July 10th, 2011

eyes black and white

Taxes are Anti-social

The first lesson of Economics (possibly its one and only lesson) is the notion of Economic Cost, or Opportunity Cost. Everything else follows. Including the fact that taxes are anti-social: they destroy the social fabric by stopping cooperation between citizens, and enthrall the least productive people to corporations (whether "public" or "private").

To illustrate the notion of Opportunity Cost, consider a man who proudly explains how he's saving a lot of money by building his own house himself, or by accomplishing any other task in which he is unskilled, rather than pay an expensive professional to do the job. Someone who understand Economics would retort that in examining whether or not he's actually saving money, he should indeed take into account how much it would cost to have the job done by a professional, but he should also take into account the time and other resources he spent accomplishing the task, and the money he could have made by spending those resources doing other things, such as working extra hours at his regular job or at a side job.

Odds are, he could have made more money in a profession that he is skilled in, used that money to pay a specialist to do the task at hand, and still have some extra money left to use for additional things. Indeed, if he is good enough at the amateur task that he can save more by doing it than by doing his best paying job, then he might consider leaving his job and become a professional at that "amateur" task.

Other factors may appear in the story. One might for instance argue that accomplishing the task oneself brings pride and satisfaction of its own, that the physical or intellectual activity involved in the task brings balance that complements one's professional activities, that the task at which one was unskilled precisely develop skills one desires to acquire, that the way the task is accomplished is a venue for self-expression. Such non-monetary values are important factors that matter indeed; but then one shouldn't put forward "saving money" as the rationale for doing the task oneself; instead these other values should be put forward.

There are also reasons beside non-monetized values that might justify doing unskilled work over buying someone else's skills. For instance, one's activities might not be elastic: one's main job may not allow for either extra hours or for a side job, or one's ability to sustain this main job may be limited; then indeed accomplishing the task might be monetarily efficient, at the margin; but then, at the margin, one might be well-advised to set up shop making that one's side job. Of course our protagonist might have other good reasons not to switch his main or secondary profession to accomplishing similar tasks: the market for similar amateur tasks is too small, or risky, or regulated or even declared illegal; he might have a limited tolerance for such task, or the inability to satisfy the tastes of customers when they differ too much from his; transaction costs on such a task may be too high. etc.

The role of Economics is not to dismiss such non-monetary factors, but precisely to insist on how important they are in making a decision that in monetary terms should be seen as unobvious at best, and quite possibly a mistake. Economics does not try to reduce all human values to the monetary amounts that are exchanged or preserved, but instead insists in confronting us explicitly to the valuations that we do make implicitly when we claim that we prefer some allocation of resources to some other allocation of the same resources.

So much for Economics.

Now, suppose that taxes are introduced in the equation.

No longer able to freely trade with other people, our protagonist reconsiders whether to hire a skilled specialist or to do things himself. Say that without taxes, it would have taken him the salary and/or profits from 4 days of work to afford the services of a specialist; then only if he could do the task in 4 days or less could he have gained to do it himself (modulo adjustment to other values that he finds or abhors in doing the task). But if the many taxes (sales tax, income tax, etc.) amount to (say) one third of one's revenues, then the specialist will have raised his price by 50% to be able to cover the cost of his labor; now our protagonist needs 6 days worth of work pay to be able to afford for the same task. What more, since the same taxation applies to himself, he has to work 9 days to actually receive 6 days worth of pay. It now becomes profitable of him to eschew 9 days of his skilled but taxed work in exchange for something that is only worth 4 days of his unskilled but untaxed labor. As a result of taxation, he will do inefficiently with unskilled labor what could have been done efficiently with skilled labor. The deadweight loss due to taxation is 5 days of his skilled work, lost to him first and then to society as a whole.

Now multiply this example all over society; for each and every task that people could delegate to each other, the task won't be delegated unless the efficiency gained from skilled labor (after transaction costs) surpasses the inverse square of the complement of taxes. The corresponding deadweight loss increases very fast as taxes are raised. Plenty of people will do things themselves, or put up with these things not being done, instead of paying each other to do what each of them do best. People will remain isolated and asocial, instead of being social and cooperating with each other.

Worse, because of this tax burden, people with limited skills that don't justify this efficiency barrier will be unable to live by selling on the open market their services at doing what they enjoy doing the best; instead, they are pushed into the dreadful life of a salaryman in a corporation big enough to afford economies of scale in dealing with government bureaucracy, taxes and regulations. Taxes are therefore a subtle way to push people, especially poor people, into being the subservient slaves of big "private" corporations that are truly an emanation of government "public" spending. Of course, if you understand Economic Reasoning, you know that the dichotomy between "private" vs "public" is just an irrelevant trick created by monopoly governments to distract us from the real concept that matters: the distinction between voluntary and coercive.

Finally, as people are driven to relative autarky with respect to their neighbors and fellow citizens instead of enjoying their peaceful commerce, the very social fabric is destroyed, especially amongst the poorest and least skilled in society; not sharing any mutual interest with others, not being bound by mutual obligations, the unskilled "youth" excluded from the official job market drift into "welfare" parasitism, violence and crime. Enjoy your tax dollars at work.