[Tim Lee]
Will Wilkinson has a question:
Libertarians and many conservatives often talk about lower taxes as a matter of liberty. But a higher tax isn’t more coercive than a lower one. You’re either being coerced or you’re not. A guy who mugs five people with thin wallets is no less guilty of coercion than a guy who mugs five people with thick wallets. The harm from coercion might be greater if more is taken, but there is no more or less coercion. But if you don’t think that the size of the opportunity set is a matter of liberty, then you should not think of lower taxes as a gain in liberty, but just as a reduction in harm. Yet libertarians and conservatives don’t tend to talk this way. Why not?
I think the way to think about this is to remember that taxes have two effects, which economists would dub the income effect and the substitution effect. The income effect is the one most people think of when they complain about taxes: when taxes go up, people are able to consumer less of stuff than they were before. Under the substitution effect, in contrast, consumers react to rising taxes by shifting their consumption to something that's untaxed. For example, if you raise taxes on income, people shift to consuming more leisure.
The income effect dominates for low tax rates. The substitution effect dominates for high tax rates. As tax rates approach 100 percent, the tax system increasingly comes to resemble a prohibition on whatever is being taxed. And that has two important consequences: first, the definition of what's taxed becomes all-important. And second, tax evasion becomes a more and more serious problem.
For example, in an economy with a 99 percent tax rate, barter would be extremely common. Rather than paying the mechanic to fix my car, I'd ask him to fix my car in exchange for mowing his lawn for a month. Rather than giving me a raise, my boss would let me have a company car. If there's still a deduction for health care, health care plans would suddenly get obscenely generous, as all sorts of perks only tangentially related to health care would suddenly come with health care plans. And of course businesses would live and die by the tax status of various transactions. When "income" is taxed at a higher rate, people do less of things that lead to "income," as that's defined by the government.
And that, in turn, would mean that the IRS would have to get increasingly involved in policing every aspect of peoples' lives to make sure that no tax-evading bartering was going on. Has your daughter been volunteering to watch your lawyer friend's kids because she provided some free legal advice to you a few months ago? Did the contractors who re-did your deck really do it for $1000, or did you give them some money under the table? Should your company have to report the fair market value of the meals they provide you at work as income for you? To achieve the same compliance rate, the IRS would have to hire more agents, conduct more audits and investigations, and bring more people to court over alleged tax evasion.
Moreover, tax loopholes would become an increasingly potent mechanism for social control. You'd see a huge increase in lobbying over the tax code, which gives Congress and IRS officials much stronger positions of authority. A lot of people think we've inflated home ownership rates with the home mortagage deduction. Imagine how potent such incentives would be if the tax rate were 90 percent.
Finally, you'd see a large increase in the black market, as more and more people did business under the table rather than report income that would be largely confiscated anyway. Forcing people into the black market undermines liberty in a variety of ways, including weaker property and contract enforcement, a need for secrecy, and being vulnerable to extortion from government officials. A world in which almost everyone earned money on the black market is a world in which tax officials have the power to harass anyone they wanted.
The effect is easiest to see at the top end of the tax scale, but the effect exists all along it. As a recently self-employed individual, I'm newly conscious of all the ways that the tax code shapes my behavior. I can deduct computer purchases as business expenses, so I am, on the margin, more likely to buy computer hardware. Hiring a plumber means that both he and I have to pay income taxes on the transaction, so on the margin I'm more likely to fix the plumbing myself to avoid that tax wedge. At a lower tax rate, I'd be more likely to hire the plumber.
In all of these cases, the effect of higher taxes isn't just that I'm able to buy less stuff, it's that the incentives of the tax code more strongly distort my behavior. One way to look at the tax code is as a series of rewards and punishments for doing certain things. The tax rate is a scaling factor for all of these rewards and punishments. If we think a $1000 fine is more coercive than a $100 fine, which I think it is, then a 95 percent tax rate is less coercive than a 50 percent tax rate.
Photo courtesy Beatrice Murch
That seems to make sense, as long as the tax reduction occurs in a vacuum. If a government reduces the income tax rate from 95% to 50%, but then turns around and raises the gas tax, the entertainment tax, the property tax, and the sales tax in order to pay for it, then there's no net loss in coercion. The root problem, then, wouldn't be the specific tax rate (even if it is 100%), but the size of the government that requires a given amount of taxes to support itself.
