In the movie Bubble, a woman visiting a man’s room waits until he goes to the bathroom, and then searches for cash, which she finds and keeps. Abstractly I understand why someone might do this, but I would feel completely ashamed to do it. It is not just that such theft is uncommon or illegal, or that I had a connection to the victim; I would feel ashamed even if it were legal, if most everyone did it, or if the victim were a stranger. And I suspect most people feel this way.
Robin, you say "When you manage to pay $1000 less in taxes, I estimate this has only a small effect of government spending, say less than $100."My intuition is that the effect on government spending is larger, as I suspect tax rates are limited more by voters' willingness to put up with taxes than by any limits on the desire to spend.Also, the claim "most of that spending pays for services most people value" seems misleading. I think it would be more accurate to say "most voters" rather than "most people". Spending money to restrict immigration is supported by a majority of voters, but if you expand the relevant group of people to include potential immigrants then it's unlikely a majority of that larger group would support the spending. Also, the political system creates few limits on the magnitude of harm that such spending imposes on potential immigrants, whereas the benefits of "good" spending are often limited by rent-seeking. So it might be that most spending produces results that are marginally more valuable than alternative uses of the money, but the harm done by the worst 5 percent of spending exceeds the benefits of the "good" spending.
I just realized that a truly selfless person should actually be encouraged to work harder by taxes. Why? Because the harder he works, the more taxes he can pay, the less taxes others would have to pay, and (assuming at least one person is self-interested) the less discouraged they will be from working.
So why are you reading a blog instead of working? Shame on you. :)
I think that for most people, shame is about reducing potential negative consequences to themselves, not improving social efficiency. A person feeling shame about stealing from a stranger helps prevent him from getting caught and punished. Even if stealing is legal, there's still the threat of private punishment, or being socially ostracized. But taking advantage of tax loopholes is legal, there is little threat of private punishment or others finding out, so it's only to be expected that people do not feel shame about it.
This blog is about trying to make people rational, which is already somewhat utopian. Trying to make them rational *and* selfless definitely crosses the line.
Glen asks "Are you saying that $900 collected from others will discourage more work than does $1000 collected from me?" If Robin is consistent he should say that he isn't discouraged at all from working by taxes no matter how high they are, since that would be socially inefficient, and he would feel ashamed if he did work less because of taxes.
Robin: Do you believe that additional marginal government spending has a net positive effect? I don't. My hypothesis is that there are diseconomies of scale in government such that outside some optimal range of sizes (I don't rule out zero as one of them) the bigger government gets, the more net harm it does with each new increment of spending. I further hypothesize that we are currently well outside that range. In that light, consider your claim that:
"When you manage to pay $1000 less in taxes, I estimate this has only a small effect of government spending, say less than $100."
If I made government even $10 or $100 smaller, I've done a good thing. Because a government that's smaller by $100 is closer to its optimum size. It's not even necessary to believe *all* of the reduction is in stuff I dislike. Just most of it. That should be easy for anyone with libertarian tendencies but doubly easy for *you* given that you think marginal healthcare spending is wasted.
You add: "The main effect will be to raise the tax rate so as to collect at least another $900, which will do more to discourage people from working."
Are you saying that $900 collected from others will discourage more work than does $1000 collected from me?
Robin, as you know saving money on taxes, legally or illegally, takes effort. Even though you're required to pay only a minimum amount of tax it takes effort to calculate how much. Why not just pay some arbitrarily large amount of tax over and above your marginal rate and spare the effort of this time-consuming calculation (and make an increased contribution to the greater good)?
Am I wrong in sensing the implicit assumption in your thinking that loopholing takes more effort than the act of filing a return in the first place? I can imagine at least one counterexample to this assumption. Reporting an estimate of your charitable contributions as a deduction is lying. However, this lie requires less effort than tallying up the checks written to the church or adding up the Goodwill receipts. Honest return filing takes more effort than cheating in this example. Many other legitimate deductions are not effortless to report accurately.
That said, Robin, do you have problem with expending effort to lower your tax bill from *any* arbitrarily high percentage of your income? Say from 99% of your income to your marginal tax bracket? It seems to follow that doing so is even more unlikely to be socially beneficial, and causes others to have to pay even more later.
