Tuesday, August 3, 2010

Sound of one hand clapping and the tax debate

Maxine Udall has a great post about road quality as a statement about the nature of our economy. She bases her post on an article from the Wall Street Journal about how in the Mid-west some paved roads are being converted back to gravel because the local government does not want to pay to maintain the roads. She expands on this to note how a viable road network is crucial to a strong economy and how the United States has been letting is road network deteriorate over the past few decades.

However, the focus of her post is a quote from a person living on a paved road that has been converted back to gravel, "I'd rather my kids drive on a gravel road than stick them with a big tax bill." Udall notes that poor roads might mean his kids having less income (fewer job opportunities) or somebody dying because the ambulance cannot make it to the hospital). Faced with the loss of these benefits, his children might prefer having a high tax bill to keep the benefits of a paved road.

The core of Udall's post is that the debate over taxes often focuses on the cost of the bill, paid individually, and not the collective benefits society gets from better public goods. For her, the whole tax debate is the "one hand clapping". Too much attention is focused on the cost (taxes in the future) and too little on the benefits forgone by not getting better public goods (again potential benefits in the future).

The only addition I would make is that often the total benefits of the public goods are undervalued. At the extreme are the cases of the Egyptian Pyramids or the Great Wall of China. These are both examples of public goods which have produced benefits far in excess of their costs (yes, I know people died building these structures and I am placing a value on their lives and the benefits produced now is revenue from tourism, which is quite different from the original intention of the builders, but these are still benefits). Basic point, on a cost-benefit analysis, both of these were great uses of taxes.

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