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. Brett, I'm not trying to refute your point. In an earlier post and the one you responded to I agreed with it! People desire to raise the tax rates to force unwilling participants to pay their fair share for government / society. That those two parties disagree on what 'fair' means and even on what 'share' and 'government' and 'society' means does not change this. As I said earlier, the disagreement is not over whether the coercive power of the government should be used to collect taxes – except for a small segment of libertarians and the like – everyone agrees that taxes are necessary. The debate is over what the government should be charged with doing and how it should pay for those things (taxes, bond issues, money from trees, etc). Draping a mundane point in the vestments of a truth the elites (who are these people anyhow?) don't bother to question is silly.

  2. Sad. The ability to look at the entity that gave us Wounded Knee, Iraq, Vietnam and more people in prison proportionally than China and say that it is deserving of more resources is pathological. There is one corporation in this country that is worth over a trillion dollars and has the right to kill people. Progressives are its eager foot-soldiers.

  3. "Other than weaponry, protective services (police, fire, etc.), in what area do you believe the government can allocate resources better than the private sector?"

    That's the whole point – government pays for things the private sector never will. You're talking about the eradication of public schools, libraries, roads, parks, medicare, social security, etc. Even when suppliers are contracted, the government still has to tax us to pay for them.

    And again, most liberals aren't interested in government spending for themselves. Things like safety nets, schools and other public services are all about offering a basic level of access to all Americans, with an emphasis on those who need the most help. Sure, a very few liberals can afford to send their kids to private schools. And while I couldn't, I could likely homeschool my daughters quite well. But many parents couldn't, and so we guarantee access on principle. Ditto with most other government services.

  4. "leaving her only (say) a lousy 10%, or $1,000,000."

    You really think small businesses have a profit margin of 10%? HAHAHAHAHAHAHAHAHAHAHA!

    Here's a clue for those of you who have never met a payroll. The boss gets paid last.

  5. Yes, Rasqual, I'm with you. Megan chews up this post pretty severely and spits out the pieces. The comments take care of the scraps.

  6. Unfortunately, I believe you have mis-quoted your Babbitt straw man, who (if he exists) believes something more like: “I earned my money by my own efforts and when the government takes it from me and gives it to someone else just to spread the wealth around, it’s theft.” And indeed, the compulsory "spread the wealth around" attitude (if not the specific action) is functionally indistinguishable from the attitude of a thief. You are, of course, entitled to your own opinion, but at least get your facts straight (granted, you may have difficulty doing this when using a fictional straw man, maybe you should try a different argumentative technique).

    As for who spends money better, and individual using his own, or Congress using OPM, you are welcome to your opinion, but in my ignorance I ask that you provide examples of the government spending OPM better than individuals. There are, of course, certain areas where it reasonably must be the government doing the spending (say, defense, though the individual mandate option has yet to be tested, except in the local police protection racket where it has enjoyed some success), but that does not mean it was well-spent, just that we were stuck with the spender we had.

  7. "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."

    I'm not at all sure on what basis, if you've been reading posts here for more than a few days.

    Oh, wait, you meant "expect" in a normative sense, right?

  8. As Megan McArdle points out, the types of government expenses O'Hare defends here are the low-hanging fruit: they're both the cheapest things government does and the most obviously useful. Justifying flat-out redistribution using the same argument is a bit more tricky.

    Brett makes a perfectly valid point about the silliness of comparing coercive taxation to free market transactions with suppliers. The sorts of people who proffer this argument would have no doubt been aghast (and rightfully so) if defenders of the Bush administration had dismissed post-9/11 civil liberties concerns by saying, "Hey, if you don't like it, move to Canada."

    O'Hare in a comment says: "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."

    Problem is, even when mouthing the words, statists don't actually BELIEVE this to be the case. The presumption is that wealth is first and foremost the property of "society," and that the "earners" of said wealth only "earned" it due to luck or "privilege" or some such, and should therefore feel fortunate to be able to keep anything at all. Such a philosophy is completely at odds with the founding principles of this country.

    O'Hare also writes: "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."

    Well alrighty then. But since there is not a bright neon sign telling us exactly where that point is (and since this inflection point is almost certainly in constant flux), we must debate the issue. Clearly, a significant portion of the electorate right now is saying that we are well past the point where more isn't better, and that in fact, much, much less is better. The problem here is that O'Hare and those on his side of the argument apparently want to discredit and invalidate the opinions of those with whom they disagree, therefore avoiding the whole messy exercise of actually having to take the debate seriously.

  9. Hey, Locomotive Breath, the boss might get paid last, but the boss usually gets paid MOST.

    Anyway, last or not, if the boss gets paid a lot, she pays a lot of income tax. If not, not. Should a boss whose PERSONAL income happens to be $500K this year pay less, more, or the same income tax as the employee whose salary this year is also $500K?


  10. "what’s yours is what’s left after you pay for what you use up"

    *You* don't get to dictate what I use, O'hare. I don't need you to build my roads while you've got the force of government at my head to force me to do it. Get your presumptions out of my market.