"The main effect of your efforts to pay less taxes is that others pay more later, via tax rate increases."
This is only part of the picture. The tax codes, with all their complexity, are expected to bring in a certain amount of revenue. It is true that if your actions manage to reduce the amount of revenue below this level, there may indeed be tax rate increases to compensate. But it's also possible that the codemakers expect you to take full advantage of your loopholes and set tax rates with that assumption in mind. In that case, avoiding possible deductions will cause tax revenues to come in higher than intended. That could have bad consequences as well, if we assume that overall tax levels properly reflect society's goals. So in a way, by taking advantage of your loopholes you are reflecting tax designers' expectations, making this strategy something of a Schelling point in the game.
I am aware that even the borrowed money is not "free," and that at future generations will have to pay at least some higher taxes for higher interest payments. However, again, this was a conscious (or semi-conscious) decision of our elected officials when they decided on spending, rules for transfer payments, and the details of the tax code. As I already noted above, I happen to support a drastically simplified tax code, with this sort of problem of the eneven impact of all the complications being among several factors.
For that matter, here is a problem for Robin. Suppose you are right, what tax rate should you pay? Should you not claim exemptions for your children and still pay the rate that comes out? If you are not eligible, should you voluntarily pay the AMT amount? Or, should you make a calculation of what a revenue neutral tax rate would be if there were no loopholes, in short simplification, and pay that rate?
BTW, this is such a straw man you have set up, I kind of suspect that you did it for kicks just to stir up a lot of discussion about taxes, :-).
Robin complains about lost effort. The effects of loopholes are worse than that implies, because the nature of a complex tax code means that it takes time/expertise/money to exploit all the loopholes. People who do their own taxes won't get the advantages over somebody who hires an accountant, and people who can afford very smart accountants will get correspondingly more financial benefit. As a result there is a whole tiered industry devoted to finagling the tax code. A software industry too.
I think probably everybody here would agree that a simplified tax code would be better than what we have now.
mtraven, like you I think the prospect for libertarians succeeding in eliminating politics are slim-to-none. However, I don't see their prospects being any better if they choose not to give up on politics.
Barkley: As Robin said, the money will eventually be extracted from taxpayers.
Robin: I'm wondering if this is not a case of you taking some things you personally dislike and trying to elevate them to universal or moral principles. This appears to me to be a species of bias.
I don't particularly like large vehicles, and prefer smaller cars. I can also identify some real externalities associated with driving larger vehicles (note that in the case of safety, the externality is in part a reasult of _my_ preference). But I am not certain that those externalities outweigh the utility of those cars to their drivers. Thus I am reluctant to cast opprobrium on the drivers as you do.
As a trivial example, consider Opera. I don't like it, and it is often subsidized, using up resources that could be put to other uses. Should those who use the subsidized tickets feel ashamed, or should I just admit that this is my preference, and move on?
1. The loopholes exist because a democratic legislature enacted them precisely to shape behavior society deems good. Also, don't confuse cheating on taxes with loopholes.
2. Many vehicle collisions, and perhaps most fatal ones, are not car vs. car accidents. Many are single car accidents. Many others are commercial truck vs. car accidents. So in the net sum of things, driving an SUV reduces car fatalities far more than it would increase them for potential "victim" cars. Plus, a large part of vehicular fatalities are caused by drunk drivers on law-abiding drivers and passengers. Assuming one is not likely to drive drunk, it further adds to the balance of responsibility of driving a large, heavy, safe vehicle. Throw kids into the back seat, and it seems irrational NOT to drive an SUV.
Actually, just because the government does not take your money because you used a legal loophole, does not mean that the government will be taking _extra_ money from anybody else. Presumably every rational individual will be taking advantage of the legal loopholes (aka "deductions," "exemptions" and other more neutral terms) that are available to them. Everyone should pay what they are legally required to pay. If that does not cover what our duly elected representatives and president et al have decided to spend, then we borrow from the Chinese, or whomever, to cover the difference. There is not some extra amount suddenly added on to the taxes of those who did not take advantage of legal loopholes available to them (or who were unable to take advantage of any legal loopholes).
