Monday, November 30, 2009

Services and Costs

On my way back to Texas from Michigan, I was reading the Detroit News and came across a great point. Apparently, my home state of Michigan has a flat income tax, meaning they pay 4% (I think) on all wages above a certain amount. Now the current debate there is whether or not this flat tax should be converted to a progressive tax, similar to federal income taxes.

One astute commenter remarked that taxes are used to pay for government services. Think of it as a car pool, if 4 people share the car, then each should pay 1/4 of the cost. Economically this makes a lot of sense. Especially when you realize that if one person only paid 1/16 or the cost, that would have a profound effect on his decision of whether or not to car pool. The same is true for any good or service. Our desire for that service goes up or down depending on the cost. Remember that.

There are many of us who worry that too many people don't pay taxes, or don't pay enough taxes. The worry is simple. Government provides goods and services and they have a cost. If one doesn't pay those costs, then the calculus of utilizing those services is distorted and bad things happen.

As a society, we believe in helping those in need. On some level the desire for a progressive taxation system is designed to do just that. The problem with that system is it has a very undesirable side effect, it hides the costs of government. A more desirable system is to directly transfer wealth from those who have it, to those who don't. And then let EVERYONE pay EQUALLY for the costs of government.


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