Paying for what you use up

Among the standard bleats of those who want [to be heard asking for] less taxes on everyone,  and want to actually have less taxes on on the bleater personally, is a sort of pugnacious Babbitty claim that “I earned my money by my own efforts and when the government takes it from me it’s theft.”  Another is that individuals will spend a given dollar better than the government.
Both of these extremely tiresome memes were thrown around in response to a couple of earlier posts with a confidence that surprised me coming from readers of this blog.  So I guess I need to take them on, at least for the record.  If you recognize these as ignorant cant, you might as well scroll up or down to the next post which will assuredly enlighten you more than this one. Short version of the first lesson: what’s yours is what’s left after you pay for what you use up, which means after taxes.  Shorter version: don’t like government? Try Somalia (and  let us know how that works out for you). Short version of the second: just how do you propose to privately pay everyone to mean the same weight when they sell you a “pound” of something? Do you really want to buy a set of the satellites that make your GPS work by yourself? or in a little satellite club with dues and monthly meetings? Shorter version: back to Somalia.

OK, “I earned it and it’s mine”.   Meet Anita the small manufacturer, with gross revenues of $10,000,000, and let’s accept that this properly measures the value of her product in everyone’s eyes, and compared to everything else.  I have never heard such a person claim that this is all her money and she deserves to keep it all; instead she happily lets her employees, landlord, banker, and suppliers confiscate most of it, leaving her only (say) a lousy 10%, or $1,000,000. She may grouse about the prices they charge and wish she could pay less, but she doesn’t call it theft of what is rightfully hers.
Why does she let them get away with this?  Because she’s making deals, agreed in advance, and more important, because these $9m worth of goods and services are completely indispensable to the $10m gross value her business creates.  We don’t expect the trapeze catcher to call the flyer a thief when he takes half the gate: they’re partners, joint contributors to the enterprise.  Just like Anita and her team. How they divide the gross varies, but everyone gets a share or the whole thing collapses in ruins. The iron law here is, “you pay for what you use up”: “I [not we] earned it” applies at most to net profits, not all the money you take in.
But I didn’t mention some other partners in the enterprise, who contribute essential factors of production. Among these are the folks who built the road on which parts come in and goods go out, who patrol it so Anita’s shipments are safe, who run the courts that make her contracts worth signing and save her the great expense of a private army of Pinkertons and thugs, and on and on right up to the bureau of weights and measures that make it possible for parts to fit together because everyone knows what an inch is. What these have in common is the property of market failure, which despite libertarian determination to pretend such a thing cannot exist, is a completely non-ideological, non-negotiable, technical property of certain goods, including many very good goods. They all have a real economic cost: making them uses up resources (asphalt, labor, copier toner) that are then not available for something else.
The only way to have most of them is to stand up a government and give it taxing power, and this scheme lets Anita pay for a large class of her inputs.  What really would be theft would be for her to figure out a way to consume them and somehow make others pay, and we know how much entrepreneurs despise theft. What would be fatal to the entire business is for the ideologues who demand that government be drowned in Norquist’s bathtub to succeed.
There remains the question of who should pay what part of the cost of that road used by so many. Some government services can be charged for on a fee basis, like a carbon charge proportional to how much of the planet’s cooling capacity you use up, and let’s do it when we can. Some can’t, or shouldn’t be: welfare in all its forms is a one-way deal.  If you think all poverty is a matter of motivation, you will want to stop subsidizing it, and you will watch  people starve in the streets with pride as their character improves.  But if you want any, you can’t charge the users proportionally to their use; same with the army and the EPA.
So a lot of these goods that Anita really needs to make her business work could be sold to her and the rest of us – but not to her alone -  at very different price tariffs and with very different rules.  Flat percentage of income?  Graduated rates? Graduated rates plus deductions and loopholes that flatten them out?  A VAT? An important topic for another day.  But expecting Anita not only to pay her workforce, but also her  governments, out of her gross is not taking anything that belongs to her.  What belongs to her as proprietor is her net after both those things, and yes, she personally owes another bite for the market failure goods, and fairness transfers, that make it possible for her to live her private life (hey, Anita, how about a free-market drugstore and supermarket without an FDA? Want to keep up a private fire department and navy?) and live it without constant shame. Otherwise she would be stealing. What a nice thing to do for Anita, to make it possible for her to do her fair share and maybe even a little more.
Summing up: what’s yours is the value you create less the inputs you use up to make it. It is simply not the case that you make your profit (much less your gross) and then the government takes some of it: it is the case that you pay for what you use, private and public, and the rest is yours to have and to hold and to enjoy as you wish.
Now about how Anita will spend this or that dollar better than government. No, the government shouldn’t decide how all Anita’s money is spent. But that doesn’t mean Anita and each of us can spend every dollar in the economy better than government, because there are things no-one can buy alone that we pretty much (this is never perfect) all want.  For example, we can buy education for our own children but not for our employees without a time machine; that already happened.  Nor even for our future employees, unless we want to bind children to a lifetime employment contract: you can pay for lots of education for lots of kids and not get anything out of it down the line unless everyone else agrees to pitch in. You can’t buy your way out of traffic congestion alone unless you’re rich enough for a helipad at home and at work…but what if you want to have dinner at someone else’s house, or go to the mall? You can’t buy yourself haddock for dinner – not for long -  unless you are rich enough to conquer and patrol the whole ocean so it doesn’t get fished out. Public goods, externalities, common-property resources, declining marginal cost goods…yes Virginia, there are market failures, and they are properties of the goods themselves. They are no more a political choice than the cost of gasoline in Venezuela, no  matter what price Sr. Chavez is able to force on it. It’s entertaining, if a little lame, to ridicule the government’s attempt to buy them on our behalf, and less waste is always better than more waste, but there’s no other way.

