Guest Post: Is it time to abolish income & consumption taxes?

This post is a theoretical, not very practical, consideration of what the government tax and spend system ‘should’ look like to be fair and Pareto Optimal.

It’s theoretical because even tiny changes to the massive entrenched machine of the current tax and spend system face monumental inertia. An entire universe of politicians, civil servants, unions, lobbies, constituents, businesses, accountants etc etc. are built up around this. We all take it as given and stakeholders continually chip at the beast to try to move it even incrementally in their direction. However, massive complexity shields what are truly simple underlying principles… gasp! Let’s keep an open mind, since the world has seen many different environments concerning taxation.

So what does Causal Economics predict is optimal when it comes to government tax and spend? Let’s look objectively from foundations.

There is always an important role for taxes and government spending in society. However one of the first problems when it comes to taxation effectiveness is starting with taxes. Sound like semantics? It’s absolutely not! This is a critical distinction. Consideration of taxes should only ever follow consideration of what actually needs to be done – the necessary spend, driven by the democratic desires of citizens/taxpayers.

Starting with taxes as the focus is the first critical instance of causal decoupling (benefit and cost decoupled across citizens). It results in the government collecting funds automatically without having to make a case to the public when they want to spend.  Not surprisingly, that’s why income, consumption and wealth taxes are popular with governments. They get paid every time someone else works, buys or just improves their finances. The government chases everywhere money is in action and puts itself in the middle to make sure they get paid. This is done regardless of any spending focus and discipline. Imagine if companies were able to just charge everyone a price and then figure out something they thought the people should want. It is hard to find a stronger example of causal decoupling anywhere than income and consumption taxes. This isn’t to be critical or emotional about it. It honestly describes reality.

Many on the left side of the spectrum see this as ‘progressive’, justifiably going after the rich. They often argue that this is a desirable decoupling, where the state increases its own B/C and that of it’s beneficiaries by coercively lowering the B/C of ‘the Rich’. Inherent in this thinking is that anyone who has more money should just pay more and that any money sent to government results in more results. Most moderates don’t believe that one! This type of taxation usually actually reduces the B/C ratio of the middle class who don’t have access to as many tax shelters as the wealthy.

Government programs are necessary, as are taxes. But society moves further from Pareto Optimality whenever governments make decisions on behalf of individuals. B/C is highest for individuals when they have the freedom to make their own decisions. The higher the level of liberty in a society, the closer it comes to Pareto Optimality. This is common sense. Think for a second whether you are happier making your own choices or being told by someone else what you have to do.

So once necessary government spend is determined by the will of the people … that’s another not so small post … how should taxes be collected?

For government services that truly benefit each citizen equally, a flat tax allocation matches C and B. This includes things like the military and widespread infrastructure, although the appropriate level of spend can be debated. A flat tax for the identified service ties cost to benefit directly. Flat taxes tied to spend programs, not income or consumption, maximize utility.

For government services that only some citizens benefit from, such as use of a particular program or a specific physical asset like a bridge, a user fee tax most tightly couples C and B therefore maintains the highest possible B/C ratio for the most citizens. Those that use the service enjoy higher B and C, with an improved ratio (we can be sure of this because they voluntarily engage in the activity). Those that don’t use the service don’t pay.

Where private transactions create externalities that impact other citizens, some corrective redistribution can make sense, as long as the costs and benefits are directly coupled.

Whenever discussing taxes, it’s key to keep in mind that where individual citizens can’t reasonably afford their share of taxes, they should have access to ValueFare social support. ValueFare is essentially workfare, where citizens can work as many hours they want, in order to determine their earnings. Welfare can help in the shirt term, but creates reliance and dependence. ValueFare creates more earning opportunity and rewards solid work.

That’s a whirlwind look at what Causal Economics means for tax policy.


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