1 Mar 2018

Populist taxes and minimal government?

Plenty want to get something (useful government services) for nothing (no taxes), but that free rider attitude is the quickest way for everyone to agree that nobody should pay. The result, as we can see in many poor developing countries, is a government that is starved for funds and thus unable to provide the non-excludable, non-rival public goods (security of self and property rights, market regulation, etc.) that help everyone.

An alternative sets taxes according to "democracy," which can result in good things, but also "soak the rich" policies that lead to many tax shelters and corrupt exemptions (the US in the 1960s) or "we pretend to pay but actually tax the middle class" policies written by the rich (the US today).

In cases of failure to place the burden on those most able to bear it (the rich), I would suggest a thought experiment to identify a "fair" level of tax as well as ways to spend that tax on public goods.

First, set taxes through a unanimous (or 80-90 percent threshold) vote that is all or nothing, i.e., everyone pays only if everyone agrees to pay. (Such a threshold can prevent free-riding.)

Second, spend that money on public goods that provide a high multiple of benefits to every citizen, e.g., $3 per American per year for GPS. (Useful public goods have very high benefit:cost ratios.)

As you can guess, such a system would result in an extremely small government, but a government that everyone would does support.

The downside of such a system (which means I wouldn't support it in many well-run countries) is that it would probably not engage in the transfers that many of us assume is the government's job. That "failure" might not be a bad thing, as it would end special interest programs (farm subsidies) without undermining non-discriminatory programs that any eligible citizen could tap (retirement, disability, education, basic income).

Bottom line: Government's monopoly on power should be used to the benefit of a majority of citizens. Thus, it makes sense that those citizens should be able to control how much power government has and what it uses that power for.

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