CHAPTER 4 TAXES ARE TOO HIGH The myth of the government as consumerRead more at location 1280
People hate taxes. This is actually just a special instance of a more general law, which is that people hate paying for stuff.Read more at location 1282
When the woman in front of me was handed her bill, she stopped the mechanic and asked, “How much of that is taxes?”Read more at location 1286
“I just want to know how much those bastards are taking from me.”Read more at location 1287
she needed to get going, since she was a nurse and couldn’t be late for her shift at the hospital. “Wait a minute,” I said. “You’re a nurse? At a public hospital? That means you work for the government.”Read more at location 1288
That’s like Tom Cruise complaining about the price of movie tickets.”Read more at location 1292
What sets the issue of taxation apart is the notion, popularized by generations of economists, that taxes are not just a personal inconvenience to the taxpayer but are also objectively bad for the economy.Read more at location 1296
a surprisingly pervasive error that I refer to as the “government as consumer” fallacy.Read more at location 1298
Thus the government gets treated as a consumer of wealth, while the private sector is regarded as a producer. This is totally confused.Read more at location 1303
People produce wealth, and people consume wealth.Read more at location 1305
They simply constitute mechanisms through which people coordinate their production and consumption of wealth.Read more at location 1306
A lot of errors in economic reasoning arise from the tendency to treat economic institutions as though they were people.Read more at location 1310
In the same way, many people think that having corporations pay taxes represents some sort of an alternative to having individuals pay taxesRead more at location 1315
Both of these errors can be overcome simply by “following the money” to see where it ultimately comes from, or where it ends up.Read more at location 1317
The firm is nothing more than a mechanism for organizing a very complex set of transactions between individuals.Read more at location 1320
The state should be thought of in exactly the same way, at least with respect to its economic role.Read more at location 1323
The primary difference between the state and the corporation is simply that membership in the former is universal and compulsory, while in the latter it is not.Read more at location 1324
Because of this nonvoluntary aspect, it would be misleading to call the state merely a “nexus of contracts,”Read more at location 1326
The state, as people on the right never tire of reminding us, grew spectacularly over the course of the twentieth century.Read more at location 1328
It’s as though the referees in a hockey game went out and got sticks,Read more at location 1338
A better idea would simply be to rebrand it as something else, like “the public goods state.” This term reflects an idea, expressed canonically by Paul Samuelson in a 1954 Review of Economic StudiesRead more at location 1344
Samuelson defined public goods as ones that were nonexcludable—you couldn’t prevent anyone from enjoying them—and nonrival in consumption—one person’s consumption did not diminish the quantity or quality of anyone else’s.Read more at location 1347
it drew attention to the efficiency rationale for the welfare state.Read more at location 1351
There are, in fact, almost no public goods in Samuelson’s sense—even something like national defense, which benefits all citizens without distinction and regardless of their numbers, does not qualify, since it benefits only citizensRead more at location 1353
More important, though, Samuelson made it sound as though there were a special and distinct class of goodsRead more at location 1355
In fact, many of the goods provided by government are of exactly the same kind as those provided by the private sector.Read more at location 1356
Despite the agreeable homophony between “public good” and “public sector,” most of what governments are in the business of providing is not public goods, but rather what economists call club goods.Read more at location 1358
Every good, Buchanan pointed out, has what might be referred to as an “optimal sharing group.” Your toothbrush, for instance, probably has an optimal sharing group of one,Read more at location 1361
For instance, it’s not a great idea to spend too much money on exercise equipment. While it is convenient to have an elliptical trainer in the basement so you can work out in the privacy of your own home, this very expensive piece of equipment is likely to sit unused 362 days of the year.Read more at location 1363
the use of a flat fee for payment can have the unfortunate effect of obscuring the nature of the underlying economic transaction. For instance, people who join a gym often don’t realize that they’re paying for everything—theRead more at location 1373
The second important point is that club purchasing often involves a significant reduction of consumer choice.Read more at location 1377
This cross-subsidization among members is clearly one of the disadvantages of many club-purchased goods.Read more at location 1383
One can see a similar phenomenon in the case of condominiums. Each building offers its members a mix of “private” amenities (living unit, parking space) and “public” ones (elevators, security, heating).Read more at location 1389
Again, each condominium offers a different bundle of public (or club) benefits, with options such as a swimming pool, garbage removal, even concierge service.Read more at location 1391
Now suppose someone comes along and says, “How high should condo fees be?”Read more at location 1397
Does it make sense, when shopping for a condominium, to find the building with the lowest possible fees? Again, it depends.Read more at location 1401
This may seem crushingly obvious, and it usually is in the case of condominium fees. Unfortunately, when it comes to the subject of taxes, people tend to get all confused.Read more at location 1405
In the same way that members of a club pay a fee for admission and then enjoy a certain range of goods “for free” once inside, as citizens of a country we all pay fees and then enjoy certain other goods “for free.”Read more at location 1407
In some cases, the optimal sharing group is everyone (consider national defense, the sewage and water system, highways).Read more at location 1410
One of the goods that can often be purchased most efficiently through taxes is insurance. Since the benefits of an insurance scheme come from the pooling of risks,Read more at location 1414
One can see, then, the absurdity of the view that taxes are intrinsically bad, or that lower taxes are necessarily preferable to higher taxes. The absolute level of taxation is unimportant;Read more at location 1422
This is why low-tax jurisdictions are not necessarily more “competitive” than high-tax jurisdictions (any more than low-fee condominiums are necessarily more attractive places to live than high-fee condominiums).Read more at location 1424