A 50% tax on someone making $10k per year shuffling fast food might encourage him to go underground selling drugs. At low levels of income , we need more incentives to work , not less.
I hedge fund manager making a half-billion a year , however , is unlikely to stop working because his next half-billion is taxed at 50%. Yes , he may seek out tax shelters , but if we can raise tax rates we should be able to do away with the shelters , as well.
The fact is , this country performed better economically when we had steeply-progressive tax rates ,and other countries do so currently. Income redistribution simply works better , overall , than trickle-down. In fact , the evidence is becoming clear that trickle-down has been outright destructive.
If you want to talk about whacked-out incentives and disincentives , look at the punishment of white-collar criminals who steal $millions compared to the guy who robs a 7-11.
These arguments occur in a vacuum because they don't account for how much the government spends. Reducing spending isn't politically viable, because whenever specific programs need to be cut they turn out to be popular. Not to mention 75% of our tax money goes towards interest on debt, defense, medicare and social security. If we don't cut these it would take cutting everything else out of the federal budget. That's why I say any vague talk about balancing the budget and reducing spending that doesn't talk about reducing spending on defense, medicare, social security and which specific programs need to be cut is political posturing with no intention to reduce spending.
The result is what we have today, a crushing federal deficit and interest costs that suck money out of the country.
The fact is , this country performed better economically when we had steeply-progressive tax rates ,and other countries do so currently. Income redistribution simply works better , overall , than trickle-down. In fact , the evidence is becoming clear that trickle-down has been outright destructive.
Goldilocks - support please. Given that the countries with the lowest tax rates recovered first from the Great Depression (look at Sweeden vs the US) I'd say the opposite is true. There's no evidence that trickle-down is destructive unless;
1. You consider income disparity to be de facto evidence of harm, independent of otherwise rising quality of life.
2. You rely primarily on immediate post-WWII years in the US, when America's overseas competitors had been bombed to dust, to support the positive effect of certain policies.
The harm from coercion might be greater if more is taken, but there is no more or less coercion.
That's one of the more inane semantic arguments I've seen recently.
In response to the question originally raised: Some degree of government is necessary and accepted. Taxation is needed to fund government. At a certain level, taxation is simply a resident's dues to be a member of society. It's the social contract.
It's when government goes beyond what an individual believes the government should be doing that taxation is perceived as coercive. Nor is this just a conservative/libertarian perception - think of liberal anti-war protesters who go to jail on tax evasion because they refuse to fund a war. They pretty clearly find taxation to be coercive as well.
I agree that hardcore conservative/libertarian types do tend to use simple (and simplistic) "taxation is theft" slogans, but that's more of a parody than an argument.
The early conception of the scope of government in the USA was pretty much limited to public goods, narrowly defined: military, police, criminal and civil courts, jails, not a whole lot else. As the tax take increases, it necessarily represents a step away from true public goods (or at the very least a much looser interpretation of public goods to include education, roads, healthcare, etc. etc.) At high rates of taxation, much of the tax base goes towards transfer payments. Narrowly-defined public goods represent externalities for which government is often a superior solution for all concerned. It isn't difficult to argue that low tax rates covering such true public goods are not coercive in the same way that looser public spending and transfer payments are. So high tax rates are qualitatively different and are indeed more coercive than low tax rates.
The fact is , this country performed better economically when we had steeply-progressive tax rates ,and other countries do so currently. Income redistribution simply works better , overall , than trickle-down. In fact , the evidence is becoming clear that trickle-down has been outright destructive.
Except that we had less redistribution, in the modern sense, when we had steeply-progressive tax rates - most of the spending went to the military.
[A] hedge fund manager making a half-billion a year, however, is unlikely to stop working because his next half-billion is taxed at 50%.
Because the rich are, what, really greedy? I don't make anything like that much, and when I was laid off last year I thought very, very hard about whether or not to look for work.
I've saved enough for a modest retirement, and I'm earning at my peak. Even now the tax bite is enough that continuing to work will help my retirement not by adding significantly to my savings but by postponing when I start spending it. If I could have convinced an interesting employer to take me at 60 percent time, boy would I have done that.
In your last sentence, don't you mean "a 95% tax rate is more coercive than a 50% tax rate"?