the tax bill idea – more comments
A few months ago, I wondered if it would be better for people to pay a tax bill instead of an income tax. In that scheme, the state tallies up the cost of gov’t and divides by the size of the population. Call that number your “tax bill.” You discount for poverty and surcharge for wealth.
Two points. First, Tax Historian, a commenter, thought that I was arguing that each person get an individualized bill. E.g., if I drove more, I might pay more taxes for roads. That is not what I suggested and I agree it would be impractical. Rather, my suggestion is simple. At the end of each year, the state looks at its expenditures and divides by the population size. So if the federal budget was $300,000,000,000 (33o billion) and our population was 300,000,000, then each person pays $100. The rich might pay a multiple to account for lower income people who can’t pay at all or pay the full price.
Second, I was a little surprised by the hostility in the comments. Here’s the intuition so you can see where I am coming from. Currently, most tax schemes just assume that the state vacuums up a certain chunk of your income, or transactions, or assets. If you believe that the state just owns part of you, or that you just owe a chunk of your wealth to someone else, then sales taxes or income taxes or value added taxes seem normal.
However, if you start with the assumption that government provides services that can’t be provided privately, then it doesn’t follow that the state just owns, say 30% of your income or 8% of your transactions. Instead, you should first (a) figure out what you need and then (b) force people to pay up. That’s the logic of assessments in homeowner associations, for example. Let’s put it this way with an example. How do we shop for food? (a) We just give the grocer 10% of our income and hope he give us enough food or (b) We ask the grocer how much it costs and then pay the market value. There’s a good case to be made for the second option.
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The traditional public economics answer for why we have any income tax at all instead of just something like your “tax bill” idea (or as we’d call it, with our knack for a beautiful turn of phrase, “lump sum taxation”) is redistribution — the reason the gov’t charges people based on income is because they’re trying to transfer money from high-income to low-income people (at least ideally — there’s a whole lot of other transfers too). So I guess my question is, if you don’t see the point of that (and I’m not saying you’re necessarily wrong), then what proportion of the rest of government are you supposing still makes sense?
Again my appeal to the traditional economist answer: the textbook answer is that the government should mainly be in the business of either providing “public goods” (i.e., things the market can’t provide efficiently because, for instance, it’s impossible to prevent people from benefiting from the good if they don’t pay — e.g., law & order or clean air) or redistribution (ideally in cash but possibly in kind). The more expensive things the gov’t does tend to fall into the “redistribution” category — Social Security and health care most obviously, but also education (a very large portion of state budgets). Even regulation doesn’t generally take up a huge chunk of the budget.
As a pedantic aside, note that if everyone gets a flat fee tax bill, but the size of your bill is a function of your income, how is that different than a tax on income?
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Ryan P
February 3, 2013 at 2:14 am
Coming from a slightly different public finance tradition than Ryan P, I’d say that ideally taxes ought to match burdens to benefits and suggest that roughly speaking that is what our federal, state, local tax system does. We use income as a proxy for benefits received where individual matching is difficult (e.g., where benefits are passively enjoyed as in the case of national defense, which was the main function of the federal government from the 40s through the 70s). Parenthetically, my own view is that redistribution per se has a relatively low priority in US tax design (due to lower relative risk aversion than elsewhere). More equal outcomes are achieved primarily through transfers, whether in cash or in kind, but the primary function performed by most cash transfers, including the EITC, is an insurance function, something the state can do where private insurers cannot owing to adverse selection, moral hazard, or missing markets (the former do not go away under state provision, but they are easier to mitigate). There is an element of redistribution via public choice in the American fiscal system, but it tends to be dominated by in kind transfers (for a quick discussion of the logic of this mechanism, see http://afinetheorem.wordpress.com/2013/01/27/how-does-family-income-affect-enrollment-n-hilger-2012/).
Fabio, in your numerical example, you left out a zero. In any case charging every person in the country an equal tax bill based on the full cost of government would work out to about $20K per capita.
On a related point, in Oregon we are running an experiment using GIS to monitor road use, which, adjusted for axle weight and speed, allows for direct billing to an individual’s credit card or bank account based upon actual road use. This system could also be used to effect congestion pricing.
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Fred Thompson
February 3, 2013 at 5:02 pm
I’ve heard the claim that taxes aren’t really redistributive because after all, people who pay more in taxes get more benefits. The reason why I’m skeptical is that it seems too much like a nice rationalization rather than a real estimation of what the expensive parts are. Defense is a big chunk I’ll grant, but that seems evenly split — I don’t think marauding armies discriminate on the basis of income**. Health care and SS are clearly redistributive (though not, I grant, always directly towards the poor — we don’t, after all, really care that much about them), as are most other in-kind transfers. Nor does public education only benefit high income taxpayers (and you certainly don’t get a tax cut if you don’t have kids or send them to private school). If anything, I would argue the benefits you get from the state might very well be decreasing with income.