Private citizens can buy some things for themselves, and even each other, better than government can, and government can buy other things for them better than they can for themselves.  Sorry to let the air out of a spiffy, rousing, bloody-shirt  balloon; deal with it.

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

74 thoughts on “Paying for what you use up”

  1. It's not perfectly germane to the post, but I had a thought today: I keep hearing from folks who lean conservative that it would be very bad economics to raise taxes in a recession (or shaky recovery). Why aren't these same people, good Keynsians that they obviously are, also saying how bad it would be to cut spending during a recession 9or shaky recovery)?

  2. Bravo, Michael! It's hard to add anything to what you have said so well.

    Still, let's consider Anita as "job creator". To hear some tell it, "creating jobs" is a service that Anita renders to the nation. If we tax her $1M net profit a bit less, she will "create more jobs", which the nation sorely needs.

    I can understand why some people say stuff like that. It's because they have never run a business or filed a Sched C.

    Anita does her level best, every day, to figure out how to NOT "create jobs". She didn't get to be a widget entrepreneur who nets $1M a year by designing her widgets or her widget-making-machines or her inventory and accounting systems to require as MUCH labor as possible.

    Presumably, Anita works exceptionaly hard — probably puts in 16 hours a day for her $1M a year. She could easily "create" a full-time job for a competent day-to-day manager to relieve her of some of that burden. Such a manager might cost $100K per year. Wouldn't Anita have less incentive to create that job if the taxes she pays on her $1M increase from $350K to $396K?

    No. She would have MORE incentive. For the $100K salary to the manager would be a business expense in either case. Anita's net profit (the income she "pays taxes on at personal rates") would drop to $900K if she hired the manager, no matter what her personal tax rate is. But hiring the manager would only reduce her tax bill by $35K under the soon-to-expire Bush rates, but by almost $40K under the old Clinton rates.

    Who knew? It's the SUNSET provision in the Bush tax cuts that really increases Anita's incentive to "create jobs"!


  3. Maintaining a civilized society is a dirty job but somebody's got to do it. Anita seems to be deriving the greater benefits from the structure we have all built so she should contribute the greater support. Thankfully she is an honorable and sensible person who doesn't expect her night watchman's children to pay for her opportunities.

  4. To be honest, it gets kind of tired listening to the standard bleats of those who say they want more taxes on everyone, and actually want more taxes on everyone else. And when it comes to tiresome memes, "We can attribute everything you 'earned' to the government's efforts, so be thankful you're allowed to keep any of it at all!" and "The government will spend your money better than you will." rank pretty high up there.

    There's a fundamental difference between Anita's relationships with everyone else providing elements of production, and her relationship with the government: With everyone else she's free to take it or leave it, can negotiate, seek out competition… With the government, it's either do as they say, or go to jail.

    Given that disparity, you'd naturally expect that the government is going to end up taking more than it's contribution is worth.

  5. A few points about government power. First, that it is used to enforce, coercively if necessary, private contracts as well as laws, and to enforce laws that protect the life and property of rich and poor alike. Here we have a situation very like the problem that arises in health care (i.e., if you're going to require coverage of pre-existing conditions, you have to require healthy people as well as sick to buy insurance): you can't let people pick and choose which laws they like and wish to adhere to because it's only the package as a whole that has (social) stability and sustainability. Second, this isn't East Germany: anyone is free to move to the Cayman Islands or Singapore or Somalia if they prefer a different package. Third, the details of what is in the package can be changed; since government is a collective enterprise this requires collective action, i.e., politics. However people who are unhappy with this or that element of the current package are free to engage in political activity to change that element.

