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Tax choice

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In public choice theory, tax choice, or taxpayer sovereignty, is the argument that taxpayers should have a greater say in how their individual taxes are allocated. This theory, which is based on the benefit principle, applies the same concepts of consumer choice theory to taxpayers. Tax choice studies have shown that allowing taxpayers to directly allocate even a small percentage of their taxes can increase their level of satisfaction.

Freedom of choice

The freedom of choice concept is central to the idea of giving taxpayers more control over how their taxes are spent. Here are two passages which highlight the importance of choice...

As indicated by the emergence of the taxpayers' revolt and concerns for inflation, America is entering an era of economic conservatism. The citizentry is asserting that taxpayers must have a choice in the services provided, that these services should reflect their priorities, and that reasonable value is expected for tax dollars. For educators, these "new" values reflect a demand for taxpayer sovereignty, greater choice among educational programs, and more responsiveness on the part of educational systems. Daniel J. Brown, The Case For Tax-Target Plans
I find that some members of the Liberal Party accept the Collectivist position, and I am disturbed by it. It implies a pronounced lack of faith, not only in free enterprise subject to antimonopoly control but also in the 'Middle way', i.e. the encouragement of non-profit making institutions such as educational trusts, housing and hospital associations. ...I do not suggest, and have never suggested that education and housing should be turned over to free enterprise. What I would like to see is greater diversity in the provision of these services, whether public or private, so that there is a genuine possibility of choice for ordinary citizens. - Alan Peacock, The Welfare Society

Revealing preferences

Compulsory taxation solves the free-rider problem, but it does not solve the preference revelation problem...

Whereas the income received for providing a private good conveys information about the demand for that good, taxes collected under the threat of coercion say little about the demand for a public good or service. Payment of taxes indicates only that taxpayers prefer paying taxes to going to jail. Little or no information is revealed about user preferences for goods procured with tax-supported expenditures. As a consequence, the organization of collective consumption units will need to create alternative mechanisms to prices for articulating and aggregating demands into collective choices reflecting individuals' preferences for a quantity and/or quality of public goods or services. - Vincent Ostrom, Elinor Ostrom, Public Goods and Public Choices

In the absence of people's demonstrated preferences for public goods, governments are likely to inefficiently allocate public funds. In other words, without knowledge of the actual demand for public goods, it's likely that the government will oversupply or undersupply public goods.

If the individual can make separate fiscal choices for each public-goods program, which a structure of earmarked taxes conceptually allows him to do, directly or indirectly, he is informed as to the alternatives that he confronts, at least to the extent that the payment institutions allow, and subject, of course, to all of the qualifications noted in previous analysis. The uncertainty that he faces is clearly less than that which is present in the comparable decision on a “bundle” of public goods or services, with the mix among the separate components in the bundle to be determined in a separate decision process or through the auspices of a delegated budget-making authority. If this mix is not announced in advance to the voter-taxpayer, he must try to predict the outcome of another decision process, in which he may or may not participate, a process that need not exist at all in the more straightforward earmarking model where all revenue sources are specifically dedicated. - James M. Buchanan, Earmarking Versus General-Fund Financing

Tax choice would allow taxpayers to consider the opportunity costs of their tax allocation decisions. The opportunity cost valuations of taxpayers would integrate dispersed knowledge which could help ensure that there was an optimal supply of public goods. In essence, tax choice would create a market for public goods and taxpayers would have the option to shop for themselves in the public sector. There would be a dynamic and mutually influential relationship between the supply and demand of public goods.

Several studies have indicated that allowing taxpayers to allocate their taxes according to their preferences can increase their willingness to pay taxes...

We find that allowing earmarks more than doubles both contributions and the likelihood of giving to government organizations. Participants give on average $1.68 from a $20 initial payment for general purposes, compared to $5.52 for cancer research and $4.04 for disaster relief; the likelihood of giving increases from 30 percent for general purposes to 66 percent for cancer research and 61 percent for disaster relief. - Do Earmarks Increase Giving to Government?

Concentrated benefits and diffuse costs

"Concentrated benefits and diffuse costs" is the label that is used within the political economic community to refer to the distributive consequences of rational ignorance. Rational ignorance is the negative externality of taxpayers having a vanishingly small say over how their taxes are spent. Tax choice, by giving taxpayers more of a say how their taxes are spent, would reduce, if not eliminate, the problem of benefits being concentrated and costs being widely dispersed. This is because taxpayers, rather than spending other people's money, would be spending their own money which is why they would have an incentive to ensure that the benefits of government programs were greater than the costs.

In the private sector, the voluntary sector of the economy, we know that something is "well worth the money" if people are willing to spend their own money on it. In government, politicians work to separate the payment of taxes from the receipt of specific services. We're not asked "will you pay $100 right now for farm subsidies and $4000 for Medicaid and $1600 for the wars in Iraq and Afghanistan and $130 for a new presidential helicopter and ... ?"
If we did get such a question, we might well decide that lots of government programs were not "well worth the money" to the people who would be paying the money. - David Boaz, Well Worth the Money

Foot voting vs tax choice

Voting with your feet and voting with your taxes are two methods that could allow taxpayers to reveal their preferences for public policies. Foot voting refers to where people move to areas that offer a more attractive bundle of public policies.

In the Tiebout model, for example, there is costless mobility; individuals seek out a jurisdiction that provides exactly the level of output of the public good that they wish to consume. In so doing, they reveal their preferences for "local" public outputs and generate a Pareto-efficient outcome in the public sector. - Wallace E. Oates, On the Theory and Practice of Fiscal Decentralization

In theory foot voting would force local governments to compete for taxpayers. Tax choice, on the other hand, would allow taxpayers to indicate their preferences with their individual taxes. In theory this would force government organizations to compete for funding. In both cases...increased competition would decrease the X-inefficiency of government organizations.

In popular culture

In 2009 Pope Benedict XVI endorsed tax choice in his book Charity in Truth:

One possible approach to development aid would be to apply effectively what is known as fiscal subsidiarity, allowing citizens to decide how to allocate a portion of the taxes they pay to the State. Provided it does not degenerate into the promotion of special interests, this can help to stimulate forms of welfare solidarity from below, with obvious benefits in the area of solidarity for development as well. - Pope Benedict XVI, Charity in Truth

See also

References

  1. Brown, Daniel J. (1979). "The Case for Tax-Target Plans". Journal of Education Finance. 5 (2). University of Illinois Press: 215. Retrieved January 26, 2013. For educators, these "new" values reflect a demand for taxpayer sovereignty, greater choice among educational programs, and more responsiveness on the part of educational systems. {{cite journal}}: Unknown parameter |month= ignored (help)
  2. Democracy Journal
  3. Do Earmarks Increase Giving to Government?
  4. Science Direct
  5. Governance, globalization and public policy
  6. The Free-Rider Problem: A Survey
  7. What Big Government Is All About

Additional reading

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