Freeman

ARTICLE

Confession of a Compliant Taxpayer

The More Government Gets, The More Government Spends

MARCH 01, 1997 by DWIGHT R. LEE

I’m afraid of the IRS, so I always pay at least as much, and probably more, than I owe in federal taxes. I confess this with apologies to my fellow taxpayers, particularly those who don’t do as I do.

You have all heard, and most of you believe, that honest taxpayers are victimized by tax evaders. In an April 1995 Money magazine article, for example, Teresa Tritch tells us, All told, individuals and corporations are expected to shortchange their fellow taxpayers by an estimated $150 billion this filing season. That adds $1,932 to the average tax bill of every honest taxpaying U.S. household. This sounds plausible enough at first glance, but it is based on two naive assumptions about how government operates: first, that the government needs some fixed amount of money and so if it receives less from one taxpayer it compensates by taking more from another; second, that we are better off when the government spends more of our money. Neither assumption is supported by our experience with government, or by the logic of the political process.

If the government required only a fixed amount of money each year, we could hope to reduce the federal deficit by increasing tax revenues. Unfortunately, the federal government spends more than a dollar for every dollar it gets. The budget deficit fluctuates from year to year, but over recent decades it has tended to increase as federal revenues increase. So if some of my fellow taxpayers pay more taxes than required, my taxes are not reduced. Quite the opposite. The government would respond to the additional money by committing to new spending that will grow faster than anticipated, with yet more money and larger deficits being required, and I end up with a larger tax burden. Conversely, if some taxpayers underpay, my taxes will be lower, not higher, than they otherwise would be. And government spending will also be less.

But if I benefit from additional government spending, I might be worse off even if my taxes are lower because others underpay. What I gain in lower taxes might be more than offset in lost government benefits. But do I, or does anyone else, benefit from additional government spending?

This may seem like a silly question. Someone always benefits from a transfer, a subsidy, or a service when the government spends more money. But those benefits always have to be paid for by someone. So the important question is, are the benefits from additional government spending worth the costs? When the government spends more money, are the additional benefits I receive from expansions in my favorite programs worth as much as I have to pay for expansions in the programs of others? For most Americans the answer is no.

Up to a point, federal spending for defense, law and order, and other necessities is worth more than it costs. But the logic of the political process suggests that we are well beyond that point. Consider that political decisions are far more responsive to relatively small groups, each organized around a common concern, than to the general public. For example, a water diversion project concentrates large benefits on relatively few farmers who are strongly motivated to form a coalition supporting the project. The cost of the project is spread so widely over the general public that few taxpayers know the cost, and almost no taxpayer sees any advantage in organizing opposition to the project. Politicians know that a vote favoring the project will be deeply appreciated by the few getting the benefits and ignored by the many paying the bill. Thus, government projects are funded beyond the point where they are worth what they cost. For example, in California water that costs taxpayers over $200 per acre-foot to provide is sold to farmers for $3.50 per acre-foot so they can grow rice in the desert.

Wasteful Government Spending

Farmers are not alone in using the political process to capture benefits worth less than they cost taxpayers. Indeed, the fiscal relationship between local governments and the federal government causes everyone to support wasteful government spending. About 66 percent of our tax dollars now go to the federal government (up from about 33 percent in 1929), with most of these dollars being returned to states and localities through federal spending on a variety of programs, projects, and transfers. Taxpayers everywhere want their political representatives to retrieve as many of their federal tax dollars as possible, and they are not particular about how those dollars are spent. They will accept almost any project, no matter how little it is worth relative to cost, since the benefits accrue primarily to them and the cost is paid primarily by others. Their tax burden will not be increased noticeably if more federal spending is secured locally, nor will their tax burden be reduced noticeably if it is not. No matter how much the public may oppose wasting tax dollars in general, each local constituency prefers that more be wasted in their district rather than in others.

In essence, taxpayers are caught in a perverse fiscal game in which it is individually beneficial to demand federal spending that is collectively harmful. The only possible winners are federal functionaries to whom taxpayers must pay tribute for the privilege of plundering one another. The government has become, in the words of the nineteenth-century French philosopher Frederic Bastiat, that great fictitious entity by which everyone seeks to live at the expense of everyone else.

The only way to reduce the waste in this game of fiscal folly is by reducing the tax money pouring into the federal coffers. Except for a few who receive more benefits from their favorite government programs than they pay to support the programs of others, we are better off when the federal government has fewer dollars to spend. So most of us benefit when others don’t pay their fair share.

I want to emphasize that I am not advocating tax evasion. But we would be well served if law-enforcement resources were shifted away from the IRS and directed against those whose criminal behavior victimizes law-abiding citizens. Let’s do more to punish those who rob, assault, and murder, and less to punish those who want to keep more of the fruits of their labor.

ASSOCIATED ISSUE

March 1997

ABOUT

DWIGHT R. LEE

Dwight R. Lee is the O’Neil Professor of Global Markets and Freedom in the Cox School of Business at Southern Methodist University.

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