Sometimes the argument seems to be that things like education funded through an income tax aren’t redistributive because after all, high income people hire people and it’s to their (sole) benefit to have a more educated workforce or . However, since education is voluntary precisely because it raises wages (i.e., education is mainly a private good with some negative externality signaling/credentialing baggage), this doesn’t seem like a terribly convincing argument. Why not just say we tax the rich more because we think they can afford it and because we’d rather have more income stay with other groups even at the cost of some economic efficiency? It’s not like anyone is convinced when we try to claim otherwise.
** Unless the idea is the gov’t is protecting you from marauding poor people who, absent an income tax and transfers, would riot and loot your stuff or something. But I just can’t imagine anyone making this argument sincerely.
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Ryan P
February 3, 2013 at 5:34 pm
Ryan P: the idea is that rich people have more stuff to protect — defense, police, fire protection, etc. — and they are both more willing and able to pay to protect the SQ.
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Fred Thompson
February 3, 2013 at 6:36 pm
Isn’t “able to pay” mostly just another way of making a utilitarian argument for redistribution? Even the extra demand for police because of the property wouldn’t get you all the way to a proportional income tax, much less progressive taxation, even if the govt only spent money on police and pure national defense.
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Ryan P
February 3, 2013 at 10:57 pm
“Isn’t “able to pay” mostly just another way of making a utilitarian argument for redistribution?” Not really, wealth (stuff) is more unequally distributed than income. But I was merely expressing the standard definition of demand, expressed as willingness and ability to pay. Willingness to pay with someone else’s money isn’t effective demand; it’s wishful thinking.
The argument for public support of education is similar but not identical — investment in human capital is the major driver of GDP growth, some of that payoff is captured by the individual being educated, but a lot of it takes the form of a more productive economy and accrues to whomever benefits form that greater productivity — in recent years a substantial proportion of the total payoff has been to the wealthy. One can probably make a better argument for using income taxes to support schools now than 30-40 ears ago.
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Fred Thompson
February 3, 2013 at 11:30 pm
In any event, since even poor people don’t like being killed, you’re still not getting a highly progressive tax system based on a pure benefit argument for police. If the rich couldn’t pay for private security and security were the vast majority of federal gov’t outlays, a mixed system (part lump sum tax on everyone, part mild income tax) might be plausible, but I’m not seeing it for our current system.
The consensus in the literature is that most of the reason for rising inequality is “skill-biased technical change”. Certainly hard to argue the private return to education has been falling. You might make the argument that there’s a pro-growth effect of STEM education in particular on technological change that isn’t entirely captured by the educated and that this effect dominates the negative signaling externality. But is that really plausible for all kinds of education?
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Ryan P
February 4, 2013 at 3:35 am
I am not implying that the private return to eduction has been falling, quite the contrary, merely that there are significant spillovers which are largely captured by society’s winners. Attributing inequality to skill-biased technical change is less consensual than you seem think. The wide increase in inequality in the past three decades has the feature that it can be mostly imputed to an increase of the top 1% share. It is not the engineers or the high skilled workers who got richer. It is the asset owners, the CEOs, the football players, the top brokers, and so on.
As to police and fire protection, we have a perfectly appropriate wealth tax to support those activities – the property tax, which does a pretty good job of matching individual burdens to benefits.
On the social returns to broad investment in human capital, in addition to the classics – Mincer and Griliches, see: http://economics.uwo.ca/newsletter/misc/2012/stokey_jun13.pdf
Click to access human_capital_accounting_in_the_united_states.pdf
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Fred Thompson
February 4, 2013 at 4:44 pm
I am not denying that we can’t imagine a world in which there is a gross positive externality, or even a net one. I’m questioning the evidence that we live in a net positive externality education world for all kinds of education. Since I also see health care as largely a private good, I’m still unclear why the benefits of the expensive bits of either state or federal budgets are largely going to the 1%.
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Ryan P
February 4, 2013 at 11:38 pm
Having gone back and read Fabio’s original post, there is something to like about his proposal: send every family an annual itemized receipt for their proportionate share of total government spending. It is easy to put that info together. It’s usually the first thing we do in an introductory public finance class: this is how much we spend per capita and this is what we spend it on and this is how that spending has changed over time. Lacking that common understanding much of the stuff that follows – adequacy, incidence, efficiency, fairness of tax systems – wouldn’t make much sense. So why not send that information to everyone? Of course, arguably that’s sort of what the Tax Foundation does with its tax freedom day announcement each year.
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Fred Thompson
February 6, 2013 at 4:57 pm