In this world, nothing is certain except death and taxes"
Neither one is a particularly pleasant topic, but taxes are arguably the lesser evil, so
let’s focus on them!
Taxes are an unfortunate reality for most people living and working in the modern world,
we pay them every year, we complain about them, and then we try to forget about them
until next year.
Yet taxes are also one of the most important elements of any economy around the world.
Societies can grow from effective taxation and crumble without it.
Taxes are what funds our roads, and schools, and parks, our military, emergency services,
social welfare and everything in between. These services are structural elements of
modern society. We wouldn’t have these without taxes, and without them we would have chaos.
So do we need taxes? Well, not necessarily.
They serve an important purpose, but there are other systems that could theoretically
achieve the same thing. Any alternatives that exist to one of the most important factors
in our economies are worth exploring, even if some of them are a bit out there.
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Before we start trying to prove Ben Franklin wrong it is important to truly understand
what it is that taxes achieve, and why we have to pay them.
Price Of Society Your subscription the modern world
Taxes are what a government uses to raise revenue to fund its expenditures. If a government
does not raise enough taxes to fund these expenditures, it doeswhat anybody else would
do, take on debt to temporarily live above its means.
This is the oversimplified cycle of government fiscal policy in our modern economies, and
it should make sense to everybody. If we stop paying taxes, the government either has to
stop paying for the services that keep society going, or it takes on more and more debt until
it ends up going bankrupt.
So this is why taxes are levied. Simple enough. But there is more nuance to this argument.
Certain economic schools of thought, not to mention political ideologies, advocate for
raising fewer tax dollars and spending less money. Their opposition will argue that raising
more tax dollars and spending more money is the way to go.
Both of these sides will argue that their way is the right way to deliver the most overall
prosperity to an economy. But they can’t both be right, right?
Well in a sense they can, so remember this for later.
In either case, taxes will still exist. So now it is important to ask why do the people
pay their taxes?
Some people have made the argument that taxes are like paying a subscription to modern society.
But lets be honest… It’s not out of some civic duty to keep their nation going, or
even because they think they will benefit from government programs. I mean c'mon let’s
be honest - the real reason is that if you don’t pay your taxes, you go to prison.
As far as motivation goes, this is about as much as most people need.
Now on to the alternatives.
The Logical Question What about the tax-free nations?
The United Arab Emirates, Qatar, Monaco, Brunei, these are all examples of national economies
that operate without the need for income taxes.
In fact prior to 1913 the USA did not have federal income taxes.
So this gives us an easy answer to the question of do we need taxes. To which these countries
would answer a resounding, no!
But this all comes with one big asterisk… or rather two big asterixis
The first is that these countries do have taxes, they just don’t have income taxes.
When we explored the economy of Monaco, which is a nation famous for being a tax haven,
but we found that a majority of the government’s revenue still came from taxation.
In the case of Monaco, this was a Value Added Tax, or a sales tax. This is ideal for these
tourist nations because it generates government revenue from people just visiting the country,
rather than income taxes, which require people to work in the country.
Alternative taxes are a common feature for a lot of countries and they have a lot of
advantages.
Take Singapore for example, it still has income taxes, but they are incredibly low. What it
does instead is levy taxes on things that require government expenditure.
Cars are the best example here.
Roads, and highways, and traffic lights, and bridges and tunnels are all funded by taxes,
apart from a few private toll roads.
These are expensive and not everybody gets the same use out of them. Someone who works
from home and walks everywhere in a normal country is still going to pay for roads through
their income taxes, even if they never use them.
In Singapore though, they wouldn’t really need to. Income taxes are low, but instead
the government raises the money it needs by taxing the bejeezus out of the people that
actually own cars.
Depending on the car, buying and registering a vehicle in Singapore can easily cost 5 times
as much as it does in the United States.
This gives the Singaporean government the revenue it needs to pay for these public goods.
If you don’t need or want to drive a car, no worries you don’t need to pay.
In many ways this is a really really fair system. You get what you pay for. Beyond this,
it helps ease congestion in the tiny nation because not many people are going to drive
given how expensive it is.
However this system is not without its problems.
When a car costs as much as a house, many people are not going to be able to afford
it. For some people driving is just a necessity, they might be in an industry that requires
driving, they might have disabilities that require easy transport, or they might live
in remote areas without easy access to public transportation. Remember this for later, because
it is very important.
The arguments back and forth for this type of taxation are fascinating, you could make
a video about it. oh and look at that, we did!
But Singapore still has taxes, so it might be fascinating, but it's irrelevant.
