Sunday, August 3, 2008

The true nature of taxation

I recently posted on the regressive effects of taxes on the poor. I have since been thinking about the nature of taxation as robbery, and it has dawned on me that taxes, which fund the parasitic class, have only one effect: taking from the many and giving to the few.

The rhetoric surrounding taxation attempts, in Orwellian fashion, to reverse this fact. Taxation is justified today by arguing that it takes from the rich (the few) and gives to the poor (the many). But this is never true. Even if a particular tax measure hits a group of wealthy individuals for PR value, the rich can only ever account for a tiny fraction of total revenues taken in by the government.

We can deduce that taxes never take from the few and give to the many by simple reasoning. Group dynamics always involves the public goods problem: how does a group of people come together to achieve a particular goal while minimizing the deadweight effects of freeloaders? The free-riding problem results from the fact that when a group of individuals come together to achieve a goal, there is only minimal detriment to the goal if one individual slacks off or doesn't contribute his part or pull his weight. A self-interested individual, then, is tempted to contribute less than his peers. But since this is true of each individual in the group, all individuals are alike tempted not to pull their weight. If left to self-interest alone, the group will likely fail to achieve their goal.

In the case of tax resistance, there is but a small benefit for any one individual if taxes are lowered. If I were to mount a political campaign and succeeded in getting taxes lowered, I would not benefit by more than a couple hundred dollars a year. The costs to me would be much higher than any benefits. I could try to distribute the costs by fundraising. But the public goods problem immediately undermines this effort: Each individual taxpayer has an incentive not to contribute to my tax-slashing campaign and instead let others foot the bill. If we succeed in lowering taxes, those who did not contribute will be ahead of those who did. If we don't succeed in lowering taxes, those who did not contribute will still be ahead of those who did. So, either way, the incentive is to not contribute!

Contrast this with a political lobby, say, the farm lobby. As an individual farmer, there is some incentive for me to lobby Congress for farm subsidies. But the costs of lobbying may exceed the benefits I receive from it. So, I distribute the cost by fundraising, that is, getting many farmers to contribute to the farm lobbying effort. There is a similar incentive for farmers to freeload and not contribute their piece.

But, there are two important distinctions between lobbying for subsidies and campaigning against tax increases. First, the pool of beneficiaries is far smaller, making the public goods problem less daunting. Second, and as a corollary, the political connections can help ensure that most of the benefits of lobby money go to those who participated while those who freeloaded do not receive much, if any, benefits.

Let's say there are 1 million tax payers. All their taxes go to a single special interest of 1,000 people. The size of the revenue collected is immaterial. Each taxpayer has an incentive to pay less taxes, but he also faces costs in campaigning to have his taxes lowered. Each member of the special interest lobby has an inverse incentive to have taxes increased. He also faces lobbying costs in order to get taxes increased. However, the 1,000 have a massive advantage over the 1 million in that the incentive facing each individual member of the special interest to have taxes raised is 1,000 times greater than the incentive facing each individual taxpayer to have taxes lowered. This is a simple consequence of the ratio of the number of taxpayers to the number of members of the special interest lobby.

When the incentives facing each individual are high, the public goods problem is small. This means that it is easy for special interest lobbies to remain organized and to achieve their goals, while it is difficult for tax resistance movements to do so. This is exactly what we observe in reality.

The thesis that taxation is from the few for the benefit of the many is laughable. The few who are the victims of this fictional, heavy taxation would face massive incentives to escape this burden and would find it easy to organize themselves to do so. Meanwhile, the many who are the supposed beneficiaries of this taxation have little incentive to ensure that the system continues and that the few do not escape through wiles. In reality, the exact reverse of taxing the rich and giving to the poor is the case. The few who benefit from taxation - the parasitic class - have massive incentives to ensure that the system continues, while their vicitims - the millions of taxpayers - have a much smaller incentive to stop the blood sucking since only a "small" amount of blood is taken from each victim.

What is most disturbing of all is that both political parties adopt this fiction that taxes go from the wealthy to the poor! The only difference is that Republicans think less should go from the rich to the poor and Democrats think things are fine the way they are or, perhaps, more should go from the rich to the poor. But the socialist promise requires a suspsension of disbelief greater than Carroll's Alice in Wonderland. Taxes do not go from the few to the many, they always go from the many to the few, from the productive class to the parasitic class. There is no exception. But Republicans buy into this socialist backwardation of reality every bit as much as Democrats do.

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