    As to Brett's last point, let's assume for the sake of argument that the option is there for government to be less efficient in its delivery of service than it could theoretically be, because of its power monopoly, and that this lack of efficiency will generally be realized. So what? The fact that a necessary strategy has a suboptimal side-effect doesn't argue against the necessity of the strategy.

  6. There is a fallacy of engineering that (I think) is relevant here, which comes from trying to optimize individual components of a complicated system without considering the system as a whole. (Sometimes the resulting errors fall under the colloquial rubric of "robbing Peter to pay Paul.") I was talking with a Xerox engineer once who told me the following story: A team working on a component of a copying machine was given a very small amount of space to work with and had a lot of trouble fitting the power supply for that component into the space allotted to them. Finally by dint of very creative thinking and hard work they came up with a design that fit the constraints. In fact the design was so clever that they won an award for it.

    It subsequently turned out that there were several other power supplies in the machine that could easily be expanded slightly to handle the load needed for their component.

  7. "Second, this isn’t East Germany: anyone is free to move to the Cayman Islands or Singapore or Somalia if they prefer a different package.'

    Granted, this limits the extent to which governments can impose bad deals on their citizens, which is why really bad governments impose high barriers to exit, (The classic sign of a bad government is that it puts it's efforts into stopping people from leaving, rather than entering.) and even fairly nice governments claim the right to tax you quite heavily on the way out. But "limits" is, of course, less than "eliminates".

    I'd also note that we're not just talking about a lack of efficiency in the provision of genuinely needed services. There's also over-charging for services, preventing the private provision of services so that they CAN be over-charged for, (Think first class mail.) and even 'services' you're forced to buy even though you neither need nor want them, and would actually be better off without them. (The war on drugs, for instance.)

    What I'm arguing for is a very strict analysis of what it's actually necessary for government to do. Government should be a last resort, not a first resort.

  8. In fact, I'd say this does pretty well explain my attitude towards when the government should be involved in the provision of a service.

  9. "And when it comes to tiresome memes, “We can attribute everything you ‘earned’ to the government’s efforts, so be thankful you’re allowed to keep any of it at all!” and “The government will spend your money better than you will.” rank pretty high up there."

    Well, we all have our crosses to carry. Presumably you can calm your jangled nerves by listening to Donald Luskin mangle the Laffer Curve some more. And let us know which vendor provides you with better road and Brown-Person-Wedding-Bombing services for your dollar, will you?

    "With the government, it’s either do as they say, or go to jail."

    O'Hare anticipated your response. When are you packing for Somalia? America: love it or leave it!

  10. I could actually do without the brown person bombing services, thank you. Along with the door kicking down services. Then there's the matter of the immigration control services I'm paying for, and NOT getting…

    Ok, we can add to annoying liberal memes, the 'If you don't like everything we insist the government do, move to Somalia!" meme.

  11. We're always looking for people to join our facebook group:…. Our slogan: "We're proud of our country and the taxes we pay to keep it great!"

    For me the bottom line is that, while we all have different ideas about what government should do, taxes need to be levied to pay for it. I don't like all the military spending. Conservatives don't like all the social spending. But both of us feel they are deeply moral, just and important. We sort all of this out through debate and the democratic process. Then we all pay the bill.

    So the question becomes who will pay what share? Some of us feel that wealth can be thought of as being borrowed from larger society, others feel it is entirely the product of one's own labor and therefore no moral obligation can be claimed. Either way, the bill is coming. As a purely practical matter, the more money you have, the less burdensome taxes will be; no one who pays taxes ends up with less money than someone who makes less. Whether or not this is "fair", in terms of daily life the better off will always have more income, thus more opportunity.

    So because we'll always be paying for things we don't believe in, more of that burden ought to fall on those who feel it least. It is the price we pay for democracy.

  12. "What I’m arguing for is a very strict analysis of what it’s actually necessary for government to do. Government should be a last resort, not a first resort."

    Brett, this is what I was trying to get at with my reference to "(social) stability and sustainability" and the engineering parable. A "strict" view of what is "absolutely necessary" may not be to everyone's liking. And in general it's as much a law of humanity that what we individually think "absolutely necessary" is likely to be affected by self-interest as it is that the government's monopoly on coercive power will lead it to (in some sphere) "[take] more than its contribution is worth." So discussions over this or that element of the package will be ongoing and worthwhile. But ultimately stability and sustainability require at least a grudging consensus. You think that the government must enforce private property rights? I agree, as long as we don't have children going without food, clothing, shelter, health care, and a good education. Otherwise, I'm afraid I don't agree. If a sufficient number of people feel as I do — and, historically, that appears to be the case — then it will be difficult to sustain a policy (or indeed a government) that enforces private property rights if the welfare of children is not a priority as well.

    Let's call it a social contract.

  13. "Some of us feel that wealth can be thought of as being borrowed from larger society, others feel it is entirely the product of one’s own labor and therefore no moral obligation can be claimed."

