Voluntary Taxation

Will Wilkinson, writing at The Economist, quotes Ayn Rand and begs to differ with her:

Ayn Rand’s position on government finance is unusual, to say the least. Rand was not an anarchist and believed in the possibility of a legitimate state, but did not believe in taxation. This left her in the odd and almost certainly untenable position of advocating a minimal state financed voluntarily. In her essay “Government Financing in a Free Society”, Rand wrote:

In a fully free society, taxation—or, to be exact, payment for governmental services—would be voluntary. Since the proper services of a government—the police, the armed forces, the law courts—are demonstrably needed by individual citizens and affect their interests directly, the citizens would (and should) be willing to pay for such services, as they pay for insurance.

This is faintly ridiculous. From one side, the libertarian anarchist will agree that people are willing to pay for these services, but that a government monopoly in their provision will lead only to inefficiency and abuse. From the other side, the liberal statist will defend the government provision of the public goods Rand mentions, but will quite rightly argue that Rand seems not to grasp perhaps the main reason government coercion is needed, especially if one believes, as Rand does, that individuals ought to act in their rational self-interest.

It’s true that we each benefit from the availability of genuinely public goods, but we benefit most if we are able to enjoy them without paying for them. A rationally self-interested individual will not voluntarily pay for public goods if she believes others will pay and she can get a free ride. But if we’re all rationally self-interested, and we know we’re all rationally self-interested, we know everyone else will also try to get a free ride, in which case it is doubly irrational to voluntarily pitch in. (from “Ayn Rand on Tax Day,” free registration required)

Wilkinson’s analysis is more than faintly wrong. A rationally self-interested individual will voluntarily pay for something if his expected benefit is worth (to him) the price he pays. The fact that a purchase might yield uncompensated benefits to third parties (i.e., positive externalities) is beside the point. Individuals do many things with their money that benefit others, without expecting to be repaid by those others. Individuals also do things that benefit others, in more than the ordinary way of voluntary exchange — sometimes for money, sometimes not, and sometimes at the risk of life and limb.

In addition to the obvious but signifcant case of philanthropy, there are subtle things like building an elegant house with beautifully landscaped grounds. Clusters of such houses on upscale streets yield satisfaction not only to their owners but also to drivers, joggers, and strollers who pass through the neighborhood — often with the main purpose of enjoying the elegance and beauty that surrounds them.

A similar case in point is the practice observed in many neighborhoods of creating elaborate displays of Christmas lights. Such displays not only please the homeowners who create them (or pay someone to create them) but also the flocks of sightseers who are drawn to such displays. Homeowners (for the most part) do this without compensation from sightseers. (Some homeowners in a less-affluent neighborhood in Austin, which is known for its over-the-top lighting concoctions, have been known to invite voluntary donations to help defray the cost of their displays.)

Finally, on this point, there are not-so-subtle examples of doing good for others as a habit and even a way of life. Many persons devote many hours a week to voluntary work in schools, hospitals, and the like. Then there are firefighters, police officers, and a goodly fraction of the members of the armed forces who perform jobs that put them in harm’s way, and do so not only for the money they earn but often because they feel a duty to make their towns, cities, and nation safer for the inhabitants thereof.

In any event, a rationally self-interested person who values national defense or the justice system would be a good candidate for making voluntary contributions to support those kinds of governmental functions. It would be a simple thing for influential and very wealthy individuals and major corporations to parlay their self-interest into the creation of organizations that raise money from like-minded individuals and corporations. Imagine a version of the American Heart Association called the American Defense Association; imagine a version of the Junior League called the Justice League. If anything, it should be easier to entice “voluntary taxes” in support of essential functions like defense and justice than it is to entice contributions to charitable organizations, which seldom yield more than “feel good” benefits to donors.

Not all fund-raising efforts for charities succeed in obtaining donations from everyone they solicit, but fund-raisers neither expect nor require 100-percent success. Similarly, an American Defense Association or Justice League would not require 100-percent success in its efforts to raise enough money to defray the costs of national defense and domestic justice. It is enough that the prospect of being “taxed voluntarily” to support such causes would appeal to a large number of affluent taxpayers.

Of particular interest to fund-raisers would be those individuals and couples with adjusted gross incomes in the top 50 percent of the AGI distribution. For tax year 2008, the top 50 percent paid 97 percent of federal income taxes collected by the federal government. Before the Great Recession and associated “stimulus” spending, when the federal budget was nearly in balance, spending on national defense and justice (at all levels of government) accounted for about 20 percent of all government spending. It seems to me that the a rationally self-interested person or couple in the top 50 percent would leap at the chance to eliminate all of his or their taxes if the alternative were to donate a smaller amount to the causes of defense and justice. There would be holdouts — especially among affluent leftists, of course — but there would also be the usual donors who give far more than their “fair share.”

Consider, for example, the persons in the top 1 percent of the AGI distribution, who paid 38 percent of the federal income taxes collected for 2008, or the persons in the top 10 percent, who paid 70 percent of the taxes. Members of those groups (as well as others in the top 50 percent) would have a strong incentive to ensure the provision of defense and justice, understanding (as most of them do) the importance of order and stability to their livelihoods.

Further, I expect that many of top income-earners would lead example (as they do for charities) with their contributions. Additionally, I would expect them to be leading contributors to advertising campaigns that explain the economic benefits of maintaining a robust defense and vigilant system of justice while, at the same time, paying a lot less for government services. Chief among the benefits would be stronger economic growth — as money is saved and invested instead of being poured down so many rat-holes and into counterproductive regulatory agencies. In the end, there would be more jobs, higher incomes, less need for charity, and more money with which to dispense charity to truly needy individuals.

In summary, Wilkinson’s analysis seems rooted in a sterile conception of rational self-interest. It seems to assume that bright, hard-working, high-earning individuals cannot perceive the real benefits that would flow from “voluntary taxation” for certain purposes, namely, national defense and domestic justice.