Thought Experiment
May 7, 2010 Taxation

I can’t tell you how many of my students think that taxes do not promote disincentives to act. They think, for example, that when you tax wages, the only possible response is to work more. When you tax savings, the only possible response is to save more, and so on. Their thinking is that you have some target in your life you want to reach, and therefore you do any and everything in your power to get to that goal. In other words, students do not think that prices matter.

These same students then go onto careers in government or professions which rely on the government to exist. So here is another simple proposal I would make going forward. Name an income level for an individual or corporation that is “worthy” of being taxed at the highest rate. Then, if a government entity is in that same “income” level, it ought to be “taxed” the same way.

My town of Pittsford spends about $14 million every year. Suppose they were taxed at the 40% rate that we want to tax the “rich” at. (I know, that is a marginal rate, but the point remains). What would happen to the projects which the town currently funds? Would all of the town workers put in 40% more time, volunteer of course, in order to make sure the parks stay open, the streets get cleaned? Would the town of Pittsford try to sell its services to nearby towns in order to make up the difference?

Of course not. They would do what every single human being who has ever walked the earth would do – they would reduce the amount that they can provide, and they would do whatever they could to avoid the taxes. I am totally in favor of a tax on governments. What should we do with the tax revenues? I don’t know. Perhaps put them in trust for future emergencies. Perhaps send them randomly to charities around the world. Perhaps rebate them tax free to citizens. Who should collect the tax? Well, if you think that last question is a problem, then why do you not think that using governments to correct “market failures” is not also a problem?

"1" Comment
  1. Ed Rendell thinks the same way, no fooling.

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