    And some of us don't think "larger society" = "government". Don't think government is even a decent stand in for larger society. That it's just a component of society that manages to get away with shooting people who won't knuckle under.

    And while democracy is a great way of making choices that have to be collectively decided, getting to make individual choices is better in almost all cases. We should be trying to minimize the part of our lives that are subject to democracy, or any other cracy, for that matter.

  14. Brett, you ought to make a list. However, dismissing the principled ideas of those you disagree with as "memes" seems tendentious. Anyhow, I'll see what I can come up with:

    – We can attribute everything you ‘earned’ to the government’s efforts, so be thankful you’re allowed to keep any of it at all!

    – If you don’t like everything we insist the government do, move to Somalia! (A revision of "love it or leave it!")

    – The government will spend your money better than you will.

    – That's racist.

    – They aren't ultimately responsible for their actions, it's society's fault.

    – The environment ought to be protected.

    – America is not a Christian nation.

    – Corporations aren't people; money doesn't equal speech.

    – Citizens have a right to health care.

    – Gays are not mentally ill.

    – If schools have to, why shouldn't the pentagon have to have bake sales as well?

    – Illegal immigrants are not terrible people.

    – You can't earn privilege.

    Feel free to add more!

  15. "you pay for what you use, private and public, and the rest is yours to have and to hold and to enjoy as you wish."

    I like this argument, but how does it (if it does) get you to progressive marginal tax rates?

  16. “Some of us feel that wealth can be thought of as being borrowed from larger society, others feel it is entirely the product of one’s own labor and therefore no moral obligation can be claimed.”

    And some of us don’t think “larger society” = “government”. Don’t think government is even a decent stand in for larger society. That it’s just a component of society that manages to get away with shooting people who won’t knuckle under.

    You've misinterpreted my meaning. By larger society I didn't necessarily mean government at all. I don't know about "shooting people" – I think the police generally go after criminals. The government does provide services that drive wealth/growth and upward mobility, like public education, roads, parks, social services, defense (although I here I think the expenditure/lives saved is absurdly misspent).

    But a good deal of wealth is simply inherited from existing social structures that individuals are lucky to be born into. This would include: race, gender, family and neighborhood. Just plug in some figures from those broad indicators and you've already got a pretty good predictor for life success. Government goes a long way toward remedying these inequalities by providing access to services that allow individuals to transcend their disadvantages and compete with others who were born into privilege.

  17. "how does it (if it does) get you to progressive marginal tax rates?"

    By interpreting "what you use" as proportional to earnings. See my previous post on privilege.

  18. Coercive taxation is a considerable, important, and intrinsic deficiency of public enterprise; also other kinds of coercion. I always tell my students that public policy deserves especially careful analysis because in government, and nonprofits under a tax-deductible-contribution regime, we are managing resources taken from people by force. But private enterprise has considerable, important, and intrinsic deficiencies as well, including liberty-compromising deficiencies and risks to community and social capital. I don't see why coercion gets the unique scarlet C that means we should have as little government as possible! Or why government should be a last resort; I think we should have whatever amount of government gets us to the point that more isn't net better, recognizing the opportunity cost of each step, choosing service-by-service, and then stop. This has been my personal rule for chocolate and lots of other stuff, and probably Brett's as well, and it has legs.

  19. If coerced coordination is always bad and government a last resort, then the merit of sports must go from yo-yo at the top down through tennis, doubles tennis, baseball,basketball, … , to football at the bottom. Why would a real liberty-loving American do anything but yo-yo and situps? Football, the devious socialist virus eating away at our society!

  20. "I don’t know about “shooting people” – I think the police generally go after criminals."

    Where criminals in many cases are just people who don't knuckle under. It's not like our criminal law is restricted to malum in se offenses, you know.

    As that essay I linked to relates, the heuristic I've used most of my life is, "If you’re not willing to have somebody hauled off at gunpoint over the project, then it’s probably not a legitimate concern of the state."

    The state is organized violence, everything it does relies on violence in some way or other, or could be better done without the state's contribution. So the first question you should always ask when you're proposing to have the government do something is, "Would I be willing to shoot somebody who doesn't cooperate with this?" Because, if you want the government to do it, you DO want people who won't cooperate shot, at some point.

    Now, that's a price worth paying in some cases. Mostly in cases where you're staving off the depredations of OTHER states, or small time criminals aspiring to commit state like activities. But it's a price you should always be aware of, and if you're not willing to pay it, you should find some other way to do something besides government.

    "“how does it (if it does) get you to progressive marginal tax rates?”

    By interpreting “what you use” as proportional to earnings. See my previous post on privilege."

    Nah, even that only gets you to a flat rate, "progressive" taxation takes a larger percentage of your income as your income rises, not a fixed percentage.

