Taxes, Who Benefits? A Look at Alex Tabarrok’s Argument

Alex Tabarrok tries to calculate who benefits from the Federal Government, the rich or the poor. He allocates numbers, from Social Security to the military, and he concludes the rich get more than they get back from the government. Its worth a look.

However, I think he makes a mistake – he has an implicit assumption that the system is stable and will not change. But systems do change. Its been less two decades since a Superpower collapsed. When it happened, the old status quo disappeared, and a new one appeared in its place. Many of those at the top of the new status quo were also at the top of the old status quo. Many were not. And many who had previously been at the top of the old status quo found themselves nowhere close to the top of the new status quo.

Other examples of huge changes in an existing political/economic system that cause huge churn in the set of winners and losers in society are easy to find. Just since the January 1,2000, off the top of my head, I can think of the following:

1. The fall of Milosevic in Serbia
2. The fall of the Taliban in Afghanistan
3. The fall of Saddam in Iraq
4. Darfur
5. The takeover of Gaza by Hamas

I don’t know enough about it, but perhaps the Orange Revolution in the Ukraine also qualifies. And by not a very much, huge changes (in several directions) could have happened in Venezuela in the last few years. And right now Bolivia could be teetering toward the same place.

Even closer to home, things have changed. Not long ago being black meant having fewer rights than being white, and being a woman meant having fewer rights than being a man. And no doubt, in each case, the folks who had the power paid more to keep the system running than those who were at the bottom. And any obvious direct transfers went toward those at the bottom.

The way I see it, paying taxes means paying for an existing system. There is nothing magical about the system – it can change. And if it isn’t funded, it may be more likely to change.

Now, assume there are two groups in the system: the haves and the have-nots. For simplicity, let’s assume members of the haves are all identical, and members of the have-nots are all identical.

If the system is replaced by a completely different system, history indicates that some of the haves will retain their privilege, and some will not. Similarly, some of the have-nots will retain their lack of privilege, but some of them will gain privilege. Put another way… if there is a big change (but not so big that we haven’t observed the equivalent scores of times in the last one hundred years) in the system, the haves suffer an expected loss, and the have-nots get an expected gain. Presumably, there is a benefit to the haves to avoiding that risk, and there is a loss to the have-nots to not getting that opportunity.

In our system, perpetuation of the existing system is funded through taxes. We can either ask those who benefit from the system to pay for it, or we can ask those who who might be better off taking their chances with another system to pay for it.

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Update. Fourth sentence in second paragraph corrected. Thanks to sootytern for pointing out the error.