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?

Confirmation Bias and Pragmatarianism

JHC, in a recent comment on my Crooked Timber Liberals entry, shared this article...Your Money, Your Choice.  Much to my pleasant surprise the author of the article, Cait Lamberton, discussed the potential value of allowing taxpayers to have a greater say how their taxes are allocated.  It's always enjoyable to have our conclusions confirmed...aka...confirmation bias.

The thing is...it's not confirmation bias because the author of the article is a liberal/progressive!  A Ph.D no less!  Is this a reasonable rationalization?  Well...in my entry on deontological ethics vs pragmatic ethics I considered that both a "pragmatic" communist and a "fair" natural rights libertarian came to the same conclusion that I was full of BS.  So, just on its own, it doesn't necessarily mean much when people from opposite sides of the political debate come to the same conclusion.

Just how self-aware am I?  Is there a bell curve of self-awareness?  One time an English professor criticized me for writing too self-consciously.  For some self-awareness introspection check out Kent's blog entry...Are We Doomed To Be Wrong?.

Kent (see his critique of pragmatarianism) shared a link to my entry on the Blind Men and the Scope of Government...and a link to Cracked.com's list of 5 Logical Fallacies That Make You Wrong More Than You Think.  Those two articles seemed to have presented a challenge to his very strong anarcho-capitalist conclusion.  Was Kent fazed by these challenges?  No way.  Nevertheless it was still somewhat entertaining to watch him so deftly escape from the possibility of being wrong.  Kent...kinda like an anarcho-capitalist Houdini.

As a pragmatic ethics kind of guy I wallow in anything that demonstrates just how wrong we are.  The more cause for self-doubt the better.  As Socrates said, "...it seems that I am wiser than he is to this small extent, that I do not think I know what I do not know."  And as Oliver Wendell Holmes said, "to have doubted one's own first principles is the mark of a civilized man."  Therefore, doubting our principles makes us wise and civilized!  So with great relish I checked out Cracked.com's list of stuff that makes us wrong.

#5. We're Not Programmed to Seek "Truth," We're Programmed to "Win"

How true is this?  If you love playing devil's advocate then this especially applies to you.  It certainly applies to me.  For example...in a recent entry I encouraged people to become the devil's advocate for public goods.

Where is the intersection between winning and truth?  Is it true that history is written by the conquerors?

When I first thought of pragmatarianism I certainly did not consider it to be truth.  Neither did any of my friends...so it was fun to play the devil's advocate for pragmatarianism.  Several years passed with pragmatarianism being nothing more than a purely hypothetical situation.  It wasn't until I genuinely considered anarcho-capitalism...and experienced a sliver of self-doubt...that I recognized the truth in acknowledging that nobody has a monopoly on truth.

#4. Our Brains Don't Understand Probability

Now take it into the realm of politics. The U.S. has spent $1.3 trillion on the war on terror so far. That was in reaction to about 14,000 total deaths from international terrorism from 1975 to 2003. That's more than $90 million spent for each person killed. 

If you point out that this money would have been better spent preventing industrial accidents (which kill twice as many people per year than died in the World Trade Center) or, even better, curing cancer (the equivalent of about 200 WTC attacks each year), you'll be told, "Say that to the 9/11 victims, hippie!"

People are more likely to gamble with other people's money than they are with their own.  Therefore,  taxpayers should be allowed to consider the opportunity costs of war.  Having served in Afghanistan...and having greatly valued our efforts over there...and having lost close family members to cancer...I'd like to pretend that I'm not biased one way or the other.  Forcing taxpayers to make hard decisions with their own individual taxes is the only way to guarantee the maximum benefit to society.

#3. We Think Everyone's Out to Get Us

In one study, subjects were asked to rate the likelihood that strangers would share pretend winnings with them. The subjects figured about half were trustworthy enough to share. When it came time to actually share, about 80 percent came through. The subjects thought the world was almost twice as corrupt as it actually is.

This is also where you get claims like, "Those conservatives don't really think taxes are too high, they secretly hate poor people!" or "Those liberals don't really think the poor need assistance, they're secretly communists!" It's impossible to learn anything from a conversation with someone who you think is lying to you. The more arguments you get into with those lying extremists from the other side of the aisle, the more you learn about how they lie, the faster your brain turns off after they start talking. 

Maybe the anarcho-capitalists are right that the free-rider problem is not that big of a problem.  Or maybe anarcho-capitalists are proof positive that people have to be coerced into paying taxes.  Allowing taxpayers to directly allocate their taxes would reveal which public goods, if any, the free-rider problem applies to.

#2. We're Hard-Wired to Have a Double Standard

The reality is, of course, that you were on completely different roads. The assumption that everyone's circumstances are identical is so plainly wrong as to be borderline insane, but everyone does it. Pundits and politicians alike mock the unemployed as lazy, even though their own data shows that for every five unemployed people, there is only one open job. "I don't understand, can't you all just become radio talk show hosts like me?"

Right, we're all just blind men touching different parts of an elephant.  The Truth can only be arrived at by integrating all our unique perspectives and values.  Our true values can only be revealed by forcing us to put our money where our mouths are.  Therefore, taxpayers should be allowed to directly allocate their individual taxes.

#1. Facts Don't Change Our Minds

That is why confirmation bias exists. We read a news article that supports what we believe, and we add it to the "I'm right about this" column. News articles that contradict what we believe are dismissed. We make up a reason -- maybe the source is part of the conspiracy from the other side or whatever it takes to make sure the "I'm wrong about this" column remains empty.

This explains why the Ostrich Response to pragmatarianism is by far the most common response.  For another perfect example check out how neither Team Hayek nor Team Keynes responded to my compromise...Opportunity Costs for Thee, But Not For Me.

Well there you have it.  The 5 logical fallacies that make you wrong more often than you think also happen to make me right more often than I think.  But I might be wrong.