  21. Brett, we have progressive taxation on one particular thing: Adjusted Gross Income. We do not have progressive taxation of Realized Capital Gains, or Sales and Use taxes at the state level, or property taxes at the local level. And even on AGI, we have limited progressivity: "your income" gets taxed at an essentially FLAT rate as "your income" rises from $1M to $10M to $100M.

    The recently notorious Prof. Henderson bemoaned the fact that he's too poor to pay any more tax on his measly income. I say he was making a case for MORE progressivity: we could afford to tax HIM a bit less, if we would tax the people compared with whom he is a relative pauper a bit more.


  22. It's not just about "market failures".

    Even where "the market" succeeds fully and completely, the market does not reward virtue and achievement. Even in theory, a market economy is not an Ayn Rand novel. It is easy to lose sight of some of the fundamental insights of economics, when a hack like Greg Mankiw is writing the textbook, and it's all reduced to a b.s. feel-good story about how, if you just align the incentives correctly, everything will work out.

    As the classical economists discovered 200 years ago, most of the rewards of education, innovation and entrepreneurship end up flowing to rentiers, landlords chief among them. They actually do almost nothing that could be called "earning" in a moral sense. They are not adding to the productive stock; they profit as scarce land or rights are allocated to higher and better uses, and in the process, they capture the rising productivity of successful entrepreneurs and industrious workers.

    It's why, traditionally, so much taxation is levied on property, and why eliminating that property taxation with capital gains tax holidays and investment tax credits and other political scams is so damaging to the whole society in the distribution of income.

    When the government builds a road or a transit line, it is the adjoining property that rises in value. It is a simple enough principle, and and an insight at the historical and theoretical core of economics — at least it is at the core of an economics, which has *not* been hijacked by political ideologues.

    But, of course, economics has been hijacked by political ideologues, and so this insight is no longer part of the common intuition. It has been replaced, by means of relentless propaganda, by an obsession with the "size" and scope of government.

    The concept of "economic rent" — an unearned portion of factor income — was once central to the doctrines and insights of economics. Now, it is just a pejorative, associated almost exclusively and indiscriminately with supposed government grants of privilege; following Mancur Olson, "rent-seeking" is the particular province of lobbyists in Washington. The economy beyond the reach of corrupt government — the economy of the mythical competitive market — is magically rent-free, a canvas for pretty pictures of virtue rewarded and individual choice empowered.

    An actual market economy — even abstracting from the usual catalogue of "market failures" — will tend to channel income toward the landlords, and those, who succeed in constructing an apparatus of market power, to restrict choice.

    Those, who work hard and invest in their education may "earn" more money, but to apply their education they will crowd into cities and pay high rents. Industry sectors where labor productivity is rising most rapidly are likely, however perverse it may seem in moral terms, to see wages decline; while sectors, where productivity gains lag, will tend to be the ones, where incomes rise. A Bill Gates is a billionaire and a Vinton Cerf is merely a prosperous professional, not because of the relative value of their contributions, but because of mostly accidental peculiarities concerning how economic rents could be captured.

    There is certainly a core of truth in the proposition that incentives matter, and personal self-discipline, hard-work, thrift and prudent investment, matter, and, overall, we want the society and its economy to honor and reward these virtuous behaviors. And, we want empower individuals and families and independent business people to be able to make intelligent choices, in what must be a highly decentralized economy, if that economy is to perform for everyone.

    An economics written to please plutocrats, full of tendentitious naivete and simple-minded ignorance does not help.

  23. "Government goes a long way toward remedying these inequalities by providing access to services that allow individuals to transcend their disadvantages and compete with others who were born into privilege."

    The government can't be satisfied with just providing a level playing field. It insists on handicapping the players too.

  24. "Now, that’s a price worth paying in some cases. Mostly in cases where you’re staving off the depredations of OTHER states, or small time criminals aspiring to commit state like activities. But it’s a price you should always be aware of, and if you’re not willing to pay it, you should find some other way to do something besides government."

    This is the nub. Who is the "you" here? In the second sentence, it's a collective "you" — in fact, "we." WE'RE "staving off the depredations of OTHER states, or small time criminals…" None of us as individuals actually has the capacity to act in this way, which is why this is a responsibility of government. In the second sentence, I think you're imagining that it's a singular "you" — "…if you're not willing to pay it, you should find some other way…". But you (and we) can't have it both ways. It can't be that we operate effectively as a collective agent exactly and only in those circumstances where you as an individual — or alternatively, each of us as individuals — think we ought to. That's not effective collective action, that's either dictatorship or chaos.

    A couple of points about progressive taxation.

