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Thursday, July 12, 2007

Externalities in a Nutshell: Part 2

More correspondence with a student in an introductory class. I think I somehow view this dialog or parlay as "brain candy" (hat tip to JurisNaturalist for term), and that's why I enjoy it so much. I've got to stop blogging and get some work done... anyway, here it is:

Consider this example - say I want to contribute to a particular cause with my church which I consider worth my time and money. Say you also have a cause which you consider worth while to which you donate your time, money, and effort. Finally, say that we each consider the other person's cause to not be the best way to spend time or money - not that either are bad, simply they are not how we would each choose to use our resources. Would it be morally acceptable for either of us to force the other to contribute to our cause?

Consider then that this is what government can do in programs such as education, welfare, and other such public works. If you do not pay your taxes, then you are subject to legal penalties - thus, whether or not you approve of a particular program, you must support it or face penalties.

The idea rolling around in my head to fix that issue is simply this - let consumer taxes be raised to fund those programs which are necessary for the entire country to function - arguably, those which are non-excludable, such as roads, national defense, police - these can be divided between federal and state as each are more capable to accomplish (largely state - if Montana has less roads to maintain than New York, it can have a lower tax to support them). Beyond such necessities (setting aside determining what they would be for now), let additional programs be supported by taxes of choice - if you desire the benefits of a program, then you can pay a proportion of your income to support it. Thus, the amount of revenue, and thus the degree to which a program can grow, is determined by the demand for its service. For example - if I want to homeschool my children, I don't pay the proportion of tax set aside for that purpose, and spend it on educational materials instead.

Observations, comments, improvements?

  1. If you get "happy" from doing something, we call this gaining utility and you are said to have "gained utils." If something you do is enjoyable, whether or not you get a monetary reward, you should engage in that activity.
  2. Its never OK to force someone to engage in a particular activity. It unethical and uneconomic. If you think someone else should be doing something, and they aren't, the reason they aren't is twofold: a) they don't have the same tastes and preferences as you and/or b) they don't get anything out of the activity. Forcing them to do something would never increase total social welfare because they themselves would experience "disutility" from engaging in that activity, which can be viewed as a cost (instead of reward) and hence would lead to decreased total social welfare.
  3. Taxes and education get tricky. In the above example, I said the person would receive disutility, and hence its a cost to that person. Taxes are also a cost to individuals, and those that pay them may not like it, but they must pay taxes. Are we forcing them to do something? Yes. Is it unethical? Maybe. Is it uneconomic? No. We have a could reason to tax these individuals due to the nature of education--it provides positive spillover benefits to everyone. I hardly think forcing someone to do community service against their will helps anyone, but in any case the persons receiving the benefit and bearing the cost are two different individuals. Therefore, with education, everyone should pay for the benefits they receive. No free lunch and all that.
  4. Our government has actually accomplished much of what you state in the first part of your last paragraph. Most states do have different tax rates for highways, for instance. Check your gas pump next time you fill up, there should be a sticker with the tax rates of most of the south east on it. Some are low. Ours are not, but we have six major metropolitan areas in our state, and more roads. Go figure.
  5. Finally, the problem is that "taxes of choice" are analogous to charitable donations in the private sector. Charity is "under-provided" meaning that more people could be helped, but aren't, because costs and benefits aren't aligned to the correct people. Basically, like in point 3 above, the same people should bear costs and receive benefits, otherwise there is the classic "free rider problem." With charity, it may be that the beneficiaries are "free riders" themselves, they receive an external benefit from the donors decision to give (the donor bears all costs and receives some benefit to the transaction, if he didn't it wouldn't take place). The beneficiaries of the donation pay no costs associated with the transaction, and are not forced to "pay-it-forward." Similarly, "elective taxes" would pose the same problem without a corresponding enforcement scheme. Assuming we could accurately forecast demand/tax rates, whose to say that wouldn't be more costly than the current system?

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