Thursday, February 4, 2010

Imagine nothing but toll roads.

I subscribe to The Simple Dollar (because it's a neat blog with pretty good advice) and in the author's most recent roundup post was a link to another post, at another blog, with the subject line "The Hypocrite Test: Should Rich People Pay More?" I cleverly deduced had a feeling that this post was about taxes somehow, so I clicked on it.

I was correct. The author of this post begins with the following scenario, in which the reader is supposed to imagine that they've been working hard for twenty years, and have gone from having nothing to having a very nice house in a very nice part of town (where they now live with their family and their possessions, some of which are also nice.) This nice new house needs a nice new boiler, because apparently the one it came with was not so nice. So they call a contractor, who:
...pokes around a bit, then hands over a proposal. $15,000. Youch!

Sounds out of line, so you thank him and send him on his way.

Later that day, you run into an old friend who lives “down the hill.” You mention your need for a new boiler and are surprised to discover he’s in the market for the exact same boiler. And, the one he’s replacing is the very same one you have. AND, he also just got an estimate from the same contractor…for the exact same amount of time, same equipment, same job.

But, your friend’s estimate was $7,500. Half of yours.
The author asks if this scenario is fair or not, and specifically tells the reader to think about why it is or isn't fair and keep that line of reasoning in mind. The author then goes into the next scenario. Guess what it is.
This time, you’re the guy living down the hill, earning a modest living. The contractor is now the government, the estimate you and your wealthy acquaintance received is your tax burden and the benefits are the services provided to both of you by the government.
The instinctive conclusion that many readers will come to is that neither situation is fair. This makes sense if you assume, as the author does, that these to situations are "the same issue, just set in a different context" - a transaction is fair if you get what you pay for, and since taxes don't work this way then they must not be fair. I was tempted to make this assumption as well, but when I took the time to consider the analogy, I realized that it was flawed.
Buying a boiler and having it installed involves a business transaction. Two people with different incomes, living in houses of different values, need the exact same new boiler. Assuming that the matter of installing the boiler would involve a similar amount of time and work in both houses, it's reasonable and fair to expect that the prices will be similar. This is how such transactions are supposed to work - we exchange an amount of money for items or services of equivalent value. We pay more or less depending how much value we place on something, we don't pay for things we neither want nor need, and if we choose not to buy something it almost never affects anyone but ourselves.

Taxes are different. We pay taxes because the government needs money to get things done. Even if we had an ideal system with no debts, no deficit, and no waste, many of those things would not benefit every single taxpayer directly. Everyone pays according to their ability, and the money goes where it's needed. This isn't like a business transaction, nor should it be. We already know what happens when taxes are optional, and if they were a one-to-one transaction where people only had to pay for the things they wanted or needed, we would have something that I would describe as a tyranny of the majority.

Take roads, for example. Under a perfectly fair system where paying taxes was like buying a boiler, every single road would function sort of like a toll road - they'd get funding for maintenance based on how many people used them. Roads in densely-populated areas that get lots of use would most likely be fine. But what about a road that goes from a small rural town into a large city? Someone who lives in the city might never need to drive to the small town, but the reverse is almost certainly not true. Even the least-traveled road needs regular upkeep to remain usable, and it's not unreasonable to think that this system would cause a lot of roads going through rural and remote areas to become underfunded and poorly-maintained. Unless some people who don't use those roads decide to be generous, traveling to and from those areas would become more difficult.

Now, is this fair? If people happen to live well outside of a large city, should their ability to travel be dependent on charity? Is it all right if their tax contributions aren't enough to pay for a mail delivery route? Should their kids have to go to school in a building full of code violations and use textbooks from the 1970s, because their parents' taxes weren't enough to fix those things and no one else felt like paying?

Writing about the relative merits of various tax systems and things like welfare would take me longer than just this post to go into. But I don't need to do this to demonstrate the point that fair and effective taxation does not and cannot work like a fair business transaction, where everyone gets what they pay for. If it did then then people could only be sure of having their needs met by being part of a large group, or by having a lot a money - anyone else would be left to fend for themselves. I find this unacceptable, and I don't think there's anything hypocritical about that.


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