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Taxes and (In)Efficiency

The divide between the two main political parties today is historically wide, and ideas about what is the proper taxation level is a key difference between them.  The Democrats, led by President Obama, favor ever-higher taxation levels, claiming to be driven by their pursuit of what they refer to as “fairness.”  The Republicans mostly rally around the notion of reducing taxes, with a belief that lower levels of taxation will leave more money in the hands of people and companies who will spend or invest that money and thus stimulate economic vibrancy that will create more jobs and the hoped for real economic growth.

In a vacuum, the idea of arguing about lower or higher taxes is foolish.  A reasonable discussion must begin with a vision for what role we as a nation desire for our government to have.  In considering this, we must question the government’s capability to properly execute whatever roles we wish it to undertake.  And then, and only then, can a budget for government spending be arrived at for which tax receipts must then pay for.  It is tragic that there is no proper discourse on this process, by neither politicians nor citizens.

The issue of government spending is very much the same as taxation. I was recently asked for my opinion on the matter of a free education system by a left wing thinking friend, who said that she was curious to hear the opinion of a “non-liberal.”  First, I corrected her that first and foremost I treasured personal freedom and thus consider myself a true “liberal.”  Then I explained to her that there is no truth to the notion of a “free” education inasmuch as teachers, books, computers, and facilities all need to be paid for.  The zero-price education that she coveted was in fact simply a cost transfer from those who wouldn’t pay to those taxpayers who now would.  Now, one could make a reasonable argument for zero-price education and the benefits that are sure to accrue to the nation as a result.  What I find to be problematic about the proposal is both the dishonesty inherent in its being sold as being “free,” as well as the idea’s inherent inefficiency.  A “free” education would involve a heavier government hand inasmuch as the costs would be billed from schools to the government, and then the bills would be passed on to taxpayers.  This system of intermediation removes the natural check and balance that exists when consumers pay for a product they purchase, and thus have a voice in demanding a high degree of quality in return for their money.  Without this direct relationship between consumer and producer, the slippery slope towards inefficiency and corruption is inevitable.  The history of government is rich with evidence of this.

As an important aside I must mention our deficits and debt, which serve as a fine example of the problem.  When tax revenues are insufficient to pay for a budget, which is the case in the U.S. and most countries each year, then money must be borrowed to make up the shortfall and future taxpayers will have to ultimately pay for this.  So, a budget deficit, as well as government debt that is simply the accumulation of deficits, translated into the most simple form means having future generations of taxpayers pay for things that we today wish  to have but cannot afford, or won’t pay for ourselves. Those future taxpayers, who have no representation because they don’t get to vote today, are thus easily victimized.  There is no check and balance system to protect them, and taking from “them” and spending on “us” is very hard to resist.

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