Mark Thoma Asks A Fallacy Of False Choice With “Which Tax Is Preferable?”

On Economists View, Mark asks:

Is it important for taxes to be progressive? Or is progressivity in the net benefits the only important consideration?

In this context:

In Europe, the VAT is used extensively. VATs are regressive, but they’re an important source of revenue for the highly progressive tax-and-transfer systems in Europe. That is, although the tax itself is regressive, it is very good at producing revenue and once the distribution of benefits is accounted for (both cash transfers and other benefits), the systems are highly progressive overall.

I have always argued for progressive taxes, in particular for the principle of “equal marginal sacrifice” (the lost dollar paid in taxes should lower utility by the same amount or everyone, and since the marginal utility of a dollar falls with income this implies a progressive structure). But increasingly I’m wondering if a flatter structure that brings in more revenue and ends up more progressive once the benefits are accounted for might not be better.

The political right seems to think there is something valuable about the pain from paying taxes, that’s why they complain when people are able to avoid them (unless you are rich and manage this through legal avoidance). ((Note: Mark makes another mistake in criticizing the rich for avoiding taxes, when the reason that they avoid them is their disagreement over how they are USED, and the unequal risk they must take to create wealth. Again, financial sector aside. Conservatives think in terms of business people. Progressives think in terms of bankers. )) When people are forced to feel the pain from taxes, they argue, that helps to keep government small (this seems to argue for equal marginal sacrifice and progressivity so that the marginal pain is the same).

My argument for progressivity is a bit different. It is based upon equity. It seems fair to have those with more pay proportionately more. But why shouldn’t the overall outcome be the important consideration?

So, he bases his question on the assumption of ‘Equity’ in result, meaning that ‘a moral sense of equity’ is the means by which decisions should be made.

Even if Mark’s right that ‘equal marginal sacrifice’ is the definition of ‘equity’, it is a selective definition because it only considers money transferred. But far more than money is reallocated in these transfers. He’s using (as do most progressives) a conveniently selective definition of ‘transfers’. All transfers have secondary effects called ‘externalities’. An economist who selectively chooses to ignore externalities in transfers is effectively committing a form of deception. In Mark’s case, given his consistency, it’s a form of self deception that humans commonly use to deceive themselves and others in order to justify obtaining their preferences.

What are the Non-Monetary transfers under ‘equal marginal sacrifice’?

    1) By laundering the relationship between producer and consumer through the artifice of government, the producers are deprived of the social status they have earned by serving consumers in the market. This is most important, because social status is as much or more important to humans as is money. People use money to pursue social status. Social status provides both entertainment, access to stimuli and experiences, and most importantly access to other people a) in terms of opportunities, and b) in terms of mates.

    The side effect of ‘status opacity’ has been that the upper classes have abandoned society both culturally, morally, and financially. And while any civilization can

    2) The CHOICE of what ends to put this ‘equal marginal sacrifice’ (money) to is taken from the people who produce and given to the people who consume. So, producers are deprived of determining how their wealth can be best put to use for the common good.

    3) Worse, since any producer in a market economy must serve consumers in order to create wealth, then they have more and better knowledge of how to create wealth than bureaucrats, and because they must create and run market organizations that serve consumers, they also have better understanding of how to achieve ends in an economy. So society is deprived of the knowledge of how to better itself. And producers are deprived of the opportunity to increase their wealth, society’s wealth, and their social status. ((Note: that if you consider government sponsored fiat money bankers as part of the private sector, I’m stating that by definition they are not producers, but government sponsored semi-political entities who privatize wins and socialize losses. Banking under fiat money is a government sponsored monopoly. Period.))

    4) Even worse, producers are deprive of their influence on the social norms we call ‘culture’. No civilization has survived the loss of it’s aristocracy. And aristocrats work very hard to preserve their social status by demonstrating how ‘good’ they are for the people. They create arts. They create culture. They create new products and services – in fact, they create almost all interesting and beneficial products and services. THey are a culture’s research and development organization. But in purely social terms, they create a race for the top, rather than a race for the bottom.

Humans will sacrifice food and money to observe their alphas. They learn from their alphas. There are alphas in every social group, and every economic group. Without social status, there would be little signal for people to learn from. People would invent ‘black market signals’ for social status. The benefit of the western model is that social status is earned through the service of consumers in the market, not mysticism, or violence.

