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Paying for what you use up

Michael O'Hare, professor of public policy | September 29, 2010

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 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 (at the Reality-Based Community) with a confidence that surprised me coming from readers of the site.  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.

Cross-posted from The Reality-Based Community.