Every year, in dozens of countries around the world, right-wing anti-tax groups calculate and then solemnly declare a “Tax Freedom Day,” in order to let people know what day they “stop working for the government and start working for themselves.”Read more at location 1429
“mortgage freedom day,” in order to let homeowners know what day they “stop working for the bank and start working for themselves.”Read more at location 1431
One can find a similar fallacy at work in the widespread belief that tax cuts “stimulate” the economy. This is the same as believing that a legislated reduction in condo fees would stimulate the economy. Naturally, if condo fees go down across the board, it will result in people having more money in their pockets to spend. But it will also result in condo boards having less money to spend.Read more at location 1437
Absent some effect on savings, the increased demand that occurs in one sector is necessarily offset by decreased demand in some other.Read more at location 1442
For various reasons, taxes can’t be imposed as “flat fees” the way that club fees are usually imposed (Margaret Thatcher tried, in the U.K., but didn’t get very far with it). This means that they must be collected in other ways, such as income and consumption taxes, which distort economic incentives and generate all sorts of counterproductive tax-avoidance behaviorRead more at location 1447
To say, as Milton Friedman once did, that any tax cut is a good tax cut is simply to articulate an arbitrary preference against a particular type of purchasing arrangement. It’s like saying that the best condo fee is the lowest condo fee.Read more at location 1458
One of the things that tend to muddy the waters when it comes to understanding club goods is that we often give things different names when they are purchased collectively and when they are purchased individually.Read more at location 1461
There is a problem, however, in the market for life annuities. It’s known as “adverse selection.” Basically, a life annuity is a good deal if you expect to live for a very long time, but a bad deal if you expect to die young. As a result, the only people with an incentive to buy them will be those who, for some reason or another, expect to live for longerRead more at location 1473
Women, for instance, typically have a life expectancy five years longer than men, so the value to them of a life annuity is significantly greater.Read more at location 1476
Yet there are many other factors affecting life expectancy that are not so easily detectable by insurance companiesRead more at location 1480
This problem is somewhat attenuated, however, if people go shopping for annuities as a group. For example, if an employer approaches an insurance company and says, “I’d like to buy life annuities for all my employees,” this is inherently less suspicious. After all, since very few companies make employment decisions based upon anticipated longevity,Read more at location 1486
Unfortunately, when we purchase life annuities as a group through an employer, they are no longer called annuities. Instead, they are called “defined benefit pension schemes.” This change in nomenclature creates all sorts of confusion; there is an inclination to regard pension schemes as savings arrangements, rather than as insurance products.Read more at location 1491
Of course, if it pays to shop for annuities as a group, then the bigger the group, the better.Read more at location 1495
No surprise then that the state also “purchases” life annuities for its citizens, in the form of public pensions (the Canada Pension Plan, Social Security in the United States).Read more at location 1498
in the United States, for instance, people routinely compared the rate of return of money that was saved and invested in the stock market with the rate of return of money paid into Social Security.Read more at location 1501
It amounted to comparing an investment to an insurance policy. In this respect, it is like calculating the rate of return on your car insurance:Read more at location 1503
People buy insurance not because they hope to get a payout, but because of the peace of mind that comes from being protected against particular risks.Read more at location 1506
what proponents of “privatization” of Social Security in the United States were recommending was not really privatization of the system. Privatization would involve individuals purchasing life annuities privately, rather than collectively—which would be a transparently bad deal. What they were actually recommending was that individuals stop purchasing insurance entirely, and instead simply save for their own retirements.Read more at location 1508
Note: PRIVATIZZARE LE PENSIONI? NO. PRIVATIZZARE IL RISPARMIO. IMO: MA QUI ASSICURARSI EQUIVALE A RISPARMIARE. Edit
There is, of course, one big difference between paying fees to a club and paying taxes to the government. It is an almost inevitable consequence of shared consumption that it reduces consumer choice.Read more at location 1515
And yet with clubs the consumer still has some choice.Read more at location 1517
People may hate condo and gym membership fees, but they are not forced to pay them.Read more at location 1519
In the case of the state, however, this exit option is typically absentRead more at location 1520
schools—what do I need those for? I have no kidsRead more at location 1522
the state is not just a case of collective shopping; it is also a case of compulsory collective shopping.Read more at location 1522
state provision should be considered only in cases of egregious market failure, when a one-size-fits-all provision is better than the alternative.Read more at location 1526
goods where consumer preference is more homogeneous, because the losses caused by “preference mismatch”Read more at location 1530
the major functions of the welfare state are often discharged at a more local level and where there are very few internal barriers to mobility.Read more at location 1532
each U.S. state or Canadian province offers a different mix of club goods.Read more at location 1534
Even in a nonfederal system, every country delivers a large number of public services at the level of the municipality,Read more at location 1535
the economist Charles Tiebout has shown that municipal governments are able to achieve the same level of efficiency as private markets.Read more at location 1538
in most cases, when the welfare state provides a certain good, it does so at a very low level, leaving consumers free to “top up” their entitlements by purchasing more of the good on private markets. This is true in all the major categories of welfare-state expenditure: pensions, education, security, disability insurance, health insurance,Read more at location 1542
Finally, it is important to distinguish those who want to exercise an exit option from those who simply want a free ride.Read more at location 1547
