Saturday, March 24, 2007

Why Are Taxes Bad?

Well, first, here's why they're not bad: Forking over lots of money at the end of the year is a meaningless gesture, especially if everyone else does it too. Just as giving $100 to everyone in the country will make no one richer, taking $100 from everyone in the country will make no one poorer. It's just moving around pieces of paper (or, these days, readouts at the ATM or on your PC), and has no effect on supply or demand.

That said, there are basically three bad things about taxes:

1) They create wrong incentives for taxpayers

2) They create wrong incentives for tax recipients

3) They are morally hard to justify

More specifically:

If you were to perform a service that requires a minimum profit, and the taxes reduce your profit from acceptable to unacceptable, then you will not provide that service. And if you do not provide that service, you will lose the opportunity to make money, your customer will be denied your product, and the government will receive no taxes. That is, everyone loses (although the government's failure to receive taxes is probably a positive thing). The technical term for this is "deadweight loss" and affects:

- People who would otherwise want to make extra money by working overtime or having a second job; i.e. their incentive is to now produce less
- Businesses that are marginally profitable (like small stores) who cannot compete against larger and more profitable businesses who can pay higher taxes; i.e., their incentive is to close their business

In short, if you penalize people for being productive, then they will become less productive -- which exacerbates scarcity and increases prices; i.e., we become poorer.

On the receiving end, tax recipients (from those receiving welfare benefits to government employees) are given incentives to remain unproductive. Instead of things, they are paid to be at home or at their government jobs, producingconsuming things. Their consumption exacerbates scarcity; these people do not provide any mitigating production to lessen scarcity. This also makes everyone else poorer.

Finally, it is hard to morally justify the forced taking of anyone else's property -- which is what taxation is. At times, taxes might produce a desirable outcome from a consequentialist perspective -- but that must be compared against undeniable moral problems.

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