Feb 23, 2016

A Thought Experiment on Taxes

Raising taxes is not an effective means of achieving desired social outcomes. Here's a thought experiment that will demonstrate why ...

Imagine that every year, you have to take the taxes you owe to the tax office and pay them in person. In fact, you have to bring them in the form of gold coins. The amount of coins you have to bring is based on a percentage of your income, like it is now. When you arrive, you're given a cup for your coins and sent into a room with an IRS agent and a giant scale.

On the left side of the scale are three jars labeled "War," "Debt" and "Handouts." That's the side of bad government spending.

On the right side of the scale are three additional jars. These are labeled "Education," "Aid" and "Infrastructure." That's the side of good government spending.

QUESTIONS

It has a been a good year, and you have 100 gold coins to distribute. How would you distribute them?

Let me guess: The right side would hit the table with a clunk.

No such luck, though. You don't get to distribute to the coins as you see fit. Rewind. You have 100 gold coins to distribute. The IRS agent hands you instructions for how to distribute your coins based on how Congress has voted your taxes should be distributed. By law, you are required to follow the instructions on that piece of paper.

Now how are your 100 coins distributed?

Result: The left side would hit the table with a clunk.

Would it matter if, because of an increase in your taxes, you had a cup of 200 gold coins?

The good jars would get more, but the bad jars would get a lot more.
Result: The left side would still hit the table with a clunk.

Would it matter if, because of a decrease in taxes, you have a cup of only 50 coins?

The good jars would get less, but the bad jars would also get less.
Result: The left side would still hit the table with a clunk.

But two positives would also result: a) the money spent on things like war and handouts would be reduced, b) you'd get to keep more of your money to spend as you saw fit.

Would it matter if you were a billionaire and had to bring a Brinks truck loaded with cups of coins with you to the tax office?

The good jars would get fuller, but the bad jars would be overflowing. The left side would still hit the table with a very loud clunk.

Would it matter if you were a billionaire but only had to pay 100 coins because of special tax breaks for billionaires?

Not in terms of tipping the scale. But the two positives above would apply in an amplified way.

Reality Check: Do billionaires bring Brinks trucks or cups with same amount of coins as ordinary people?

Do you have any doubt this scale metaphor reflects the reality of the situation? If so, why? If not ...

What's the best solution to this problem?

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