Robin, please clarify if you are shamed by exploiting tax loopholes or lying on your return. There is a significant difference.
Loopholes have a basis in the tax code. Poorly worded provisions or poorly synchronized rules sometimes offer an opportunity to avoid tax. The complexity of tax codes makes it difficult for legislatures to foresee how particular provisions will interact with the market. Sometimes, admittedly rarely, a taxpayer can avoid tax *and* follow the code to the letter. This is just an unintended consequence of complex areas of statute. The same problem exists in many other areas of statutory law.
Taxpayers who exploit loopholes provide a valuable service to the authorities. Legislatures must rush to redraft provisions to close loopholes. Moreover, the potential for future loopholing pressures the drafters of statute to clarify meanings, codify the intention of certain provisions, and otherwise use unmistakeable language, thus making it easier for all of us to understand and comply.
Pressing it further, loopholers are often not compensated for this service. Even when the basis for the loophole is found in the code, the taxpayer bears nearly all of the risk of exploiting it. There is no guarantee that the loophole can be successfully defended in court, and the taxpayer will be liable not only for the tax due, but for attorney's fees, fines, interest, and the costs of restructuring to take advantage of the loophole in the first place.
Given this, there is no place for shame in loopholing.
In any given domain, the honest can be taken advantage of by the dishonest. In the case of lying on a tax return, the dishonest transfer tax liability to the honest in exchange for additional risk of audit, fines, and having to pay interest on back taxes. When the number of enforcement actions versus the number of returns filed is low, the risk premium of lying on one's return increases. We can therefore make at least one testable prediction: in times when the number of tax enforcement actions are consistently low, less tax as a fraction of GDP will be paid.
Does this mean that lying on your return is somehow different than stealing? No, in fact the rational thief's calculation of risk premiums is at least very similar in both cases. However, I don't see that there is a bias necessarily involved.
Robin, you say "When you manage to pay $1000 less in taxes, I estimate this has only a small effect of government spending, say less than $100."My intuition is that the effect on government spending is larger, as I suspect tax rates are limited more by voters' willingness to put up with taxes than by any limits on the desire to spend.Also, the claim "most of that spending pays for services most people value" seems misleading. I think it would be more accurate to say "most voters" rather than "most people". Spending money to restrict immigration is supported by a majority of voters, but if you expand the relevant group of people to include potential immigrants then it's unlikely a majority of that larger group would support the spending. Also, the political system creates few limits on the magnitude of harm that such spending imposes on potential immigrants, whereas the benefits of "good" spending are often limited by rent-seeking. So it might be that most spending produces results that are marginally more valuable than alternative uses of the money, but the harm done by the worst 5 percent of spending exceeds the benefits of the "good" spending.
A tax loophole is a change in our behaviour or financial structures that the government has decided to reward by means of reduced tax.
If government is good and wise, then we are doing the right thing to follow the behaviour the government is trying to encourage.
If government is stupid or corrupt then we are doing the right thing to minimise the money they have to spend on stupidity or corruption.
Have I missed anything?
I just realized that a truly selfless person should actually be encouraged to work harder by taxes. Why? Because the harder he works, the more taxes he can pay, the less taxes others would have to pay, and (assuming at least one person is self-interested) the less discouraged they will be from working.
So why are you reading a blog instead of working? Shame on you. :)
I think that for most people, shame is about reducing potential negative consequences to themselves, not improving social efficiency. A person feeling shame about stealing from a stranger helps prevent him from getting caught and punished. Even if stealing is legal, there's still the threat of private punishment, or being socially ostracized. But taking advantage of tax loopholes is legal, there is little threat of private punishment or others finding out, so it's only to be expected that people do not feel shame about it.
This blog is about trying to make people rational, which is already somewhat utopian. Trying to make them rational *and* selfless definitely crosses the line.
Glen asks "Are you saying that $900 collected from others will discourage more work than does $1000 collected from me?" If Robin is consistent he should say that he isn't discouraged at all from working by taxes no matter how high they are, since that would be socially inefficient, and he would feel ashamed if he did work less because of taxes.