    I don't need you, and I will never pay for you. Go fuck yourself.

  11. Somalia is only a relevant analogy when you run into an absolutely hardcore "all taxes are theft!" libertarian. They're rare, even on the internet.

    Cutting taxes w/o cutting spending first strikes me as stupid, given that it's been done repeatedly with ill effect. Cutting spending is a lot harder. The programs that spend the lion's share of the money have large & potent consituencies. We will have to make cuts to those programs, and it will not be pretty. I'm in, but forgive me if I doubt the sincerity of people who suddenly decided they were alarmed about spending in November, 2008.

    Alex – there are more things than just military, police, fire that the government does best (food/drug safety, public transportation, large infrastructure projects, regulation and more). You raise the issue of Education. I assume you are not opposed to paying for public education, but simply think that vouchers will lead to more efficiency? I suppose that's possible, but I don't think it's all that likely, really. Private schools, under the current system, do not have to take anybody/everybody the way public schools do. Private schools full of students who grew up well-off with educated parents outperforming public schools who don't get such a student population is hardly surprising to me. If you take the student body of an underperforming public school, turn it over to a private school and get measureable improvement, ok. That's interesting and worthy of consideration. Just slagging public schools by saying that people of means often send their kids to private schools doesn't really work, though.

  12. "Problem is, even when mouthing the words, statists don’t actually BELIEVE this to be the case. The presumption is that wealth is first and foremost the property of “society,” and that the “earners” of said wealth only “earned” it due to luck or “privilege” or some such, and should therefore feel fortunate to be able to keep anything at all."

    That's just a liberal rebuttal of the argument that all wealth is created by virtuous, hard-working, deserving folk who shouldn't be taxed. It's "I hit a home run and you booed me!" versus "Dude, you were born on third base and scored on a wild pitch." There is hard-earned wealth and there is also privilege (and luck, both good & bad). Most times, people's success or failure is a mixture of that stuff. It is irritating to a liberal to hear the tired meme of the "self-made" millionare who, when you bother to look, lacked for nothing in childhood, inherited a bunch of money, etc. Similarly, it is irritating for the conservative to hear arguments that wealth is just about privilege and luck. In reality, it's usually a mixture of all those things.

  13. "That’s just a liberal rebuttal of the argument that all wealth is created by virtuous, hard-working, deserving folk who shouldn’t be taxed."

    Well, maybe… except I never actually hear anyone making that argument. Also, most millionaires were not born with it.

  14. Wow, incredibly dumb reasoning here. As others have pointed out, Megan McArdle fisks this but good. She's made you her bitch, O'Hare.

  15. Rob in CT

    Yeah, so just how much wealth did Steve Jobs inherit? Bill Gates? Warren Buffett? Henry Ford?

    I could name dozens of others. Your turn.

  16. One more comment on the whole "earned" vs. "got lucky" argument:

    How one obtains wealth (as long as it is done legally) is much less important than what sorts of behaviors society encourages. Let's say Richie Rich inherits a billion dollars. Under what type of tax burden is he more likely to spend his wealth and invest it in the economy instead of just hoarding it and looking for offshore tax havens?

    Or we can look at it more generally — Let's assume Rob's extremes: an argument between someone who believes "all wealth is created by virtuous, hard-working, deserving folk who shouldn’t be taxed (much)" and someone who holds that wealth is the result of luck and privilege and belongs to "society." The first philosophy will lead to low taxes and therefore encourage hard work and smart economic choices and discourage sloth. The second philosophy will lead to high taxes and high degrees of redistribution, therefore discouraging hard work and economically wise behavior while encouraging dependency.

    So regardless of what one believes about how wealth is created, which philosophy will lead to greater societal wealth and prosperity?

  17. It makes about as much sense for people who are not in government to argue about what government should do as for the swimming survivors of a mid-ocean shipwreck to argue about what sharks should eat.

    The government of a locality is the largest dealer in interpersonal violence in that locality (definition, after Max Weber). This is my basic text…

    Eduardo Zambrano

    "Formal Models of Authority: Introduction and Political Economy


    Rationality and Society, May 1999

    "Aside from the important issue of how it is that a ruler may economize on communication, contracting and coercion costs, this leads to an interpretation of the state that cannot be contractarian in nature: citizens would not empower a ruler to solve collective action problems in any of the models discussed, for the ruler would always be redundant and costly. The results support a view of the state that is eminently predatory, (the ? MK.) case in which whether the collective actions problems are solved by the state or not depends on upon whether this is consistent with the objectives and opportunities of those with the (natural) monopoly of violence in society. This conclusion is also reached in a model of a predatory state by Moselle and Polak (1997). How the theory of economic policy changes in light of this interpretation is an important question left for further work."