    1. Fairness as "equal pain". A complicated issue to be sure, but one measure of fairness is "causing equal pain." Because of marginal utility, the value of a given percentage of a poor man's income is worth more to him than the same percentage of a rich man's income is worth to him. Hence fairness under this model requires progressive taxation. This isn't the only measure of fairness (and for that matter fairness isn't the only criterion that matters here) but it's not a trivial one either, and it needs to be taken into account in formulating a reasonable tax code.

    2. Fairness as "value given for value received". It's hard to measure the exact value of government services, specifically, for rich people, the value of social stability and the maintenance of a system that protects their private property rights. However the proposition that this value is linear with wealth is certainly arguable, in fact it's highly unlikely. (Consider its value to a man whose children are starving.) This again argues for progressive taxation.

    Both of these points have been well understood for a long time. ("The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread," is from Anatole France in 1894.)

  25. I think Thomas and Brett should pay a 75% income tax rate. That would be the most fair, I believe. Already I feel sorry for them, so it's ok.

  26. The government can’t be satisfied with just providing a level playing field. It insists on handicapping the players too.

    To the extent that this is true, which is very small indeed, I suspect it works in exactly the opposite way of they way you're thinking.

  27. Russell, of course you do. That's likely what motivates your politics. The trick is to frame and phrase it in neutral language, like this: state university professors have seen their total compensation grow more quickly than the median household income over the last twenty years, and much of that compensation growth is the fruit of an irrational positional arms race, in which state universities and other nonprofit universities bid up the salaries of faculty members. Since our goal is to educate our young people and not to promote the agglomeration of talented faculty in one locale, we should, to the extent possible, discourage this kind of positional arms race. One way to accomplish our goal would be to simply regulate salaries directly, but the costs of this kind of interference in university governance might be thought too high. Tax policy suggests itself as another way to accomplish the goal, and perhaps a better one than direct regulation, because it allows universities to continue to determine salaries on their own, with whatever limited effect those might have following the enactment of the proposed tax policy. Your turn. Given that you've singled out Brett and me, I think you're going to want to start with something like, those who are more talented and successful should pay a much higher rate.

  28. @ Brett

    "The state is organized violence, everything it does relies on violence in some way or other, or could be better done without the state’s contribution."

    Oh come on. You're not going to make me start naming all the things that wouldn't/couldn't be done without the state's contribution, are you?

    @ Charles

    "The government can’t be satisfied with just providing a level playing field. It insists on handicapping the players too."

    I think you're mixing metaphors. What is your definition of a level playing field? Mine is a situation in which the participants come to the table as relative equals. The way privilege works, the relative agency of an individual is in large part determined by the "playing field" in which he was raised. The social programs most liberals are interested in raising taxes on the rich to pay for are targeted very specifically to the most needy among us, people for whom something like childcare, health care, tutoring, drug treatment, food stamps, etc. is a basic lever on helping them to become successful. We can argue about the merits of whether one program or another adequately addresses behavioral outcomes, but the idea that there are those among us who lack the self-efficacy to compete as adult citizens should be obvious. Liberals aren't generally interested in helping themselves – once one has the luxury to even begin to be politically empowered, one is likely to have more than enough agency to be successful.

    But beyond that point, when we really are talking about individuals with relatively equal levels of human capital, I don't see why we shouldn't seek some – as you put it, "handicapping". Very good moral arguments can be made against aristocracies and the accumulation of inherited wealth.

  29. I see now that proposals to raise Michael's taxes are to be removed for "incivility and vacuousness." Proposals to raise anyone else's taxes are fine, including proposals to raise mine. Such are the high standards Michael has for discourse. Well, I suppose I should be happy he didn't feel the need to lie about me.

  30. I am baffled. Less than a week ago Prof. Pollack wrote a post entitled "Hey Governor Quinn, Raise My Taxes Already". I've been reading the blog for years and can recall many, many wishes to repeal California Prop 13, an action that would certainly raise Mark's taxes.

    Why, then, are commenters Brett and Thomas accusing Mark et. al. of trying to raise someone else's taxes? That's the exact opposite of the truth. They're trying to raise their own *and* those of everyone above them.

  31. “Some of us feel that wealth can be thought of as being borrowed from larger society, others feel it is entirely the product of one’s own labor and therefore no moral obligation can be claimed.”

    Hasn't anyone ever considered that both might be true? In other words, wealth is borrowed from a larger society, but unless one is willing to labor, no wealth will be accumulated? To give a real world example, a child goes to public school. However, unless that child labors to produce good grades, he/she will never produce wealth. If the child labors hard enough, opportunities to attend college may be offered, both from public and private institutions. Financial services are offered either from the state or possibly alumni. If the student fails at his labors, again no wealth is created. One can labor long hours either by the sweat of ones' brow or the production of ones' mind and still be beholden to institutions that allowed that wealth to be created.

