Taxes: Lost in Translation

Being that it is tax season, I have been thinking heavily on the subject of money. To be frank, money is always on my mind. This is not because I am greedy. Nor is it because money tops my list of priorities. It is simply that I, like most everyone else, spend the majority of my waking hours laboring for a wage. I am not implying that I have a difficult life. I make my living, not by the sweat of my brow, but through mental labor, poised before a monitor in a somewhat comfortable chair. I count myself blessed for this.

Be that as it may, spending such a vast amount of time, essentially endeavoring to stockpile a sum of digital tallies, causes me to question the role of money in my life.

Nearly the entire first half of one of my favorite books, Free to Choose: A Personal Statement by Milton & Rose Friedman, is devoted to this exact question. What is the purpose of money? The answer can be reduced to this simple, yet infinitely complex answer: communication. At its most basic level, currency is used to communicate the value of goods and services. When I purchase a package of chewing-gum for $1, I am telling Trident at what level I value their product. Sounds simple, right? Not quite. At that same time I am communicating the value of every singe ingredient used in the manufacturing  of the product, as well as the labor and machinery. This is essentially how a free-market economy works. Every purchase is a communication of value helping the provider of the service or good to set the most efficient price for their product.

As with any form of communication, be it verbal or written, the message transmitted through currency can be lost in translation. There are many reasons for this, the most important being taxes. Being the necessary evil that they are, taxes are a part of life and I will not argue, at least not here, that they shouldn’t be. However, I do feel that one should understand the effects of taxation to make sure that the benefits are not being outweighed by the costs. One of the effects of taxation is added noise in the above mentioned communication of value.

Taxes raise the cost of the raw materials, machinery and labor used in the creation of goods. This cost, although placed on the manufacturer, is realized in a higher price to the consumer. This places static in the communication lines because although a pack of gum might be worth a dollar to me, I will not purchase it for a $1.50. The added $.50, which in this example is the value of the tax put on the ingredients in the gum, has caused me to leave the market. This is not because I don’t perceive the same value in the product as before, but because it has become more expensive without increasing in value. There is simply no way for me to communicate this to the market. My only option is to not purchase it at all. However, that leaves me without any gum, Trident without any revenue, and the market without needed information on the actual value of the raw materials. This loss of efficiency called a deadweight loss.

Because this post is meant to be only my reaction to taxes I will not discuss subsidies and the further communication breakdown they cause.  Though you can rest assured that I have plenty of opinions on that topic as well.

The ill effects do not stop there. Not only do governments collect tax revenue, they must eventually spend it. Usually this happens before they have even collected it. Many would probably be surprised to learn that our tax rate here in America is about 40%. That leaves me only $.60 of every dollar earned to communicate with. The other $.40 is given to (taken by) the government and spent how they see fit. Some of this tax revenue is used on essentials. The other portion is pumped back into the economy in ways that increase the signal to noise ratio. At first glance, it may seem like government spending is a good thing. However, what they are actually doing is miss-communicating the demand for certain goods or services.

One example of this is the recent Cash for Clunkers program. In this case, the government basically took a portion of my wages and used them to discount the price of new vehicles; essentially lying to the system that vehicles, and the raw materials used to create them, are in high demand. This was a relatively short lived program, but this same thing is constantly occurring though subsidies, stimulus packages and the like.

At this point some might be thinking, “But the government might know how to better spend money than most individuals. They will do what is best.” The best rebuttal for this argument also comes from Free to Choose. Friedman explains that there are four types of spending:

  1. Spending your own money on yourself
  2. Spending your own money on somebody else
  3. Spending somebody else’s money on yourself
  4. Spending somebody else’s money on somebody else

The most inefficient of these is the fourth. This is because there is the least incentive to maximize the value of money when it is not your own. Also, when spending that money on someone other than one’s self, there is even less reason to spend wisely. This is exactly the type of spending that government does. Put simply, they can afford to be inefficient because they are not spending out of their own pockets. For this reason, I believe that the more money that is in the hands of private individuals the better the economy will run. Prices are forced down and innovation is fostered through competition. We only have this competition because individuals and businesses seek to get the best value out of their money. Often, governments are actually incentivised to waste money in order to increase budgets.

It might seem as though I am altogether against taxation. That is not the case. I understand the importance of contributing to society just as much as anybody. However, I feel that taxes and government spending are, and forever will be, an issue of paramount importance. If 40% of the money we make is controlled by government officials, that means that they have taken control of nearly half our power to communicate though currency and, through inefficiencies, are often using it against us. Sometimes they do it purposefully and sometimes haphazardly. I’m not sure which one frustrates me more.

This post has gotten far to long for me to finish my thoughts. I will devote my next post to what can actually be done about inefficient or objectionable taxation. I will probably cover a few of my views on voting and civil disobedience. For now, please feel free to comment below and let me know where you stand.

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12 thoughts on “Taxes: Lost in Translation

  1. I agree with all of this, and look forward to your next post about how you propose a fix to the current system. If everyone really sat and thought about how much we are taxed, there would probably be an uprising. I am often surprised actually, at how inexpensive some items we buy are, when I think about all the different cost (taxes) involved in getting the product to me. That red pepper that Jane Doe ate for breakfast? The farmer pays taxes on his land, taxes on the fertilizer and equipment used to cultivate their peppers, then taxes on his income from selling the peppers to the distributor. The distributor pays taxes on the gas and vehicles it takes to move the peppers to the retailer, as well as taxes on their profit. The retailer pays taxes on their property, their marketing, their employees, their profits. Okay, no sales tax for me on the purchase of the red pepper, but I pay taxes on the gas it takes to get me to the store to buy the pepper, as well as on the vehicle I drive to get it. I use my income to pay for the pepper that has already been taxed through payroll taxes. Any money left over from buying peppers will be subject to taxes on my estate when I die. Please, share with us your solution!

  2. Here is a thought to consider…Let us think about a low income family. Due to the lack of income, the family is able to receive health care (Medicaid) at virtually no cost. Now this family is able to have children at virtually no cost. Also, due to low income, this family is not taxed very hard if at all. Up to this point I really don’t have too much of a complaint, at least on the surface. The real issue I have is now that tax season is here, there are those who fall within the above mentioned category that are now receiving significant returns from a system they have yet to contribute to. Oh, how I would love to get tax credit for children I didn’t have to fork out any medical expenses for. Oh, how I would love to get federal money that is not actually a return (since I didn’t have to pay into the system in the first place). I guess if I weren’t commenting on this blog and I were spending my time working harder maybe the topic of government spending my money wouldn’t get me so fired up.

  3. Nicely written Philip! I’m interested in your next post. I’m not completely against taxation. I think it is a necessary evil for services like education, roads, police, military, etc. However, I also find there is a huge disconnect in the amount of money taken in and how it is used; it is not always done in a way that is meaningful or helpful to the US citizens who contribute to it.

    I also love Lonny’s comment. That is an aspect I think about often and it drives me NUTS.

  4. billions of taxpayer money sent to Egypt (an example) for military support (also overbilled the Pentagon by tens of millions during his 30 year tenure, to be invested in private enterprise,,how many of these despots is the US supporting worldwide? That taxpayers are supporting? The barter system works well at the peoples’ level, money is just one of many tools, it is not a priority in life,,,human values are! the govt. can print as much as it wants, when a ga. of gas is $15 and a loaf of bread is $15, the barter system will appeal a lot more..

  5. Pingback: Taxes: Swallow the Pill « Philip Chiappini's Blog

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