Sunday, November 2, 2008

Thoughts on Aztec's thoughts

Aztec's previous post was an excellent one, but it highlights some of the core philosophical differences between Aztec and myself. I think they're worth some exploration.

From a purely economic perspective, the only economic loss associated with using income taxes to achieve government objectives is the utility associated with the individual spending those dollars. So, if you take a macroeconomic perspective, the argument against paying higher taxes is purely a selfish one.

I completely disagree with this statement. It falsely assumes "government objectives" mirror those of individuals. I would argue that often "government objectives" are not reflective of the objectives of citizens, taken individually or even taken as some sort of whole. Tax credits for oil companies, the bridge to nowhere, and ethanol are just three of probably over a thousand "government objectives" that are not reflective of the decisions individuals would make nor reflective of the objectives of the body politic. The government objectives exist as they do due to lobbying, political donations, electoral concerns and countless other distortions created precisely because the government is involved in the objective-setting. Taken to the extreme, it is unlikely German citizens as a whole supported mass murder of Jews, but the government achieved that goal spectacularly.

Secondly, I am one of those crazy conservatives that believes the government consistently destroys wealth. Take an imaginary $1000. If I pump that into the private economy, the end result will on average be some positive return, turning the $1000 in wealth into some multiple of that. If I give the government that $1000, the government, through bureaucracy and spurious "government objectives", will return some fraction of that $1000 to the economy. Despite significant productivity gains, economic growth has been poor for nearly two decades, and I hypothesize that is due to the increased size and influence of the federal government.

The alternatives: voluntary giving, charity, and the like were not sufficient in the past, and simply will not be sufficient in the future. Recent scholarship in behavioral economics tells us that voluntary participation leads to significant free rider issues and creates incentive paradoxes that thwart even agreed upon objectives. Compulsorily participation eliminates these economic inefficiencies.

I would agree that free rider issues exist in some arenas (military, infrastructure, environmental issues) and on these issues, the federal government has a necessary and Constitutional role. But "incentive paradoxes"? Are you kidding? There might be some incentive paradoxes in the private sector, but the government is one big nest of screwed-up incentives. I also think you shortchange voluntary giving and charities. From what I've seen comparing Habitat for Humanity versus HUD or Red Cross/corporate charities versus FEMA or women's shelters versus state social workers, it's not even close. The "private" charities tend to be much more responsive and effective than the state.

I would happily pay twice as much in taxes that are currently apportioned to the safety net, if I could then choose from a menu of "private" charities to whom that money was given. If $5000 of my taxes currently goes to the less fortunate Americans, I would gladly raise that to a compulsory $10000, if you would in return give that money directly to charities of my choice. But get the government out of the decision-making and processing. To echo my above statements, I feel very confident that $1000 given to Second Harvest is much more productive in helping people than that same $1000 washed through a similar government program.

We gladly pay more in taxes because we feel that its our obligation to give back to this country that has treated us so well. Having benefited so much from living in this country, we have a patriotic duty to give back in greater measure than others. It's the price of success - one that we will gladly pay because we are grateful to be here.

I agree 100% with your sentiments here, but I don't see how this philosophy, which strikes me as a common one from most Americans, gets you anywhere near some of the policies your party supports.

First of all, even under a flat tax system, the more you earn, the more you pay for the services and privileges that come from being an American. The percentages may be that same, but in actual dollars, the rich pay more, the poor pay less. One could argue that you need some level of progression in a tax system in the name of some ambiguous notion of "fairness", but at some point it becomes counterproductive. Thanks to numerous tax credits and deductions that phase out as income rises, 40% of Americans pay no taxes at all right (rising to 49% under Obama's plan), while something like 5% of Americans pay 95% of the taxes.

One pretty clear rule of economics is that when you drop the price of something to zero, demand jumps. If the government is going to provide or subsidize everything under the sun, and 49% of people do not have to pay a penny for those provisions, it's not hard to imagine that those people will vote themselves more of the provisions in the future. It's great for the party in power for a while, but it's clearly unsustainable, and in the end, it destroys the system.

One final note on the whole "selfishness" argument. If you think of it logically, the selfishness argument is absurd. You claim it is selfish that I want to keep some percentage of my income - say 70%. Fine, you guilt me into agreeing to 60%. What is to stop you from applying the same label to me now? 60% is now clearly selfish, let's make it 50%. You can do the reductio ad absurdum play on this to the obvious conclusion. That is the diabolical genius of socialism. It starts small and grows naturally. I prefer the genius of liberty. I pay the federal government to provide the core services that demand a federal government, but beyond that, I am able to make my own judgement on what level of charity, consumption, savings, and investment works for me. You are welcome to come and preach to me that I am being selfish, but you don't get the force of the state to impose your metric of selfishness on me.

If you want to pay more taxes because you find it your patriotic duty, more power to you, whip out the checkbook and be a great American, but leave me alone to make my own decisions on what is patriotic and what is not for me.


Restless Native said...

Thomas Friedman essentially endorsed Obama in his piece on Saturday.

GammaBoy said...

Not a bad column, but his recommendations for the candidate are kind of dumb.

This is not the problem...

We cannot get out of this crisis unless China starts consuming more and unless Europe keeps lowering interest rates.

If Friedman thinks that's going to fix anything, he is on crack.