Robin: Do you believe that additional marginal government spending has a net positive effect? I don't. My hypothesis is that there are diseconomies of scale in government such that outside some optimal range of sizes (I don't rule out zero as one of them) the bigger government gets, the more net harm it does with each new increment of spending. I further hypothesize that we are currently well outside that range. In that light, consider your claim that:
"When you manage to pay $1000 less in taxes, I estimate this has only a small effect of government spending, say less than $100."
If I made government even $10 or $100 smaller, I've done a good thing. Because a government that's smaller by $100 is closer to its optimum size. It's not even necessary to believe *all* of the reduction is in stuff I dislike. Just most of it. That should be easy for anyone with libertarian tendencies but doubly easy for *you* given that you think marginal healthcare spending is wasted.
You add: "The main effect will be to raise the tax rate so as to collect at least another $900, which will do more to discourage people from working."
Are you saying that $900 collected from others will discourage more work than does $1000 collected from me?
Robin, as you know saving money on taxes, legally or illegally, takes effort. Even though you're required to pay only a minimum amount of tax it takes effort to calculate how much. Why not just pay some arbitrarily large amount of tax over and above your marginal rate and spare the effort of this time-consuming calculation (and make an increased contribution to the greater good)?
Am I wrong in sensing the implicit assumption in your thinking that loopholing takes more effort than the act of filing a return in the first place? I can imagine at least one counterexample to this assumption. Reporting an estimate of your charitable contributions as a deduction is lying. However, this lie requires less effort than tallying up the checks written to the church or adding up the Goodwill receipts. Honest return filing takes more effort than cheating in this example. Many other legitimate deductions are not effortless to report accurately.
That said, Robin, do you have problem with expending effort to lower your tax bill from *any* arbitrarily high percentage of your income? Say from 99% of your income to your marginal tax bracket? It seems to follow that doing so is even more unlikely to be socially beneficial, and causes others to have to pay even more later.
Barkley, I am not proposing any particular tax choices, just disapproving of effort to change those choices.
Hal, I do not follow you. Surely the effect of behavior on tax revenue is pretty linear here.
"The main effect of your efforts to pay less taxes is that others pay more later, via tax rate increases."
This is only part of the picture. The tax codes, with all their complexity, are expected to bring in a certain amount of revenue. It is true that if your actions manage to reduce the amount of revenue below this level, there may indeed be tax rate increases to compensate. But it's also possible that the codemakers expect you to take full advantage of your loopholes and set tax rates with that assumption in mind. In that case, avoiding possible deductions will cause tax revenues to come in higher than intended. That could have bad consequences as well, if we assume that overall tax levels properly reflect society's goals. So in a way, by taking advantage of your loopholes you are reflecting tax designers' expectations, making this strategy something of a Schelling point in the game.
rcii,
I am aware that even the borrowed money is not "free," and that at future generations will have to pay at least some higher taxes for higher interest payments. However, again, this was a conscious (or semi-conscious) decision of our elected officials when they decided on spending, rules for transfer payments, and the details of the tax code. As I already noted above, I happen to support a drastically simplified tax code, with this sort of problem of the eneven impact of all the complications being among several factors.
For that matter, here is a problem for Robin. Suppose you are right, what tax rate should you pay? Should you not claim exemptions for your children and still pay the rate that comes out? If you are not eligible, should you voluntarily pay the AMT amount? Or, should you make a calculation of what a revenue neutral tax rate would be if there were no loopholes, in short simplification, and pay that rate?
BTW, this is such a straw man you have set up, I kind of suspect that you did it for kicks just to stir up a lot of discussion about taxes, :-).
Robin complains about lost effort. The effects of loopholes are worse than that implies, because the nature of a complex tax code means that it takes time/expertise/money to exploit all the loopholes. People who do their own taxes won't get the advantages over somebody who hires an accountant, and people who can afford very smart accountants will get correspondingly more financial benefit. As a result there is a whole tiered industry devoted to finagling the tax code. A software industry too.
