Tuesday, May 15, 2012

Aligning Public Incentives

Okay, so the major problem with laissez-faire capitalism is that it rapidly ceases to be laissez-faire capitalism.  One interest group gets its, the next one wants its, and so on and so forth.

So how do you align the incentives of voters to promote a free state?  Constitutionally, what's the solution?

I think I have it.

First, constitutionally, all federal income in excess of expenses gets distributed evenly among all citizens.  Every person gets the same amount.  This is your welfare system.  If public funds get looted or spent, there is no welfare.

Second, constitutionally, taxes are required to be flat; nobody is taxed more, nobody is taxed less.

I think a good tax system for this is a federal sales/services tax with a deduction (up to, but not exceeding, the cost of purchase) for resold goods and services, and nothing else - tax consumption, and consumption alone.  Yes, that means you're taxing unprofitable businesses.  Good.  When it comes to market distortions, distortions which promote saving money and closing unprofitable businesses is best.  Another good option is a strict land tax (NOT a property tax), as I discussed in a previous post; this has the advantage of not requiring businesses to do the government's tax accounting work.  An income tax has debatable merit, but with flat taxes, the damage it could do is muted.

I think such a system creates incentives for precisely the correct behavior, and would be self-sustaining.  (As opposed to strict libertarian systems, which tend to devolve into socialized systems.)

Anybody see the obvious failure I'm missing?


  1. I'm actually a big fan of both the Georgist land-tax as well as a consumption tax. The only thing that I think I would feel like adding to your proposal is some extra consumption allowances for each dependent in a household.

    The consumption tax is actually something that I think the left really could get behind (given its current infatuation with environmentalism), but is unlikely since they would first have to get past the ideological hurdle of no longer 'directly' sticking it to the wealthy (even though the wealthy would inevitably wind up paying vastly greater amounts of the tax).

    1. Hey James -

      Would including children in the distribution work for that, or were you thinking above that?

      (That is, if there's enough funds left over for $6000 for each citizen, it's for each citizen; a family of five would get $30,000.)

      There may be a slight misalignment, as it creates a small incentive to have more children, but since the funds aren't guaranteed (they'd vary by tax receipts and government expenditures), I don't think the incentive is strong. (Additionally, it would be self-correcting; if there is a strong incentive, it would rapidly cease to be, as the funds would be divided out more thinly.)

    2. That would be one way of going about it, yes, but there will be incentive problems, as you say. This is the simplest way, however, with a system that is based entirely upon point-of-sale collection.

      The version of this that I toy around with is tempered by the realities of political life. In my little toy-model, everyone would get a certain base tax-free consumption allowance (because it will be impossible to convince my fellow Canadians that the poor should pay any taxes, even if they benefit from the programs). There would be a point-of-sale tax that would necessarily be lower than the 'full' rate of consumption tax, while the rest would be collected at tax time as per usual. But all the consumption of households would be amalgamated (like it actually is) and so the kids' allowance would be transferred to the parents (it has always stuck me as slightly perverse that a family of four making $150k would pay about the same taxes as a single, childless person making the same).