  32. Glidwrith, maybe you missed it but that "entirely" is doing some very heavy lifting. I'm not sure if it's possible to sidestep the free will/determinism debate at this point, but this would be the place for it. In any event, the degree to which one has the right to enjoy the fruits of his labors is tied firmly to the degree to which his labors were chosen by him and only him (no parenting, peers, education, etc.). The child isn't a very good stand in because most people concede that the younger the child, the less free will he possesses, thus the less he chooses his labors, and the less right he has to his efforts (until age 18, none, right?). We blame the parents. Yet magically, when a boy comes of age, we lose our faith in what we had formerly acknowledged was a highly deterministic process of development.

  33. The exclusive Hobbesian emphasis on the coercive nature of government is overdone. After all, if the IRS had to collect everybody´s taxes at gunpoint it would collapse. The starting Lockean point for government is natural voluntary cooperation, as per the anarchists. Coercion, soft or hard, comes in inevitably as a precaution against backsliders and free-riders.

    I had difficulty in the 1990´s explaining to Eastern European officials (when the issue came up) why the German model of vocational training by apprenticeships was probably unavailable to them. A robber-baron German capitalist would drop his apprenticeships, as without serfdom he can´t peronally capture enough of the benefits to cover the costs. What I think happens is that contributing your share of apprenticeships is a social norm among employers, and backsliders are frozen out of the vital Stammtisch by the other patriarchs. This sort of social capital takes decades to grow, and to a considerable extent cannot be established by policy at all. Since the new capitalists in Eastern Europe were of the robber-baron type, the only practical option for policy was a more statist French-type scheme backed by compulsion.

  34. "Why, then, are commenters Brett and Thomas accusing Mark et. al. of trying to raise someone else’s taxes? That’s the exact opposite of the truth. They’re trying to raise their own *and* those of everyone above them."

    Because if you want your own taxes raised, you just pay more voluntarily. You only need the tax rate changed to raise the taxes of other people, who didn't want their taxes raised. Asking for rates to be raised is, thus, always about the other guy. Without exception.

    "After all, if the IRS had to collect everybody´s taxes at gunpoint it would collapse. "

    And if it couldn't collect anybody's taxes at gunpoint, it would also collapse. "Your money or your life" doesn't require that everyone be shot, you know. Just the people who don't hand over the money. While the anarchist says that the state is based on violence, and thus should be abolished, the minarchist says, the state is based on violence, but violence is sometimes justified. But you should never forget that it's based on violence, because mostly violence ISN'T justified…

    I compare it to eating meat. I eat meat, but I don't kid myself that doing so doesn't involve animals being killed. If you don't think eating meat is worth killing animals, you shouldn't just pretend that the meat you buy in stores isn't cut up animals, you should become a vegetarian. Because the animals are still being killed, even if you delegate the killing.

    Similarly, the violence is still there, whether you do it yourself, or delegate it to the state. If it's not something you'd be willing to get violent over personally, why the heck do you think you're better if you delegate the violence to the state? The blood might not be on your hands literally, but it's still there metaphorically.

  35. Brett, I think that history has shown that many are willing to get violent personally. And your comment about raising other people's taxes is correct. Of course you want to raise the other guy's taxes – he doesn't want his taxes raised but is benefiting from the state! And that doesn't begin with how a small amount from each in a large group can add up. This whole exercise is silly, almost everyone agrees there should be taxes because almost everyone agrees there should be a government. The question is a matter of degree and it always (in my experience) comes down to a debate on what fraction of accumulated wealth comes from the sweat of the brow and what portion comes from the help of others (ie the state and its citizens/residents). Naturally, the ignorant (see the NY Times inter generational income mobility flash applet) think that wealth largely comes from the brow rather than the society because that type of labor is easy to see. It is far more difficult to see that your parent's income quintile is the largest predictor of yours because most of your friend's parents were in the same quintile.

    So yes, the answer is to decide what you want your government to do and set taxes accordingly: how much money + marginal/progressive to take into account the marginal value of income.

  36. I never mind these bleats. What gets me is the look in the eye of the bleater.

    At best, it's genuine angry confusion, which means that this is a person you can actually sit down and explain things to, and at the end of that process they're going to feel sad and deflated and, frankly, poor. And unless they're absolute saints, they're going to resent you for pointing out that they were ignorant.

    But usually, the person bleating these bleats has a twinkle in the eye (if not a s**t-eating grin on the face) as they bleat about their poor oppresèd selves. The grin that says, "You can't win this argument because we're not having one. I love the things government does for me, and I especially love the fact that I'm getting them below cost, and as long as I've got mine, it doesn't really bother me that someone else is going without. Frankly, I just can't believe I'm lucky enough to live in a country where the inevitable austerity measures are going to have to work their way up through three tax brackets before they get to me–and by then, I'll be cashing my Social Security checks anyway. But anyway, for sake of appearances, I'm going to drag out my begging bowl and moan about oppression. Partially because it gives me more political leverage to keep things exactly the way they are now, and partially because I just love tormenting bleeding-heart fair-play suckers like you."

