My way 5 -- taxes

In the context of externalities and the place of the market in society, I have alluded to public goods. Loosely speaking this refers to goods that for one reason or another, in principle, cannot or perhaps should not be owned by individuals. But the theory of the market requires that everything be owned or it is helpless.

I would argue that public goods are far more important than private goods, and that therefore we ought to assume that public goods are the default and therefore it is private goods that are problematic and need to be accounted for as an anomaly. Certainly that is obvious for most of human history, during which people have very little in the way of individual possessions, and quite probably nothing that they kept for very long; most of what people did "own" in any sense was shared among the band; and the ecosystem yielded sustenance to the people with no-one even thinking of claiming ownership of any part of it. The idea would have made no sense, could not even have been stated.

Alas, we are so accustomed nowadays to think of everything as being owned that I have to make an argument about what economists largely ignore and only grudgingly acknowledge as exceptions. There are three main reasons why goods are public. Some are a little bit of two or more. First, it is impossible to limit the use of some goods to people who have established ownership. This includes not only bounty of nature, such as the atmosphere, but also certain manufactured items such as lighthouses. A shipper cannot build a lighthouse and exclude competitors from seeing it. But this is only subtly different, when you really think about it, from the second reason why goods are public, which is that they have such huge positive externalities that there obviously would not be enough of them produced if we left it to the market. It might or might not be worth it to an individual shipping magnate to build a lighthouse for the benefit of his own company, but if this did happen, it would not happen in all of the places for which a net social benefit to society would accrue by the creation of a lighthouse.

This latter argument requires a bit of elaboration. If all of the shipping companies and fishers and recreational boaters in the world could get together and parse out exactly what their benefit would be from the building and maintenance of lighthouses in all the places where they might be useful, and they voluntarily agreed to kick in the amount of their benefit to a common pool, there would no doubt be far more than enough money to build and maintain all the lighthouses they could possibly want. However, it would not happen, because most of them would wait in hopes that the next guy would do it and they wouldn't have to. And if some of them did step forward and do the right thing, they'd end up paying the cost while a bunch of freeloaders shared in the benefits, which doesn't seem fair.

Solution? Taxes. We form a government that enjoys enough popular legitimacy to solve problems of this kind, by compelling people to contribute to the common good, since, lamentably, most people just won't do it if we merely ask politely.

So government must a) protect commons such as the atmosphere from overexploitation and b) create new commons such as lighthouses which nature has not provided.

There is a third kind of quasi-public good, which is a so-called "natural monopoly." It would be ridiculously wasteful to build two or more separate networks to distribute electricity to people's homes. It's bad enough that our streets are cluttered and defaced by long lines of poles with wires, but what if there were three or four of them marching side-by-side down the sidewalk? Not only would we be unable to walk to the bus stop without stepping into the street, but electricity would cost much more because the investment and maintenance in each of the separate networks would be shared among a fraction as many consumers.

BUT

A monopoly utility would have us by the sensitive parts. It could charge whatever it wanted because it would have no competition. For some reason, in this country we have mostly allowed private companies to operate these networks but we regulate them closely to limit their prices and profits to a reasonable amount. Remember what happened in California when they tried not doing that and Enron stole billions?

Now, this ought to be perfectly obvious to everyone. We need to pay taxes, and we need to have government spending and regulation, because if we did not, capitalism could not exist. It is 100% false, and is not even supported by the most radical version of any intellectually respectable theory of the market, that taxation and government spending are necessarily harmful to economic growth or make people poorer. On the contrary, they are an irreducibly necessary condition for markets to exist and to flourish. When government collects taxes, the wealth doesn't disappear: the government spends and invests it. Whether this contributes to economic growth and overall welfare depends not on how much the government collects and spends, it depends on what kinds of activities the tax code differentially encourages and how the government spends the money. When government invests in public goods, that makes us all wealthier.

There is no consistent historic or cross-sectional relationship between the level of taxation in a country and its long-term rate of economic growth. European countries with far higher marginal tax rates than the U.S. have done just as well if not better economically (depending on what you measure) and with far less poverty, far less social problems, and happier people. Their corporate CEOs make a fraction of what ours do, and keep even less of it, but they still get up in the morning and go to work and run strong, profitable companies. Historically, in the United States in the past century, our strongest periods of growth have coincided with the highest marginal tax rates.

Duh. I can't believe we have to argue with these idiots.

Next: Recession.