Taxation is unlike most transfers of money from one individual to another: while most other transfers are entered into voluntarily, taxation is compulsory. In Chapter 5 we saw some of the reasons why the contributions to support public services need to be compulsory: because of the free rider problem, unless support for public goods is made compulsory no one will have an incentive to contribute. We showed, in particular, that all individuals might be made better off by voluntarily agreeing to be compelled to contribute to the support of public goods. Yet the ability to compel individuals to contribute to the support of public goods may also provide the government with the ability to compel individuals to contribute to support some special-interest group: the government has the power to force one group to give up its resources to another group. This forced transfer has been likened to theft, with one major difference: while both are involuntary transfers, transfers through the government wear the mantle of legality and respectability conferred upon them by the political process. In some countries and at some times, the distinction becomes, at best, blurred. The political process becomes detached from the citizenry and is used to transfer resources to the groups in power.
This is from Joseph E. Stiglitz, Economics of the Public Sector, Second Edition, 1988. I used the textbook in a policy analysis course at the Naval Postgraduate School in the mid to late 1990s.
I find the order of his reasoning in the above fascinating.
The first sentence makes clear, in no uncertain terms, that taxation is compulsory.
The second sentence is the typical case for taxation to finance public goods, something that he might have learned (if he hadn’t already known and he probably did know) at the knee of his mentor, the late Paul Samuelson. It also contains the standard exaggeration: no one would have the incentive to contribute? I don’t know of any such examples. Even for the economist’s typical example of national defense, if some foreign invader is coming at me, I’m going to defend myself. Is the amount of defense enough? Probably not. But my incentive is not zero.
The third sentence reminds me of James Buchanan when he channeled Knut Wicksell. Buchanan took seriously Wicksell’s idea that the only way to be sure everyone benefited from government spending is to require unanimous consent for every tax/spending program. Of course, in practice this is unworkable, but it’s a good reminder.
The fourth sentence lays out the huge downside of relying on taxes: taxes can be used to redistribute wealth. Indeed, that is the main thing they do in most countries. Here Stiglitz is channeling Public Choice theory.
In the fifth through seventh sentences, Stiglitz is way more radical in an anti-government direction than I ever would have expected.
There’s so much I like about this textbook. I don’t think he would write it even close to the same way today.
READER COMMENTS
BC
Dec 24 2020 at 5:46am
“I don’t think he would write it even close to the same way today.”
You may be right, although it’s less clear why. Does he think that government in 2020 is less likely than government in 1987 to “compel individuals to contribute to support some special-interest group?” Does he think that the political process in 2020 is less likely than in 1987 to become “detached from the citizenry and…used to transfer resources to the groups in power?” Many left-leaning economists seem less “radically” anti-government today than in the 80s and 90s. Yet, I don’t get the impression that they think the government and political process are less corruptible by special interest groups today than in the 80s and 90s, in fact quite the opposite. So, their pro-government shift doesn’t appear to match their own assessment of how the political process works in practice.
Thomas Hutcheson
Dec 24 2020 at 6:37am
I think people on the “Left” are quite aware of how political power can be used to transfer income to special interest groups. The most recent example is the huge transfer to shareholders from the “Tax Cuts for the Rich and Deficits Act of 2017.” One needs to look at each proposed tax and transfer on its own merits.
The Stiglitz outline of factors to consider are lacking on one regard, the fact that part of the value of consumption to high consumption people is it’s effect on their standing relative to other high income people. (I think it si pretty well established that people compare themselves to near peers more than to distant peers). If an increase in taxation reduces the consumption of high income people equally, that will reduce their marginal propensity to work and innovate and all the good things that high income people do than the same taxation applied individually.
Alan Goldhammer
Dec 24 2020 at 9:09am
David- thank you for an interesting post. My own views on taxation have changed radically over the years. I think government at all levels does an incredibly poor job at defining what their role ought to be, what revenues are needed and how they will be spent. Sometimes it is straight forward to analyze things at the local (city/county) level to understand needs and spending (schools, roads, parks, libraries, etc.) but as one moves up to the state and national levels it is more opaque. Your example of ‘national defense’ is a good one as the question of how much is enough has never been satisfactorily answered.
I remember when the flat tax was first proposed back when the Republicans took the House in 1992. There was a lot of arguing about whether this was better than the progressive income tax. Each year I ran the numbers for my own return and the amount of taxes we owed was close to identical under the two approaches (based on the then current rates and IIRC 20% flat tax and a $40K standard deduction). It was at that point that I figured out tax preferences were really not useful in terms of simplifying the tax code and I would have gladly settled for eliminating all of them in return for completing my taxes in two minutes.
The same goes for the lard filled corporate tax schedule which may be fattened if the current COVID-19 stimulus bill goes through. I would just as soon see it eliminated or pared way back with the elimination of all the preferences and an addition of a modest VAT.
Thomas Hutcheson
Dec 25 2020 at 5:58am
Of course there should be no tax on business income at all. Profits should be imputed to owners and taxed as income in whatever way income should be taxed.
Tax deductions as opposed to partial tax credits are just a way of making an income tax less progressive. Whether to favor some kinds of expenditures over others (whether through deductions or partial credit) is not a matter of progressivity and is irrelevant to whether a “flat” (two rate) tax is better than one with more rates in which higher levels of income (or better yet, consumption) have higher rates.
Todd Moodey
Dec 24 2020 at 10:05am
David–
One possible way to (weakly) test your surmise is whether he revised anything in subsequent editions of the text, or wrote a forward in which he walked-back or modified his claims.
Todd Moodey
Jon Murphy
Dec 24 2020 at 10:07am
I’ve noticed public intellectuals tend to be much more careful in textbooks than in columns and public statements. In Paul Krugman’s textbook International Economics, he has a very good very public-choice section on the political economy of trade restrictions. I don’t have the book in front of me so I am going by memory, but he ends by saying that, once political and special interest considerations are taken into account, most economic arguments for tariffs (eg dumping, optimal tariffs) are neat theoretical considerations but not of much practical use.
JK Brown
Dec 24 2020 at 4:46pm
Well, taxes are the first infringement on the liberty to keep and accumulate earnings over what is needed for subsistence. The more insidious infringement is the limitations imposed on who can generate wealth for themselves in the first place. That runs from Laissez Faire capitalism, through interventionism that grows to favor cronies, into the various flavors of socialism up to the state capitalism of what we call Communism, where essentially only office holders are afforded the liberty, and even then tenuously dependent upon remaining in favor with ‘Dear Leader’.
John Fiske in his ‘Civil Government in the United States’ (1902) observed:
It is in this end when “who is to decide how much they shall be” is not those that in whole pay, that we get the funneling of taxes not to public projects for the common good, but toward the engineering of society and rewarding special interests.
When the parties of special interest dominate, the result is the eventual disintegration of society as observed by Mises in his ‘Liberalism’ (1927)
Scott Sumner
Dec 24 2020 at 11:32pm
Quite a few center-left economists have moved to the left since 2008. (I’d add Paul Krugman and Larry Summers to the list.)
LEB
Dec 26 2020 at 3:04pm
You make a great point that the incentive to contribute to public goods is never zero. I was surprised to learn recently that Polio vaccination in the US was largely funded by private charity.
The March of Dimes raised $233 million and 80% of all polio patients received significant aid through the foundation.
(See Wikipedia and recent CWT episode with Melissa Dell)
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