  37. I am on the smaller taxes side, and I, too, find the it's my money argument to be unconvincing. I do, however, think that in the US today, an individual is able to spend his income to satisfy his needs and wants more efficiently than the government can. I think much of the outcry against taxes in one against the particular mix of government spending, or against the creep of government from the provision of basic services, to one that is, in my opinion, much too expansive.

    First of all, the government undeniably serves a purpose, and one that is highly beneficial. Without the government, people would not be able to produce as much as they do. Few people would deny that some taxes are necessary, and no one (probably) wants to move to Somalia. The real issue is what level of government is appropriate, which in my opinion, is in between where we are now and Somalia. The government must provide some services, but at some point, it becomes inefficient for the federal government to make decisions for everyone. People have different preferences. With a given pot of money, some would prefer to spend it on better schools, others would prefer more arts, others prefer lots of health care, and many other things. When decisions, especially those regarding economic activities, are aggregated at too high of a level, too many people's preferences are disregarded, and we end up with an inefficient outcome. Some of this inefficiency is unavoidable, some isn't. I think most of us would agree that this happens at some level of government involvement in the economy and daily life. Like Somalia, no one wants to move to North Korea.

    In my opinion, we have already passed the optimal level of aggregation such that we would be better off shrinking government and letting individuals make more decisions. To me, cries for lower taxes are generally a cry for a different allocation of spending – one where the government does less and individuals do more.

  38. Thomas writes:

    "Given that you’ve singled out Brett and me, I think you’re going to want to start with something like, those who are more talented and successful should pay a much higher rate."

    I find it utterly fascinating that Thomas' assumption is that my root motivation for raising his taxes (other than the amusement derived from his guaranteed annoyance) is that he's more talented and successful. But Thomas… I'm more talented and successful than you are. I'm all for raising my rates too.

    Now how do I know that I'm more talented and successful than you are? I alluded to the reason when I admitted that I already feel sorry for you. (I really do–no irony) You wouldn't be iterating (an infinite loop?) this compulsive atonal juvenile whining unless in fact you didn't feel that you were talented and successful. You could double my taxes… I don't care, as long as it's done collectively.

  39. "Why, then, are commenters Brett and Thomas accusing Mark et. al. of trying to raise someone else’s taxes? That’s the exact opposite of the truth. They’re trying to raise their own *and* those of everyone above them."

    Because they are intellectually dishonest. All conservatives are. We've shown that many times before. Water's wet, fire's hot, Brett is a liar, etc.

  40. People are balking at higher taxes because we aren't getting very much value from the taxes we are paying now.

    Put another way if the government were run more efficiently people wouldn't mind so much if taxes went up. Too much of our tax money is given to companies that contribute money to political parties. Too much money is given to appease unions and special interest groups. Mind you their is nothing wrong with corporations, unions, or special interest groups. As long as they aren't taking money out of the U.S. Treasury that is. I like the idea that I don't have to buy my own fleet of fire trucks and hire a team of well trained and courageous men and women on 24 hour stand by just in case my house catches on fire. I like that everyone in town chips in and we all share the costs and benefits of that service. And the same for many other services as well. I also like the idea that I don't have to own my own private land fill and garbage truck. It really saves a lot of time and money to just put my garbage by the curb once a week and have someone else do for a small fee. But, if a private company can do it better and cheaper then lets use the private company. Too often decisions are based not in the best interests of the people but what's in the best interests of the politicians. And that is why I am against higher taxes. First show me that you can spend the money your getting now responsibly then we'll talk about whether you can have more.

  41. But, to channel Yoda, when it comes to raising your own taxes, there is no "try". One simply does it. One can only try to raise somebody else's taxes.

  42. Brett, your point is mundane, please stop hammering at it. Raising taxes generates far more revenue than some people sending in extra money (not to mention that the IRS has sent it back when I have done it).

  43. "That's mundane!" is a heck of a long way from a refutation, let alone proof of intellectual dishonesty. I sometimes think one of the most dangerous sources of error for the cognitive elite, is the temptation to view mundane truths as too boring to pay attention to.

  44. What a joke. So if someone believes in small government and less taxes that means they should move to Somalia? I expect better from this blog. Other than weaponry, protective services (police, fire, etc.), in what area do you believe the government can allocate resources better than the private sector? Education? Given that most of my liberal friends send their kids to private school, probably not. Healthcare? Given how great a job they do in Medicare and Medicaid, I have my doubts.

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