Principles on Taxation

Just a random comment. I think we approach spending and taxation policy from the wrong angle. We always seem to fixate on a balanced budget but a large part of what keeps us from a balanced budget is we can't fundamentally agree on what that budget should even be. This is due in large part to an inability to agree on what is the right size government economically. It always seems to be from one side that they just keep wanting to add more stuff to government without regard for the economic cost and then devise ways, ie taxes, to come and get their hands on more of our money to feed that ever growing government. Basically politicians argue and fight about spending and taxation to get to a "balanced budget" when they fundamentally have no consensus on what that budget should be. And then in the rare cases where agreement is reached, it all gets thrown out the window when the economy changes. What got me to thinking about this is it seems they just keep thinking up new ways to get more of our money and more ways to spend it. Obviously they can't just keep taking more and spending more because eventually we would end up just giving everything we make to government and this is just not tenable nor sustainable. We ought to be able to just have the proper taxes in place and then it should just be able to be left more or less alone with minor adjustments as the economy shifts. If we communally have to devise new taxes or ways to circumvent limitations, then this is a sign that something is wrong and we are not on a sustainable path.

Maybe an approach that would be more successful in achieving this as well as getting a "right size government" is to first decide what the budget should be and then argue about how to raise that budget funding and how to spend it. First we decide first how much of our economy we want government to consume. This would be as a percentage of GDP (whether we're talking state GDP for state budgets or national GDP for federal budgets). Then we decide how to raise that revenue and separately we decide how to spend it.

What got me to thinking about this is that in the EU they have benchmarks for debts and deficits in terms of percentage of GDP. Fundamentally, government can't continue to grow disproportionately to growth (or shrinkage) in the economy. There is an optimum percentage of the economy for government. The "right size government" is set by a percentage of GDP. If government is too large with respect to GDP it has a deleterious affect on the economy as it "sucks the air out" of the economy. Government can't continue to grow indefinitely as if there is no limit to the amount of GDP that it can consume. Too small can also have a deleterious affect as it makes insufficient investment in infrastructure to promote growth and does too little for the health of the general society. So the "right size" government is the one that is the right percentage of GDP so that it does not become so large it stifles the economy or too small that it doesn't support a healthy state. More specifically, the level of annual revenue that the government takes in should be set to some percentage of annual GDP and of course there should be some range of wiggle room. There should be a target percentage of GDP plus or minus some range. There should be a range so that there is some flexibility in adjusting for short term needs. Of course the trick is that revenue really should be the at the nominal level and not just end up effectively at the upper end of the range. Perhaps something like a policy of every year that revenues exceed the nominal target, there must be offsetting years below nominal. Thus they can't just "run it to the max" indefinitely without consequence, because if there are no consequences to just always running it at the max then that's just what they'll do. In short, setting revenue as a percentage of GDP basically let's us decide up front how big we want our government to be and how much government is fundamentally economically sustainable, ie how much government we can actually afford.

It is much easier to set up a spending budget once we know how much we can spend rather than approaching it from the other end of trying to decide taxing and spending to reach some vague, nebulous undefined "budget" figure. Once we have a budget, we can decide how to spend it. We know how much we are allowed to spend so now we can set about prioritizing what's really important and not just what pork can be jammed into the spending bill. And, importantly, some percentage of this "spending" should be savings for a rainy day. And independently of spending we can set about deciding how best to construct a tax regime to raise the tax revenue that has already been determined as the level of taxation we want. Again, we can decide what are the really best tax revenue sources and not just who we can keep soaking for more and more or on whom to levy punitive taxes just because someone doesn't like them.

Simply, rather than trying to establish a "budget" in one colossal spending/taxing/budgeting process, break it down into tractable pieces (are you seeing a trend on how I think government should work?) First decide how much GDP should go to government, that is how big we want government and how much we think we can afford. Then once we know how much we think we SHOULD be spending, we can figure out how we OUGHT to be spending it because we can much more effectively prioritize spending when we have a fixed spending limit. And separately we can decide what is the best way to go about obtaining that revenue that is least deleterious to the economy and where we want the economy to go. We turn the tables from government deciding how much they're going to spend then taking our money to fund it, to telling government how much they can spend and they then decide how best to spend that.