Discouraging Effort and Success

Why do we tax labor? We know that any tax on an activity discourages people from engaging in that activity by reducing the rewards for doing it. So why do we tax hard work, production, and wise investment? Do we really want less of those things?

We need to fund our government (some claim), so we need to tax something. Why not tax behaviors that we want less of? Wouldn't that be killing two birds with one stone?

What would happen if we ditched all income taxes (including capital gains, and corporate income taxes) in favor of taxation levied exclusively against consumption? How would our society change?

I imagine a system wherein my income is not monitored by the government, but the total amount of my consumptive spending is instead. It's easy enough to do - just give up cash and require banks to report the amount of spending. As long as my consumptive spending total for the tax period stays below a legally established minimum, I pay no tax. But when my total rises above that level, I begin to pay tax out of each additional dollar spent. So if I don't spend much beyond the limit, the taxation I experience will be very low.

There are many advantages to such a system. For one, we'd stop punishing smart and hardworking people for being so productive. Every dollar they earn would be theirs to keep. This would include dollars earned for good investments (capital gains). Similarly, we'd stop punishing businesses for competence in producing and selling products and services to people who need them. When a highly successful business has to pay a large amount of income tax while its less successful competitor pays no tax (due to writing off business losses) the playing field is being unfairly tipped to reward poor performance! Not only that, but why tax production at all when production is what gives us the things we need and desire?

Also very important is the fact that taxing consumption, instead of labor, production, and investment, allows individuals to adjust their tax liability to fit their circumstances and desires. If I don't want to pay so much in taxes this year, I can reduce my consumption and pay less. And, I bear no penalty for working extra hard to earn additional money to fund my future, or my children's future.

Under this kind of system saving would be strongly incentivized. For those who wished to avoid taxation, saving and wise investment would be the safest harbor for their money. Everyone would be faced with compelling reasons to defer spending to a later date. Government subsidized retirement could become unnecessary for average Americans.

It's possible to take this idea to a more extreme level and suggest that leisure (time spent not producing or learning) could be taxed when it exceeded a certain minimum amount. This could spur the indolent and chronically unemployed (whether poor or wealthy) to return to productivity, lending their efforts to the improvement of society.

Undoubtedly there are many weaknesses in such a plan, and opportunities for clever gaming of the system. But that is no different from our current system for taxation.

Are there structural problems with this proposition?

Overly Simplistic

So, how would it change the nature of American government if every law came with a sunset clause, by default? In order to persist beyond, say, three years, they'd have to be re-adopted. I believe that the primary change would be to make governance more experimental and more fluid. Good thing? I don't know. I think most people are annoyed by the very slow pace of positive change in this country, but probably most are happy that the pace of negative change isn't any more rapid.

Would there be other significant unintended consequences? E.g. Regime uncertainty? Could those consequences be mitigated in some way?

Roots of Government

Government is coercive. Concentrated application of force is what government is for.

I imagine two stories for how government arises. The first is government as the embodiment of the social contract, where the contract in question is not figurative or proverbial, but literal. According to this story, government is chartered through an agreement among parties to defer power to an enforcer. This is the process by which townships of the old west incorporated, and hired a mayor to attend to administer the activities of government and a sheriff to physically enforce law and order. The people of the town authorized the government explicitly, and explicitly agreed to be subject to the law and to the officers who carried it out. They further participated in government through town hall meetings and by bearing arms in the defense of the law as deputies.

This same kind of government can be found in clubs and private organizations, and in businesses. The fact that in this story government originates in an agreement among the parties to be governed should not obscure the fact that the government is adopted specifically for the purpose of exercising coercion over the governed. Consider the freelance labor crew who wishes to maximize their profit. They may choose to hire a foreman who is brutally forceful, in order to ensure that every member of the crew works hard and no one is allowed to free ride.

In the second story of the origin of government, government is imposed on local people from outside of their own community, and without their consent. This is the feudalistic story of government, where small farming villages are robbed repeatedly by regional bandits. Eventually the theft becomes routine, and competent leadership among the bandits leads to a sustainable level of pillaging that doesn't destroy the farmer's ability to continue producing each year. Full-fledged feudalism is justified as protection of the serf class by the bandits, who claim that the bandits of the next fiefdom over are far more brutal than they are. So, a social contract-like mantle legitimizes the theft and coercion.

In both of these stories, government exists for the purpose of exercising force.More particularly, it is for the purpose of imposing the will of a powerful coalition, who may be a majority or may simply be a sufficiently powerful elite, upon the rest of the society. The townsfolk impose law and morality upon the lawless and the eccentric, the crew of laborers impose hard work upon the lazy, and the bandits impose taxation upon the serfs. The difference is in what fraction of the population is represented by the government, and what fraction is victimized by it.