Instead, let's look into that second big asterisk.
The other countries that get away without charging taxes have some alternative form
of revenue. More often than not, it is natural resources.
By substituting tax revenue with oil revenue, these countries can still provide all of the
amenities one would expect in a regular ol’ tax- payin’ countries.
Even places like Alaska do not need to charge state taxes. In fact, they go beyond this
by disbursing a share of this oil revenue amongst the residents of the state. So you
could call this negative taxes? Or social welfare? It depends on the flavor of politics.
The problem here of course, is that a country needs natural resources to substitute tax
revenue, with natural resource revenue.
Another big problem is that this kind of is taxation.
In theory, the natural resources of most countries belong to the people of the country. Taking
away natural resources to sell is no different from taking away cash.
In both instances, a government is taking an asset away from the people to pay for public
expenditures.
Of course, people feel direct taxation a lot more than natural resource selloffs but it
is still important to consider for the sake of our question here.
So maybe, the problem here is the assumption that governments need revenue at all.
Fueled by Inflation Why not just print money?
You have probably asked this question as a kid, why does the government not just print
money to pay for everything it needs?
Now we tend to scoff at this question and just say, cause inflation.
Which is not incorrect... but it is not the whole story.
In reality, there is not much stopping a government like the US conjuring cash into existence
to pay for everything it needs.
Logistically this is what it already does. If Uncle Sam needs to write a check he does
so by snapping his fingers and conjuring money into existence.
If you did this indefinitely you would eventually introduce more and more and more money into
the economy.
Cash is an asset like any other, it’s value is determined by supply and demand. The only
reason this gets confusing, is that we normally express the value of an item as a nominal
cash value.
Outside of this if you have more money being pumped into an economy, it will cause inflation.
Although it will do it slowly.
What a country like this would need, is a way to drive up demand for this currency to
ensure that it stays in line with this increase in supply.
The easiest way for a government to ensure that there is a consistent demand for its
currency is to force the citizens of the nation to deliver a portion of this currency back
to them at the end of every year…. As taxes.
This whole system of taxation and money creation is called modern monetary theory. Subscribers
to this theory will argue that in theory a government, especially a government like the
one in the United States, can just keep on printing money.
So long as they can find a way to ensure that people still demand a currency, you can create
this money to pay for your roads, schools, and whatever else you want to.
Actually maintaining that demand without taxation is the hard part, and of course if not done
properly you are going to get hyperinflation. Hyperinflation is straight-up not a good time,
so eventually this type of system is bound to become unsustainable.
Hopefully that isn’t a huge surprise to too many people.
Now so far we have held onto the assumption that we actually need government expenditure,
or for that matter governments at all.
So what happens if we let go of this assumption?
Anarcho-capitalism All bets are off
Anarcho-Capitalism is an economic theory that advocates for the complete elimination of
government influence in an economy.
In such a system, everything is privately owned. There are no public roads, schools,
parks, or hospitals. There aren’t even things like social welfare or emergency services.
The idea of such a system is that private enterprise would replace these publicly provided
goods, and the profit motive would encourage these services to become more competitive
and therefore deliver a greater net value to society.
Sounds kind of great right?
Well, the first thing it does is eliminate taxes, if there are no governments there are
no governments to raise taxes. So mission accomplished I guess?
Beyond this, it must be recognized that there are some legitimate advantages to such a system.
An individual would only ever have to pay for something that they actually wanted or
needed, and they could be relatively confident that they are getting a good price for their
purchase, so long as there is competition.
There are actually examples of societies like this scattered throughout history, the most
prominent of which were medieval European free cities. These were places run by merchants,
and were ultimately run purely for the profits of the individuals making them up.
The whole idea of purely unrestrained capitalism has some really interesting thought experiments.
The first is that of disabilities. In a purely capitalistic society, someone who is born
with or develops a disability is going to be less productive and less economically valuable
as an individual.
In extreme cases they may not be able to make enough money to feed and clothe themselves,
so they would just die.
A huge assumptive leap here, is that even the most hardcore free-market economists would
see this as a negative outcome.
So what are the alternatives?
Well, insurance. Social security is kind of the price that we pay to be ensured that if
we lose our job, or get sick or injured that we won’t starve.
An insurance company could provide this same service. You could insure yourself against
getting injured, or developing an illness, or even having a child that requires constant
care.
What’s more, is that you could tailor this cover, if you are an incredibly wealthy person
lose your job today you are just not going to be able to support your lifestyle on social
security checks. So even though you contributed more in taxes throughout your good years you
are going to be the same as everybody else in the bad years.
