Saturday, February 21, 2015

Taxes Are Awesome: Leviathan 2.0

I came across the line last night that “taxation is theft,” and I rolled my eyes, almost instinctually. It made me think of the overly reductive view I have of libertarian political philosophy. To me the libertarian is the two-year-old of political discourse: “Q: What is your view of the role of the state? A: NO! MINE!”. Again, overly reductive but instructive.

That got me thinking -- what is the role of taxation? I know I have been putting off mine for last year. Even though I am anticipating a refund, there is a time cost I’m not looking forward to spending. (As an aside, it was a genius who came up with automatic withholding. The perception is that you get money when you do your taxes. What a nudge!)

In a closed economy, with a commodity money and an unelected autocratic ruler, taxes could be seen as “theft” if all the taxes were was corn you owed to a landlord and you received nothing in return. But as long as you received something in return then its no longer theft but a quid pro quo. The cost of whatever it is you receive and if you wanted it my be at issue, but it is no theft if it is not just 100% expropriation. Even then you would still need some basic services and there are public goods that exist so that you would need to obtain those somehow because no man is an island. Then you’re paying fees to the service provider and taxation-as-theft to your autocratic ruler. It’s all rent in some form. I guess the chafing is that one feels much more coercive than the other. We can choose the service providers, but not the autocrat.

The problem is that we live in a world with a republican government at the federal level with fiat money and floating exchange rates. The simplest refutation to the idea that “taxation is theft” is to go look at a dollar bill. Right at top it says “Federal Reserve Note,” and right below that it says “The United States of America”. Nowhere do any of mine say “One Edgar Buck,” as much as I would like them to say “Edgar Buck” and be accepted at retailers of my choice, that is not the world I live in. Basically, no one can steal from you what never was yours in the first place. You are a temporary custodian of that dollar until you pass it along.

Instead there is a fiat currency with a slowly decreasing value. That because the monetary base is growing, and this is called inflation. Basically, inflation is the general rise of the price level. Stuff’s getting more expensive, but as the Federal reserve gets better data it is more controlled. The only time that should be a problem is if the cost of your labor is not increasing (Also if you have some sort of nominal fixed income). The Fed can influence the interest rate through policies of buying and selling bonds and other financial instruments. The basically have their hand on the tiller of how much a dollar is worth.

But what is a dollar worth? Is a million a lot of money? This is only realized through what a million can be exchanged for in the market. Will a million by a nice house or a hamburger? This is seeing money as a medium of exchange, where the worth of a dollar is realized in the terms of the goods and services that can be received for every dollar that you have. Inflation over the years makes each dollar able to buy a little less. It is hard to see the effects of low inflation on a day-to-day basis, but it can be exaggerated over a longer time period. I remember reading concern about fiat currency decreasing the value of the dollar 94% since the creation of the Federal Reserve a century ago. That would only be an issue if workers were receiving wages at a 1914 level. Low, persistent inflation is good, because that means contracts can be written taking it into account, and investments can be figured based on forward-looking projections on what inflation will be. It also has the effect of stimulating the economy because there is a disincentive to holding onto cash. In an economy where 70 of the GDP is consumer driven, that helps growth.

So if a dollar is a claim on resources that the government can make an infinite amount of, why does it have to take yours? Even a de minimis state needs institutions that protect property in some sort. I have argued elsewhere for much a larger state, but the same principles apply even if the state is just a police force and an army. In theory the state could monetize what it needed, printing the money for the paychecks to the policemen and the soldiers. The problem with that is that it makes fiscal policy (taxing and spending) into monetary policy (the amount of money out there).  As long as this happened at steady state, it would not be an issue. The problem is if there is variation in the spending needs of the state. If your country needs to go to war and it monetizing spending then suddenly there is a lot more money out there and the value of your money has gone down suddenly and without notice through a spike in inflation. Taxation is thus a social good because it makes inflation and the larger economy more manageable. Everyone chipping in protects the working and investing classes by stabilizing the economy and creating stable future expectations (though larger issues exists on who pays, for what, and how much?).  Taxation separates the fiscal and monetary realms and keeps inflation at bay by helping control the spikes in spending that would otherwise be monetized. The same argument can be said for government debt as well. As long as it is growing a consistent rate, the economy should be able to avoid shocks. An argument exists that it is the same as strict monetization of spending, but that is not true, Debt creates a liability, but it also creates an asset. It is, as I have seen it put, money that we owe to ourselves.