Taxation and Skin
I’ve been pondering Erik’s and Elias’s posts on taxation and spending, and I think both of them touched on an important point about fiscal responsibility.
Erik’s point (following on from Radley Balko’s article) about having skin in the game is an important factor in how people react to government spending. If the cost of the next dollar of government spending isn’t going to be borne by you, you have little incentive to demand value for money. After all, it’s not your money. As I commented in that post, I think the problem with the US government (and in fact, most western governments) is that taxation and spending have been divorced in the public mind. People don’t think of government money as their money, and don’t demand accountability for how governments use that money. Public attention ends up focusing on relatively trivial Budget items, while the major expenses pass by unchallenged. It also fuels calls for more government spending than is warranted, I’m happy to admit that there are many instances where government spending is worth the price, but once people feel there is no price to government spending, things become problematic.
On the solutions side of things, Elias suggests linking war spending to a dedicated tax, a suggestion that applies the same principle in a narrower domain, if you want a war you had better pay for it – in cash. As an aside, in marshalling fiscal responsibility to combat militarism Elias is in distinguished company. In The Wealth of Nations, Adam Smith argues that governments should be restrained from deficit spending precisely because it would make the voting public less inclined to support foreign wars.
Elias’s idea led me to think about my fantasy tax policy framework (the very fact I have a fantasy tax framework should be enough to tell you I am a sad, strange little man). In this fiscal utopia, every tax rate would be expressed as a function of government spending, so you would know that if government spending increased x%, your tax bill would increase y% Naturally these rates would be so set as to balance the Budget. Different tax rates would only be debated in terms of fiscally neutral alternatives: a proposal to cut (raise) taxes on group x would also include a proposal to raise (cut) taxes on group y. Or a proposal might consider moving from collecting tax revenue from one source to another (say, income to consumption taxes), but in this world discussions of tax cuts or tax increases per se would only happen as part of discussing change sot government spending.
The reason for specifying tax rates as a function of government spending is so that the CBO can score a policy not just in terms of its fiscal cost, but actually project how much tax rates would have to rise to pay for it. While a spending proposal is being debated in the House, people would be able to find out how much extra tax this proposal would cost them. Things brings the otherwise nigh-incomprehensible topic of government budgeting to a personal level. Voters can ask themselves: would I be willing to pay $x a year for this? This is the sort of decision people make every day, which makes it easier to cope.
There are some complicating factors such as externality taxes (I would make then fiscally-neutral by using them to fund an annual dividend to all citizens), and stimulus (declare the plan for stimulus in advance, and make it clear how much interest the deficit spending is racking up, and what that amounts to in taxes eventually needed to pay for it), but in principle it makes government financing much more transparent, and eliminates some of the stupider rhetoric around spending and taxes.
On the solutions side of things, Elias suggests linking war spending to a dedicated tax, a suggestion that applies the same principle in a narro w domain, if you want a war you had better pay for it – in cash.
Ptth.
Military spending has varied wildly according to external circumstances over the last eighty odd years. The arithmetic average since 1929 has been 8.2% of domestic product, with the range running between 0.8% and 44%. Capital projects, resolutions of banking crises, and national mobilizations are the three sorts of public expenditures where you have these sorts of spikes in the propensity to spend. It is sensible to seek voluntary financing (from bond buyers) and then amortize from your tax revenues over a period of decades.Report
As a matter of sound financial management you are correct. I guess my point (or Elias’s and Smith’s point) is that government can’t be trusted to engage in sound financial management.Report
Things vaguely like this sort of effort at fiscal discipline and transparency have precedents in recent history. The Clinton era “pay-go” policy is an example, and the Obama administration’s citizen tax receipt is another. But it doesn’t seem viable to express tax rates as a percentage of federal spending because neither actual revenues nor actual spending are quite as predictable as necessary for the citizen or the government. Keeping all expenditures on budget so that deficit/surplus reporting is as informative as possible helps, but even then accusations of illegitimate “accounting tricks” are available and its just not so easy for people to agree about the “right” way to count the beans. Consider the controversy(ies) about the Social Security Trust Fund. Not only is that debt that the government owes to itself, but the more that gets socked away in the trust fund the higher the total national debt. Or the controversial relation between specific tax rates or specific spending and the economy’s growth rate. Identifying just what the “next dollar” is not a tidy project.Report
These are legitimate complications to my fairly simplistic picture.
Some of the stuff you’re talking about is less of a focus for me because of how government accounting works in New Zealand (for one thing off-Budget expenditure is some combination of illegal and unheard of). But still, there would be a lot of careful construction of accounting rules necessary to implement this.Report
I agree for the most part with your utopian tax scheme James.
Although I wonder how this would affect people’s month to month behaviors, assuming that this new regime would be more volatile then the current one.
I imagine checking taxes and rates on an iPhone app every day just like I were checking the stockmarket or exchange rates. A radical exagerration of what you’re proposing to be sure. But I agree that people would then understand what they were paying for.
Part of why Social Security is so popular. People see what they pay, and have some foggy understanding of what they will get in the future, or a present reminder if they have grandparents/know someone on SS disability.
At the very least it might help to relieve some of the estrangment between citizens and the federal gov that seems to drive so many people to hate it.Report
Yes, I think James’s idea is pretty cool. I would imagine people who know more about this stuff than I do could raise some possible problems/objections, but on first-blush it seems like a great idea. In the American context, certainly, it could potentially have an enormous effect. One of the defining traits of US politics, after all, is that people have almost no idea how their money is actually spent — frequently, they don’t even know how much they’re being taxed!Report
I agree with this, and I can’t think of any remotely plausible case against the so-called taxpayer receipt, which would tell everyone exactly where their money goes, on a dollar-for-dollar basis.
As Ezra Klein once said, the federal government is more or less an exceptionally well-armed insurance company. (For some reason, he seems to think that taxpayers would approve. I’m thinking they probably won’t.)Report
I’m not sure how volatile it would be. To much instability is bad, even if the changes can be described by formula. It’s less complex in New Zealand since all money is appropriated once per year, and expenses and revenues are reforecast twice per year. So really, there are only three times per year tax rates would need to be revised.
But in the US, things would be more complicated. You might want to revise rates quarterly or something.Report
Also, I wanted to comment on this:
There are some complicating factors such as externality taxes (I would make then fiscally-neutral by using them to fund an annual dividend to all citizens),
I’ve never understood why, in a Pigouvian tax regime, the government is the chief beneficiary. Shouldn’t it be all of the citizens, collectively? (Do note: That’s not the same thing as the government.)
Perhaps externality taxes could be the outflow component of a negative income tax system.Report
There are two ways that taxation to correct negative externalities benefit all citizens: raising the cost reduces demand, thus reducing the negative externalities; funding action that reduce the negative externalities directly (regulation) or mitigate/eliminate the impact of the negative externalities. Cash payout of the proceeds of taxes on negative externalities to all citizens would reduce the effectiveness of the former and reduce funding availability for the latter.Report
What you say is true, but:
1) When it comes to my universal dividend scheme, I would make an exception for taxes being funnelled into mitigation programmes.
2) From a distributional equity perspective the proper thing to do with Pigouvian taxes is to distribute them to the people harmed by the externality.Report
Related:
http://www.washingtonpost.com/blogs/ezra-klein/post/wonkbook-since-when-do-republicans-want-to-raise-taxes/2011/08/23/gIQAPwvaYJ_blog.htmlReport