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.