I think probably everybody here would agree that a simplified tax code would be better than what we have now.
mtraven, like you I think the prospect for libertarians succeeding in eliminating politics are slim-to-none. However, I don't see their prospects being any better if they choose not to give up on politics.
Barkley: As Robin said, the money will eventually be extracted from taxpayers.
Robin: I'm wondering if this is not a case of you taking some things you personally dislike and trying to elevate them to universal or moral principles. This appears to me to be a species of bias.
I don't particularly like large vehicles, and prefer smaller cars. I can also identify some real externalities associated with driving larger vehicles (note that in the case of safety, the externality is in part a reasult of _my_ preference). But I am not certain that those externalities outweigh the utility of those cars to their drivers. Thus I am reluctant to cast opprobrium on the drivers as you do.
As a trivial example, consider Opera. I don't like it, and it is often subsidized, using up resources that could be put to other uses. Should those who use the subsidized tickets feel ashamed, or should I just admit that this is my preference, and move on?
A couple points of (admittedly biased) sanity:
1. The loopholes exist because a democratic legislature enacted them precisely to shape behavior society deems good. Also, don't confuse cheating on taxes with loopholes.
2. Many vehicle collisions, and perhaps most fatal ones, are not car vs. car accidents. Many are single car accidents. Many others are commercial truck vs. car accidents. So in the net sum of things, driving an SUV reduces car fatalities far more than it would increase them for potential "victim" cars. Plus, a large part of vehicular fatalities are caused by drunk drivers on law-abiding drivers and passengers. Assuming one is not likely to drive drunk, it further adds to the balance of responsibility of driving a large, heavy, safe vehicle. Throw kids into the back seat, and it seems irrational NOT to drive an SUV.
Robin,
Actually, just because the government does not take your money because you used a legal loophole, does not mean that the government will be taking _extra_ money from anybody else. Presumably every rational individual will be taking advantage of the legal loopholes (aka "deductions," "exemptions" and other more neutral terms) that are available to them. Everyone should pay what they are legally required to pay. If that does not cover what our duly elected representatives and president et al have decided to spend, then we borrow from the Chinese, or whomever, to cover the difference. There is not some extra amount suddenly added on to the taxes of those who did not take advantage of legal loopholes available to them (or who were unable to take advantage of any legal loopholes).
I just put an Added section to the post.
Robin, please clarify if you are shamed by exploiting tax loopholes or lying on your return. There is a significant difference.
Loopholes have a basis in the tax code. Poorly worded provisions or poorly synchronized rules sometimes offer an opportunity to avoid tax. The complexity of tax codes makes it difficult for legislatures to foresee how particular provisions will interact with the market. Sometimes, admittedly rarely, a taxpayer can avoid tax *and* follow the code to the letter. This is just an unintended consequence of complex areas of statute. The same problem exists in many other areas of statutory law.
Taxpayers who exploit loopholes provide a valuable service to the authorities. Legislatures must rush to redraft provisions to close loopholes. Moreover, the potential for future loopholing pressures the drafters of statute to clarify meanings, codify the intention of certain provisions, and otherwise use unmistakeable language, thus making it easier for all of us to understand and comply.
Pressing it further, loopholers are often not compensated for this service. Even when the basis for the loophole is found in the code, the taxpayer bears nearly all of the risk of exploiting it. There is no guarantee that the loophole can be successfully defended in court, and the taxpayer will be liable not only for the tax due, but for attorney's fees, fines, interest, and the costs of restructuring to take advantage of the loophole in the first place.
Given this, there is no place for shame in loopholing.
In any given domain, the honest can be taken advantage of by the dishonest. In the case of lying on a tax return, the dishonest transfer tax liability to the honest in exchange for additional risk of audit, fines, and having to pay interest on back taxes. When the number of enforcement actions versus the number of returns filed is low, the risk premium of lying on one's return increases. We can therefore make at least one testable prediction: in times when the number of tax enforcement actions are consistently low, less tax as a fraction of GDP will be paid.
Does this mean that lying on your return is somehow different than stealing? No, in fact the rational thief's calculation of risk premiums is at least very similar in both cases. However, I don't see that there is a bias necessarily involved.