Tax is efficient

I’m going to be posting a few brief articles about tax over the next few weeks. This is the first one. It is about tax and efficiency. The other two are about corporate tax and democracy.

Libertarians often argue that tax is inefficient because you end up paying for things you don’t need. For example, Australia’s climate change sceptics are probably a tad pissed-off their taxes are currently financing a federal department for climate change. I, and many others on the left (or centre-left in my case), get upset that our taxes fund a barbarous asylum seeker detention system.

Libertarians argue that instead of paying tax we should instead buy the things we need. By way of a simple example, rather than pay tax to fund a police force, we should instead just hire our own private security. Equally, rather than pay for local council to maintain parks, we as a community should organise to either beautify them ourselves or pay a gardener to do it for us. In this way we only pay for the things we want, and the market ensures efficiency. There is no need for government, and presumably we are richer for it.

A by-product of this self-reliance is the emergence of a robust ‘civil society’, which is perhaps the cornerstone of libertarian philosophy.  I think they are wrong on this count, but I will leave that argument for another article.  

Critics of the libertarian view often site piece of mind as an important reason to accept the inefficiencies of taxation. They say they don’t mind paying a little more tax to know that if they or a loved one suddenly develop a terminal condition the care will be available. I am sympathetic to this position.

But I don’t think the ‘piece of mind’ argument is necessary to discredit this particular libertarian position. Basic economics will suffice.

Economists don’t just think about fiscal cost, they also think about opportunity cost. And the opportunity cost of doing everything yourself is time. How many hours would it take to organise a community for the purpose of beautifying a local park? How long would it take to figure out how much policing a suburb needs and find a suitable contractor? A lifetime’s worth is the answer to both, which is why we have dedicated bureaucrats for that sort of thing. 

In this regard, tax is enormously cost-effective. I make one payment, in many cases straight out of my pay-packet without needing to administrate it, and in exchange I get an enormous range of services taken care of by dedicated professionals.  

There may indeed be some inefficiency. I may pay for things I don’t need and there may be some waste, but I suspect that does not outweigh the enormous time saving I make by using taxation.

This is especially the case when we factor in specialisation. As already mentioned, the people tasked with government obligations are typically specialists, so they will do a better job of executing those matters than I possibly could.

But perhaps more importantly, taxation leaves me free to concentrate my time on the things I’m best at, which are probably the things I get paid the most for. If I am a doctor it is most financially beneficial to me and most socially beneficial to society if I put my decade-plus training to work on medicine rather than on gardening or organising a security service. I will make more money working as a doctor for an hour than I would save organising my own security. Society will also get a lot of quality medical service rather than a little bit and some poorly organised security. 

Libertarians need to understand that government evolved because it is the most efficient way of doing many things. In many cases government allows the emergence of economies of scale. For example, national parks would be almost impossible in a libertarian framework. At the very least they would be inefficiently administrated and plagued by free rider problems.  

In cases where decentralisation would produce greater efficiencies and better outcomes (there are many such cases) government should stay out; but libertarianism simplistically conceived is the opposite of a cure-all for policy failures. Tax is efficient. Don’t let anyone tell you otherwise.