What Do We Want Taxes to Accomplish?

Perhaps this question hasn't been asked often enough. Yet it seems pertinent now, given the fact Republicans struggle to implement tax changes, given differences in preferences which make it difficult to reach consensus. What happened to all those discussions about the dynamism of a limited government?

From an outsider's perspective, Republicans often appear to be united in their desire for free markets, especially as they acknowledge anti-market forces among Democrats. Yet the internal divisions among Republicans in this regard, have actually existed for some time. In "The Social Transformation of American Medicine", Paul Starr wrote (page 419):

But conservatives, like liberals, have trouble carrying out an ideologically faithful policy; they too have interest groups to worry about. The insurance companies and medical profession have shown relatively little enthusiasm for the conservative program of intensified competition. And while the doctors and hospitals welcomed relief from regulation, they could not be entirely happy about plans to reduce the federal aid they were now accustomed to receiving. Cutbacks bring constraint, and competition does too; strong organizations take over the weak. And, as one president of a county medical society said at an AMA meeting soon after Reagan took office, "Our mentor has always been Hippocrates, not Adam Smith."

A similar subsidy "logic" seems to be in place for mortgage interest deductions as well. One almost has to wonder, given the continued relevance of the above quote: Could institutional ambivalence be part of a slippery slope which leads to authoritanism?

Another passage in the same chapter of Starr's book is still relevant today, given renewed hopes of encouraging economic dynamism by reducing licensing requirements. While many of us admire Milton Friedman's courage to encourage broader use of knowledge in the marketplace, Starr nonetheless wrote, "Although a few devotees of the free market, notably Milton Friedman, criticized the medical profession as a cartel and called for the abolition of licensing, this was primarily an intellectual amusement. No one seriously tried to carry it out."  Alas, this quote serves as a reminder, how many aspects of non free markets will likely remain firmly entrenched, in the economic realities of middle to upper income levels in the years to come.

Hence more than government size appears to be involved, when it comes to economic dynamism. What we want taxes to accomplish, and what they often end up accomplishing instead, tend to be two different things. If this weren't enough, gaining the revenue from taxation is pretty much an open ended game, depending on which party is in power. Why would anyone want to define optimal taxation, given those circumstances? And since few but the most diehard of libertarians has really explored what taxation might best accomplish, most anything is up for grabs in terms of the revenue sources that governments might seek. Why lose sleep over the craziness of the latest government grabs, when we've basically tuned out the craziness which came before? One is reminded of the old saying:

Don't tax you. Don't tax me. Tax the fellow behind the tree.

Among the quoted newspapers in the above linked article, one noted the issue was "solved" by Congress, when they taxed the tree as well. I had to laugh when I read it, since such an approach sounds suspiciously like present day proposals to tax robots! Oddly, these unusually honest quotes - which readily bring to mind a child's game - also speak to the fact many groups wouldn't be happy with tax simplicity, since "deserving" special exemptions would no longer be possible.

Even though it is mostly an intellectual exercise to consider what we want taxation to accomplish at state and national levels (given the various vested interests at stake) it's a perfectly valid question for economic dynamism at the margin, via defined local equilibrium for non tradable sectors. Yet time value as a new point of wealth origination, could build what is normally generated via tax support, into local ownership structures. This would be a more rational approach for individuals whose limited resource capacity means representative taxation is an expensive luxury, in the open ended nature of general equilibrium.

Consider why general equilibrium representative taxation (for lower income levels) has become such a luxury, in recent decades. Unlike the earlier forms of government subsidies which reinforced marketplace growth and greater economic inclusion, today's government subsidies of time based product - by their very nature - reinforce growth limits and the dominance of economic exclusion, instead.

These twentieth century arrangements stemmed in large part from a public desire to subsidize markets for the greater use of knowledge. However, knowledge can't be subsidized as a dependent marketplace, without turning a considerable percentage of high level skill into an exclusive commodity. Indeed, the incentives of knowledge providers to limit knowledge use in these circumstance, aren't "evil". These individuals are simply working with the constraints - or the limited revenue sources - of their secondary marketplace dynamics.

It's also important to understand this rationale, given regulations which have also originated as sources of cost containment. For instance: In a recent Econtalk on "permissionless innovation", Russ Roberts and Michael Munger wondered why something as illogical as a certificate of need should be "necessary" to get things done. Decades earlier, however, establishing certificates of need was often the only "solution" that everyone in Washington (and consequently the states) could agree upon, for cost containment. Again, Paul Starr wrote about certificates of need in "The Social Transformation of American Medicine" (pages 398-99):

The interest of state legislatures was plainly cost control. However, the main inspiration for certificate-of-need came from the American Hospital Association and its state affiliates. The hospitals, anxious to avoid other forms of control, stood to benefit from the limits on competition that this sort of regulation would create. Opposed were profit-making hospitals and nursing homes and some state medical societies, which objected to anyone but doctors regulating medical services. However, state officials, labor, and business accepted the argument that capital regulation would be an effective means of cost control.

Before the decades when healthcare became such a substantial proportion of our nation's GDP, there had been considerable hope that the marketplace could be expanded to serve not just upper and middle class citizens, but lower income citizens as well. However, had physicians and hospitals taken the approach of an expanded marketplace which relied on oft limited revenue sources, these groups would have inadvertently watered down their sources of general equilibrium revenue.

Ultimately, taxation can subsidize knowledge use up to a point, such as what the twentieth century made possible. Unfortunately however, these knowledge use subsidies are mostly available for the (possibly 25%) level of core employment groups which can effectively reciprocate for the mutual societal commitments involved. My concern is with the growing numbers who will not be a part of this core level of employment in the foreseeable future, which might come to represent as much as three quarters of the population in the U.S. For these groups, a different approach will be needed, to redefine how the redistribution of resource capacity that taxation was supposed to achieve, might actually be possible.