than B); or by replacing part of the current income and consumption taxation schemes with taxes that target B such as taxes on luxury goods and property. You would not argue against taxing B, even if the overall taxation would be lower?

    Arguing that “A decides not to tax the rich”, you are mixing up the level of taxation with its distribution (fairness). Of course I agree with you that such a decision would be unfair, but it is a purely hypothetical decision. The issue is not the burden distribution (which is left to the ideological debate of socialism vs. capitalism), but the level of taxation. With more taxes, C does not “get what it deserves”, it just get, in your terms, exploited by A instead of by B. A spends the tax money on things C does not want (such as wars); buys goods and services (such as roads and education) at a higher price and lower quality than could be procured on the free market; and ultimately benefit only one class of citizens: its political friends. Those B1 and C1 that votes for A get business and jobs from A. Everbody else pays for it.

    Low taxes are not a way to address inequalities in the distribution of the tax burden. They are a way to keep government bloat in check. Once government bloat is under control, politicians can debate how to distribute the (lower) tax burden fairly.

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