In our hypothetical anarcho-capitalist society, this kind of person would likely pay a higher
insurance premium, but if they lost their job they could have elected for a policy that
provides them with a higher payout figure.
Beyond that if you are happy to take the risk, you can just not pay the premiums and save
the extra money, or really hope you never find yourself out of work.
The same kind of private sector switcheroo can be done with almost anything that a modern
government provides. This is kind of the specific expense allocation we saw in Singapore earlier,
just dialed all the way up. Private everything! Toll roads, private schools, private hospitals,
everything for sale…
But you start to run into problems with indiscriminate goods.
This is a street lamp, they cost about $2,000 on average to erect and they consume about
$100 per year in electricity to keep going, beyond that there are maintenance costs and
a few other incidental costs. All in all they are not a cheap item.
Chances are most of us take street lamps completely for granted, but they do serve a really important
purpose. They illuminate otherwise dark streets providing safety to cars and pedestrians navigating
the area at night.
It would be really hard to provide a street lamp in a purely profit-driven society.
You can’t really stop someone from basking in the light of a street lamp, and because
of that it’s hard to charge money to provide this service. Why would I pay for something
if you can’t stop me from taking it for free?
Because there is no profit motive, there is no product, which means this society may have
to go without a service that provides a direct tangiblegenuine benefit.
The same thing is true on a larger scale, with emergency services and military protection.
A private military may be employed to protect the assets of individuals in an area, but
in doing so they are also indirectly protecting the assets of everybody else in that area.
Therefore by the same logic, nobody would foot the bill to pay for it and it would not
be provided.
This gets worse when you consider the other type of indiscriminate good… The bad type.
In the same way that there is no way to prevent an individual from basking in the light of
a streetlamp, there is no way for an individual to prevent themselves been impacted by negative
externalities.
In this type of society, people are driven by profits exclusively. Many profit-generating
industries produce a lot of pollution.
In a world with regulatory bodies, there is some level of control around this. We limit
where factories or power stations can be set up and also control what kind of pollution
they can leak out into the environment.
If these regulatory bodies didn’t exist, well then it would potentially be down to
private militaries to regulate and enforce these types of externalities. Very quickly
you arrive at an outcome where rich people just declare war on things to get their way,
which is a real dicey reality to be living in…
A solution to all of these problems, is to set up communities that address the problems
of these indiscriminate goods.
It’s hypothetically possible that a company could establish an area where people could
live separated from negative externalities, and be provided with things like street lamps.
Residents of this city would have to pay a subscription, but they get the benefit of
having a lot of this stuff sorted out by default.
This is also a way to ensure that everybody is chipping in for a military which would
keep this area secure, and in the event that someone didn’t pay their subscription, they
would also be responsible for forcibly removing them from the city.
If you haven’t realized by now, this company is basically just a government with taxes,
with more steps.
Anarcho-Capitalism is an amazing theory to explore, but most of the time you manage to
work your way back to the status quo.
The truth is that most products and services are best delivered by corporations with a
profit motive, the same way that there are products and services best delivered by governments
simply looking to retain power.
The exact place to draw this line between business and government services is the real
debate, but it almost certainly does not lie at either extreme of the scale.
This is one of those things that I am expecting some push back on, there are passionate advocates
for a totally free market, so I put it on to you. How would you structure the economy
of a perfect society?
The best answer will get featured in the next video on this subject, and if the answer is
really fantastic we will explore this hypothetical country just like one of our normal country
videos over on our second channel.
Final Thoughts
Nobody enjoys paying taxes, and that’s not because its money out of your wallet, a lot
of people really enjoy spending money.
People don't enjoy paying taxes because it is money out of their pockets going towards
something they wouldnt have otherwise spent their money on.
Tax dollars often don’t directly improve the quality of life of the people paying them,
but they do materially improve society.
So long as it is agreed that there are items that would not be supplied by private businesses
in a competitive market and that those items are of value, we will need a collective organisation
to supply those goods.
The most prominent collective organisations we have in the world are governments, and
the best tool they have available to them to raise revenue is taxes.
There are alternatives but they have their limitations.
Do we need as much tax as we do, well no maybe not, are there better taxes to levy in smarter
ways? Almost definitely? But do we need taxes? Well they are the worst possible solution,
apart from all of the alternatives.
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Make sure to tune in to our do we need taxes Q&A session over on the second channel for
what I am sure will be a very heated debate on a very interesting subject, hope to see
you there guys, bye.