Sunday, 4 March 2018

When Tax Is Like Theft & When It Is Not

A friend asked the following question:

"If you don't pay tax you end up in prison. Therefore is tax theft, or is it the price we pay for a civilised society? If it's the price we pay for a civilised society, then it's not one we ever had a say in. Therefore it's a kind of theft, but one we appear to allow to happen to us?"

The best way to answer questions like this, I find, is to reverse the method of questioning somewhat. In asking whether tax is theft, or synonymous with theft, we are actually looking at the properties of something definitely bad and asking whether the other thing shares some or all those properties.  

On top of that, when we consider what is wrong with something, and enquire as to whether the other thing is comparable in terms of wrongness, it is often useful to compare its fundamental principles to other things in society. I will do both those things in this blog post.

The second one first. If at school you deliberately break little Johnny's mum's window, your parents should compensate them. If you break someone's window as an adult, you should compensate them. This has an analogue with some of the negative externality taxes like pollution.

On the other hand, if the local gangster goes round small businesses and obtains money through a protection racket, or if poor Tom takes some of rich Jack's lunch money in the school playground, this doesn't seem so good, even though it is tenuously analogous to how the state treats its citizens.

Apart from in spirit, the local gangster forcing restaurant owners to fund his own lifestyle is not hugely different to how the state forces me through taxation to invest in services I seldom or never use and policies to which I am wholly opposed.

To that end, I'm afraid the properties of taxation do all too often share some of the fundamental properties of theft. If Jack steals Jill's laptop, then Jill is the victim to about the same extent that Jack is a beneficiary. But the wrongness of theft is the moral wrongness that harms society, plus all the other negative spillover effects that I'll come to in a moment.

The wrongness of taxation is that it forces consumers to spend our money on things like establishment pay, layers of bureaucracy, small business subsidies, bailouts and transportation projects that we otherwise would not. To that end, a lot of taxation is a little like theft in terms of the consequences to the consumer, but it more closely resembles a protection racket (but not wholly, as we'll see in a minute).

The other thing that tax and theft have in common is that they both impose value-robbing opportunity costs on society. When Jack designs a mousetrap, or provides a taxi service, or cooks pizzas, he adds value to society. When he steals Jill's laptop, he inflicts all the costs on society that crime imposes, but he also forgoes the opportunity to do something productive.

Taxation has similar opportunity costs. While taxation transfers funds from one place to another, and in a costly way, it doesn't produce very much. There is a small sense in which taxation sustains parts of society (defence, rule of law, and other public goods) that enables others to produce, but there are enormous opportunity costs to taxation that misallocate resources by being out of kilter with supply and demand, and as a consequence rob society of a lot of value.

Taxation and theft also rob society of value by diminishing the number of mutually beneficial transactions that occur, because they both increase the cost of trade, and therefore increase the prices that businesses have to charge. The opportunity costs of taxation and theft are the aggregation of all the forgone opportunities for trade - the mousetraps that don't get made, the taxi rides that never happen, and the pizzas that never get cooked.

Some people struggle with this notion, but it's easy to see its truth by imagining a more extreme example: a country ruled by a greedy dictator who taxes the life out his citizens and allows lawlessness to occur. The costs to the citizens are not just the taxes and the crime - the more acute costs are all the lost productivity and prospective innovations that never materialise because of the taxes and lawlessness.

In summary, then, taxation and theft share many of the same properties - but theft is a bit worse because theft always engenders net costs on society, whereas tax mostly does, but not in every instance.

Every instance where tax goes towards providing something that could, and should, be provided privately, taxation has similar properties to theft. Every instance where tax goes towards providing something, like a public good (defence, rule of law) that is more valuable to society than the cost of the tax gathered, taxation is a lot less like theft - it is more like a compulsory insurance policy that provides societal benefits that would otherwise be more difficult to obtain because of the free rider problem.