Monday, 12 June 2017

Of Course Tax Provides Less Value Than Spending The Money Yourself

Ha-Joon Chang's latest pratfall is an attempt to expose the so-called myth that tax is a burden:

"The Conservatives are clear about this, proposing to cut corporation tax further to 17%, one of the lowest levels in the rich world. However, even Labour is using the language of “burden” about taxes. In proposing tax increases for the highest income earners and large corporations, Jeremy Corbyn spoke of his belief that “those with the broadest shoulders should bear the greatest burden. UK needs £15bn in cuts or tax rises to clear deficit by 2022, says IFS. But would you call the money that you pay for your takeaway curry or Netflix subscription a burden? You wouldn’t, because you recognise that you are getting your curry and TV shows in return. Likewise, you shouldn’t call your taxes a burden because in return you get an array of public services, from education, health and old-age care, through to flood defence and roads to the police and military."

Dear oh dear, you really would expect someone who teaches economics at Cambridge University to have a better grasp on why this argument is wrong. But alas, Ha-Joon Chang appears oblivious to the key difference between services received through taxation and services received through private subscription.

Here's the principal difference Chang is missing. Market transactions like curries and Netflix subscriptions are a benefit to the consumer because they get exactly the thing they want when they purchase it. Taxes are not like this - they amount to all kinds of funds being taken from one group and given to another, which ensures that people's spending is not aligned with their revealed preferences.

George's tax goes to pay to prop up the railway networks he never uses, because he prefers to drive (an activity for which he also gets taxed). His taxes go towards paying for many things that are not in alignment with his own preferences: he can work extra hours but end up forking out for increased leisure time of people that prefer to bum around watching daytime television; he can live a healthy and conscientious lifestyle and yet fund health care for people who abused their body far more than he did.

There are countess examples of this kind - taxes taken from pacifists go towards funding nuclear programs they do not support; taxes from sporty people go towards funding gastric bands for the unfit; taxes from ordinary citizens go towards wars to which they defiantly object; taxes from people uninterested in sport go into sporting projects; taxes taken to fund green energy subsidies are taken from people that do not support these ventures; taxes from people that live in urban high-rise apartments are taken to fund flood defences for people that live by rivers in rural communities, the list goes on.

I am not making any comment here about the intrinsic merits and demerits of the tax-funded initiatives, I am simply trying to show that Ha-Joon Chang is confused when he tries to suggest that taxes are about as un-burdensome as our market transactions because we 'get an array of public services in return'.

For the whole purpose of consumer surpluses and producer surpluses is that both buyers and sellers each try to obtain maximum mutual value from the transaction. That is, buyers try to pay as little as they can for something at a price that's furthest away from the most they would pay, and sellers do the same but the other way around.

It is this process that not only creates as much market value in society as possible, it is the process that has given us the greatest human enrichment the world has ever seen over the past couple of hundred years. Contrary to what Ha-Joon Chang thinks, taxes are very much not like this. Yes they do some good, but they also misallocate many resources that would otherwise be spent much more closely in line with what consumers actually want to spend them on.