    The "public goods" argument for State (government, generally) production or subsidization of a good or service suffers from a basic flaw: corporate oversight is a public good. The State itself is a corporation. Therefore, oversight of State functions is a public good which the State itself cannot provide. State assumption of responsibility for the production or subsidization of public goods transforms the free rider problem at the root of public goods analysis but does not eliminate it.

  18. "Societal wealth and prosperity" is good. More of it is better.

    But "societal wealth", if the phrase means anything at all, is the sum of social wealth (public goods like infrastructure, public services like the NIH) and proprietary wealth. Social wealth benefits everybody; proprietary wealth benefits its proprietors.

    Increasing "societal" wealth by increasing ONLY proprietary wealth is good — as long as you're one of the proprietors and the increase is fairly uniform. Otherwise, it doesn't necessarily make YOUR life any better.

    How would you choose between these two policies?

    POLICY R: Results in 1% gain for you, 10% gain for the Koch brothers.

    POLICY D: Results in 2% gain for you, but only 5% gain for the Kochs.

    Maybe policy R results in more "societal wealth". But which one is better for YOU?


  19. Michael O'Hare you haven't run a business – that 1M profit – is probably mostly capital assets, inventory and work in process. So assume a 1M profit, 100K in cash – the rest in assets – where does the money come from to pay for the 400K in taxes……………….

  20. "Social wealth benefits everybody; proprietary wealth benefits its proprietors."

    The second statement is only true if you assume that proprietary wealth is hoarded, rather than spent or invested. If it's hoarded, then it doesn't do the owner much good. If it's spent or invested, it benefits all of society by stimulating economic activity and providing jobs.

    "Maybe policy R results in more 'societal wealth'. But which one is better for YOU?"

    From a moral and constitutional perspective, I do not wish to benefit from wealth forcibly taken from others. But your entire proposition is bad based on the fallacious reasoning I pointed out above. If the Kochs earn a 10% gain, then that's good news for me if I provide a good or service they want or if I am an entrepreneur looking for startup capital. If they only see a 5% gain, maybe they aren't in as much of a spending mood.

    But even more than that, your argument fails because it makes the same fundamentally flawed assumption statists always make — namely, that changes in taxation will not impact the incentive structure or affect economic activity or output one iota. In truth, raising the Kochs' taxes so that I can enjoy some of their wealth will not only reduce their gain, but will also reduce their economic output to society by lowering their incentives to produce additional wealth.

    Heckuva job, Tony.

  21. Ben, quit doing your Dubya impersonations. You just make yourself sound foolish that way.

    What you don't seem to get is that David Koch's "proprietary" wealth is proprietary precisely because it benefits HIM, not you. Likewise, YOUR proprietary wealth benefits you, not David Koch. "But David Koch has enough money to give me a job," I hear you cry. Sure: he can pay you an infinitessimal portion of his wealth in exchange for a couple of thousand hours of your time next year. Leaving aside the obvious fact that it's not a gift, you should at least be bright enough to grasp this: paying you REDUCES his wealth. That's why he doesn't hire you unless your work is more valuable to him than what he pays you. That's why he doesn't "give you a job" unless it increases his own, personal, proprietary wealth more than it increases YOUR proprietary wealth.

    "But even more than that", to borrow your felicitous phrase, you make a bloomer when you talk about "the same fundamentally flawed assumption statists always make — namely, that changes in taxation will not impact the incentive structure or affect economic activity or output one iota." Us "statists" are perfectly aware that some policies can in fact reduce societal wealth. That should have been obvious just from my question. The two alternative policies I asked about POSTULATED that societal wealth would end up lower in one case than the other. You seem to prefer the case where David Koch makes out better and you make out worse. I wonder which one David Koch would prefer.


  22. (Eli): "That’s the whole point – government pays for things the private sector never will. You’re talking about the eradication of public schools, libraries, roads, parks, medicare, social security, etc. Even when suppliers are contracted, the government still has to tax us to pay for them."

    Circular or false, mostly.

    School is a means, not an end. "Public" schools are government-operated schools, so "government pays for…public schools" is circular. Obviously the government pays for government-operated schools. If you mean that there is no market for education, then that is clearly false. Schools can be expensive; education is potentially cheap. In abstract, the education industry, where local knowledge of enormously variable inputs and outputs matters more than systematic expertise, is a very unlikely candidate for government operation.

    The same goes for medical care.

    Libraries? Andrew Carnegie. Borders.

    Social Security? Private markets supplied pensions. Tax-subsidized Social Security crowded out private arrangements like fraternal societies.

    Roads I'll give you, and community parks (but not National parks).

  23. "What you don’t seem to get is that David Koch’s “proprietary” wealth is proprietary precisely because it benefits HIM, not you"

    But "We" is composed of just a bunch of "him"s and "her"s, and in theory, we could all be quite well off even if ALL wealth were only "proprietary" wealth. Which is unlikely to be the case in reality, but does establish that you can't just dismiss the idea that proprietary wealth contributes to the welfare of society. Society IS, after all, made of of individuals, who are made better off by their own wealth.

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