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Don’t Like Taxes? Consider the Alternative

By PETER L. BERNSTEIN
Published, NY Times: February 10, 2008

Every year at tax time, someone is sure to remind us of Benjamin Franklin’s maxim that nothing is certain but death and taxes. The statement happens to be true, but associating taxes with death adds only to the gloom of the moment. My goal here is to remove some of that gloom.

Some readers will throw up their hands, saying I’ve given myself an impossible task. What cheer can people find in writing a check to someone they don’t know, for a purpose they can’t specifically define, and for use by a bunch of people whom many taxpayers accuse of incompetence and disinterest? And think of the time we spend figuring out how much to pay — with a negative reward for our efforts.

Yet there is another side of this picture. There are important compensations for the pain that taxes cause us. For starters, as Lord Dewar, the Scottish whiskey distiller, reminds us, “Nothing hurts more than having to pay an income tax, unless it is not having to pay an income tax.” In addition, civil servants deserve a better break than wholesale defamation.

We should have a sense of reward for helping to finance government. Yes, I know that government has serious faults, many and varied. But if we were to restrict our check-writing to parties without serious faults, we might as well throw away the checkbook.

Others complain that writing the tax check is compulsory. But if we all had the option not to pay, revenue would shrivel up and the whole system would break down into chaos.

Though people exaggerate many negatives about taxes, I am more concerned about how we ignore the positives. Indeed, taxes buy us the free society we cherish. Government is an organized institution intended to produce and manage what are known as “public goods,” and there is no way a free society can function without them. Public goods are things that all people, or at least a vast majority, want but don’t want to pay for as individuals.

Here are just a few examples:

•  We all want justice done, and justice involves courts. Judges and clerks have to earn a living, too. Taxpayers share those costs.

•  We want parks and bridges to grace our cities, but I’m not going to pay for a park or a bridge on my own, even if I could, because most of its benefits will go to thousands or even millions of people who mean nothing to me.

• We want an army to defend our country, but who will stand up and say, “O.K., I will take on the army as my personal responsibility”? Who would even want such an arrangement?

The same arguments apply to the local police departments around the nation. Or, when it comes to education, can anybody expect me to pay on my own for the schooling of millions of other people’s children across the country? I spent plenty to educate my own children. We have to do this together as taxpayers.

Paying taxes is the only way to have public goods that benefit all of us. Government is merely a device to help us pool the costs and share those burdens.

But there is more to this story. What about entitlements like Social Security and Medicare, or even unemployment insurance? What about farm subsidies? These are not public goods. They are private claims on the state. Here the case for taxes is not so clear, and debates about privatization of these obligations are intense.

Regardless of where you stand in that debate, the need for old-age pensions and health care coverage will not go away just by cutting government out of the picture. We must pay for these needs one way or another. Even if privatized, these costs would be just as unavoidable as paying taxes to finance them, and, for many citizens, privatization does not ensure the comforts of old age or the good health we seek.

I acknowlege that there is a dark side to this process. Much government spending on public goods involves waste, and sometimes corruption, and is often badly executed. In the private economy, the pressures of competition tend to minimize these kinds of costs, although government surely has no monopoly on waste (think Enron) or bad execution (automobile recalls). No matter how much people running for office promise to overcome these faults, history tells us that such efforts must fail far more often than they succeed.

There is an important reason that these infuriating drains on the taxpayers’ pocketbook have been endemic through the centuries: “We the people” do not pay salaries commensurate with our public servants’ needs. A congressman’s salary is $169,000. State governments tend to be even less generous. Many governors earn less than $100,000. And civil service salaries often go down from there. By contrast, a typical senior job in investment banking in 2007 brought in an average of more than $2 million.

Under these conditions, there are enormous temptations for public servants to engage in corruption of one form or another. And poor execution is perhaps inevitable when the most talented people prefer work in the private sector, where they earn far more.

Nevertheless, one way or another, the job gets done. Most of it deserves to be done. As Justice Oliver Wendell Holmes Jr. observed many years ago. “Taxes are the price we pay for civilization.”

~~~~~~~~~~

Peter L. Bernstein, a financial consultant and economic historian, is the editor of the Economics & Portfolio Strategy newsletter.

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