Cait Lamberton Discussing Tax Choice On NPR

Cait Lamberton recently discussed tax choice on NPR (Philadelphia)... Taxes: What we think about them, what we’d like to do with them, and some handy tips.  Her section begins around 13:00.

If you haven't seen it already... here's her tax choice article in Democracy Journal... Your Money, Your Choice.  The article is based on this paper... A Spoonful of Choice: How Allocation Increases Satisfaction with Tax Payments.

Prior to Lamberton's segment on NPR, Carroll Doherty, from the Pew Research Center, discussed the results of their latest survey on taxes.  The survey revealed that people's top tax concerns are that corporations and wealthy people aren't paying their fair share.  This is quite interesting because one frequent concern with tax choice is that the wealthy would have too much influence.

Let's think about the Koch brothers in a tax choice system.  Here are three possibilities...

A.  They don't pay their fair share of taxes = less influence in the public sector.
B.  They do pay their fair share of taxes = more influence in the public sector.
C.  They pay more than their fair share of taxes = even more influence in the public sector.

So would liberals prefer A, B or C?

Why in the world would the Koch brothers want to pay more than their fair share of taxes?  The liberal congresswoman Elizabeth Warren has the answer...

There is nobody in this country who got rich on his own. Nobody.  You built a factory out there—good for you! But I want to be clear.  You moved your goods to market on the roads the rest of us paid for.  You hired workers the rest of us paid to educate.  You were safe in your factory because of police forces and fire forces that the rest of us paid for.  You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did. 

The liberal economist Paul Krugman has a different answer...

The ugliness of our politics is closely tied to the inequality of income. You start to get a society in which the elite is just not living in the same material universe as the rest of the population. The people who have the most influence are not interested in having good public services, because they don't use them. You just get a bad society.

And The Economist disagrees with Krugman's answer...

What public services is he talking about? Don't the wealthy drive (or ride) over the publicly financed roads and bridges? Do the upper-crust not use the courts or enjoy the protection of the police? Does Bill Gates now have a private mercenary army protecting his property from Canadian invasion? 

Some older answers...

During the late war, another tax of the same kind was proposed upon shops. The war having been undertaken, it was said, in defence of the trade of the country, the merchants, who were to profit by it, ought to contribute towards the support of it. - Adam Smith, Wealth of Nations

The protection of trade in general, from pirates and free-booters, is said to have given occasion to the first institution of the duties of customs. But, if it was thought reasonable to lay a general tax upon trade, in order to defray the expence of protecting trade in general, it should seem equally reasonable to lay a particular tax upon a particular branch of trade, in order to defray the extraordinary expence of protecting that branch. - Adam Smith, Wealth of Nations

That the State should leave exports to the exporters, to industry, and to the merchants, and should not identify itself with the interests of the exporting class... If industry... values the protection afforded by warships, let them go and shell out a part of the surplus profit they have captured in this way and build the cruisers for themselves. - Eckart Kehr

If you go into Home Depot you're going to find a huge variety of different private "inputs" for sale.  Why does Home Depot offer all these different private inputs for sale?  Evidently it's because people need them in order to successfully complete a huge variety of projects.

With Home Depot... the supply of private inputs follows from the demand for private inputs.  Why should it be any different with the public sector?   Why should we suffer from shortages of the public inputs that we need to successfully complete projects?  

Hopefully the next time Doherty conducts the survey he'll ask people whether they would like to choose where their taxes go.

According to Lamberton, there are two big reasons why taxes are disliked...

1. People don't feel any sense of choice.  Whenever people feel forced to do something they experience something referred to in psychology as "reactance".

2. The act of paying taxes is far removed from all the benefits that we derive from public goods.

That last point results in what is known in economics as "fiscal illusion".  The opposite of fiscal illusion is fiscal equivalence.

The Nobel Prize economist James M. Buchanan wrote at length about this concept...

Historically, legislative bodies, through which the preferences of individual citizens are most directly represented, have exercised more control over revenue or tax decisions than they have over expenditure decisions. In part this asymmetry has its origin in the development of democratic political institutions out of monarchial institutions. Representative bodies, parliaments, first achieved the power to restrict the tax-gathering privileges of the kings. Before taxes could be levied on the people, representative bodies were given the right to grant their approval. No consideration was given to the spending side of the account because public expenses were assumed to benefit primarily the royal court, at least in the early days of constitutional monarchy. Taxes were viewed as necessary charges on the people, but they were not really conceived as any part of an "exchange" process from which the people secured public benefits. It was out of this conception of the fiscal process that both the modern institutions and the modern theory of public finance developed. - James M. Buchanan, The Bridge Between Tax and Expenditure in the Fiscal Decision Process

Also...

The most sophisticated contribution was made by Knut Wicksell 1896.  He explicitly identified the fundamental methodological error in the then-orthodox approach, and he combined positive criticism with normative suggestions for reforms.  Wicksell recognized the necessity of bridging the two sides of the fiscal account, and he noted the indeterminacy of any proposed principles that were limited to tax-side considerations. - James M. Buchanan, Public Finance and Public Choice

And here's a passage from another Nobel Prize winning economist on the same topic...

The working out of financial arrangements between collective consumption units and production units is one of the most difficult problems faced by entrepreneurs in the public economy.  Without market prices and market transactions, the act of paying for a good generally occurs at a time and place far from the act of consuming the good: individual costs are widely separated from individual benefits.  Yet a principle of fiscal equivalence--that those receiving the benefits from a service pay the costs for that service--must apply in the public economy just as it applies in a market economy.  Costs must be proportioned to benefits if people are to have any sense of economic reality.  Otherwise beneficiaries may assume that public goods are free goods, that money in the public treasury is "the government's money," and that no opportunities are foregone in spending that money.  When this happens the foundations of a democratic society are threatened.  The alternative is to adhere as closely as possible to the principle of fiscal equivalence and to proportion taxes as closely as possible to benefits received. - Vincent Ostrom and Elinor Ostrom, Public Goods and Public Choices

Fiscal equivalence is closely tied to the benefit principle of taxation.

In her interview... Lamberton suggested that people be given, at least initially, 10% to 15% control over how their taxes are spent.  Taxpayers would be able to allocate their taxes once a year when they paid them.  I think of her approach as training wheels.  It's a very reasonable and prudent approach.

According to Lamberton's study, most people tend to diversify their allocations rather than put all their eggs in one basket.  And compared to the current allocation of taxes... defense was a loser while education, science and the environment were all winners.

When Lamberton was asked if this could really work, she noted that our current system suffers from the principal agent problem.  She went on to point out that tax choice would provide representatives with considerable information about their constituents' actual preferences.  Taxpayers would be able to clearly communicate to their elected officials which public inputs they needed more of in order to successfully complete their projects.  In other words, taxpayers would be able to use their taxes to highlight where the bottleneck is in the public sector.

In terms of the likelihood of tax choice being implemented... Lamberton referred to states as the laboratories of democracy.  I agree!  And websites can also be laboratories of democracy.  There are plenty of websites, such as Netflix, that could give their "citizens" the option to choose where their "taxes" go.

A caller to the show recently traveled to Cuba and China and experienced first hand just how bad pollution in China really is.  When our tax choice training wheels come off... I'm pretty sure that it would be a good idea if Americans could have the option to give their taxes to the Chinese EPA.  Because what are the chances that the US has the greatest need for environmental protection?  And what are the chances that the US has the greatest need for military protection?