While redistribution of money may be sound, redistribution of status is HARMFUL. ((I differ from my other libertarian friends on redistribution for TECHNICAL and LOGICAL reasons that I believe would invalidate propertarian analysis. An accidental side effect of Hoppe’s interpretation of Habermas.)) This is not to say that there isn’t a Pareto efficient system of redistribution that transfers no status, creates no aristocratic disincentives, and that deprives society of no knowledge. There is such thing. But it is not ‘knowable’ or ‘calculable’ using politicians.

As an political economist, what I object to most about this discourse, is that the function of the ‘state’ is to determine how the spoils are split, instead of how to increase the pool of spoils. After all, entrepreneurs risk their lives and homes to create wealth. It does not magically happen. And specialization being what it is, and humans having the incentives and motivations that they do, there is a regressive conflict of interest between having one political organization focus on the EASY task of redistribution AND the VERY HARD task of creating prosperity via the market. Humans universally select those politically rewarding and easily understood problems. Innovation is a very hard problem where one can be wrong at all times. It involves risk. Redistribution is quite simple. Trivial. Fun even. Everyone wants to give away someone else’s money. No one wants to be responsible and accountable for creating returns on investment. Instead, if we had two houses: one which created wealth through investment, and another which could distribute returns on that investment, then the conversation about our society would be quite different. Equity would be something both ends of the spectrum desired.

Mark’s question is a false choice. There is no equity in forcible transfer. There is equity in charity because of the social status people award to contributors to society, and along with social status, ability to command adherence to norms. There is equity in voluntary exchange. But there is no equity in forcible redistribution of money, no equity in deprivation of status, no equity in debasement of norms, no equity in involuntary transfer, no equity in appropriation of political power. So the question is not one of equity. It may perhaps, be one of UTILITY: in that keeping the lower classes well fed, well protected, and gainfully employed is actually CHEAPER than having them ill fed, uneducated, and engaged in career mischief. But any claim of “Equity” assumes a community of shared interests toward ends and means. And under involuntary transfer – theft – there is no possibility of community in a domestic empire as diverse as the USA.

Furthermore, any assessment of ‘equity’ requires that some random person in ‘authority’ determines how ‘equity’ is measured (if at all), who to take money from, how much to take, and what purposes to put it to. And this process is highly politicized.

So the question is false as it is structured. But there is still an alternative:

Assuming that instead, all people above certain incomes were required to contribute an aggressive and progressive amount of their income by purchasing auctions for the purpose of fulfilling community ends – then they would actually have choice in the matter. And because of transparency, these people could be controlled — assuming that their contributions were visible, and their names attached, so that they would be checked by market forces.

The process of ‘elections’ then would be turned from one of class warfare, abstract rhetoric, and demagoguery wherein we create that most horrid of specialists – the politician. TO one where we actively engaged and encouraged our upper classes to participate in society, rather than make as much as they can before abandoning it. Sick bureaucracies would be eliminated easily and quickly. Government waste would be radically reduced. Our precious ‘Universal Insurance’ programs would be managed by market forces. And society would be steered by popular sentiment, rather than political diatribe.

In other words, an tax democracy:

    1) It would be difficult for people to contribute to purposes and ends to which they disagree – or at least, they would choose those ends with which they least disagreed.

    2) Status would neither be redistributed or appropriated by professional politicians, and class cooperation would prevail over class warfare.

    3) Society is not deprived of knowledge.

    4) Society is not deprived of positive norms.

Under such a system a highly progressive income tax would be superior to a VAT, because a VAT puts unnecessary burden on the lower classes, and creates unnecessary and expensive administration costs.

The political class is an artifact of our prior lack of the information technology needed to make directly democratic decisions. We no longer lack that technology. We no longer need politicians. We need technology, free speech, courts, and public intellectuals. We do not need politicians. Politicians are commissioned salesmen for the transfer of wealth from producers to those in need, and transfer of social status from those who have earned it to those politicians who do not.

We do not need rulers. We only need rules and tools.

It is not taxes people object to. It is the disagreeable use of them. Especially uses that take from them status and the political power to defend themselves. It’s not the abstract of government that people object to. It is the dishonesty of electoral politics the technique of fomenting class warfare, the transfer of earned social status, and the incompetence and self service of bureaucracy.

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