Taxation is Theft

by Arpit Gupta


When we talk about taxes, we focus on the disincentives they cause and the deadweight losses that result. I’ve written a lot of this subject myself, as Reihan has graciously linked to in this space. On the left, tax discussions follow a similar structure, with tax advocates, say, emphasizing how tax hikes tend not be followed by slowdowns in GDP growth rate.

What this ignores is that taxation takes away money from people that they have reason to value, that they would otherwise spend on a basket of desirable goods. This is why taxation is a “bad” that we consent to only through legitimate representative institutions, and only for purposes of extraordinary public purposes. The original Tea Partyiers after all weren’t too concerned with the impact of the Stamp Act on the colonial economy. This attitude is expressed well by Mitch Daniels:

Never take a dollar from a free citizen through the coercion of taxation without a very legitimate purpose. We have a solemn duty to spend that dollar as carefully as possible, because when we took it we diminished that person’s freedom.

So even if taxes were relatively harmless in the sense that they led to relatively low losses in labor supply or growth; we could still argue for lower taxes on the basis that our ultimate goal need not be the productive power of the economy as a whole, but the consumption abilities of households. It seems likely that the “theft” aspect of taxation has a first-order effect on household consumption while the disincentive effects are relatively less important for shorter time periods.

This is important in keeping in mind that median household post-tax income has stagnated while GDP has grown. Because the share of GDP going to taxes has stayed the same, we frequently see that as a background feature of the economy. However, the decision to maintain a constant tax burden in the face of rising economic growth was a specific choice that we made, one consequence of which has been stagnating household incomes.

Put differently, policymakers could have sat down in 1973 or what have you and said, “Maintaining the consumption and disposable income of households is our top priority. Therefore, we will focus government spending on helping individuals overcome extreme shocks only. As people get richer, and thus better able to purchase goods and services on their own, we will allow them to keep a greater fraction of their income.” The consequence of that strategy would have been that rising economic growth would have translated more straightforwardly into rising household incomes.

In large part, we opted to maintain levels of government spending rising in proportion to economic growth due to the success of “Schumerism” — my term for paternalistic spending geared to more affluent households as well detailed in this Atlantic profile of Chuck Schumer. Schumer recognized that traditional pleas for government spending based on satisfying the needs of the indigent were no longer appealing to an increasingly wealthy America that was capable of managing their own financial needs. In response, Schumer broadened the concept of the “middle class” and offered the government as a solution for providing this grouop with more aspirational goods suited for their elevated station in life — housing, etc. 

Schumerism is why we have a debt burden. In substantial part, we have not run up debt to satisfy essential goals of public policy. Rather, we have simply chosen to outsource the task of household consumption to the government. Left and right wing groups alike have offered us various psychological goods — from militaristic responses to acts of terror to Fannie/Freddie and ample housing subsidies. It would be one thing if this money were spent well or productively. Sadly, too often it is not. 

As Mitch Daniels did in Indiana, we need to make raising household income a top priority. One of the easiest way to do that would be to stop talking so much money from those households in the first place. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.