Economic Theory

Sorry, Ha-Joon Chang, but tax really IS a burden


SUGGESTED ARTICLES

Markets and Morality
Myth busting is a risky business. If the myth you try to bust is in fact an important truth, you end up looking silly. Ha-Joon Chang, the Cambridge University economist, ran this risk in The Guardian last week with an article entitled “The myths about money that British voters should reject”.

The last of his myths is that “tax is a burden”.

Many of us certainly feel that paying tax is a burden, especially around the end of the financial year. Where are we going wrong in our thinking? Dr Chang explains thus:

“But would you call the money that you pay for your takeaway curry or Netflix subscription a burden? You wouldn’t, because you recognise that you are getting your curry and TV shows in return. Likewise, you shouldn’t call your taxes a burden because in return you get an array of public services, from education, health and old-age care, through to flood defence and roads to the police and military.”

Dr Chang is not the first person to have expressed this view of taxation but I hope he is the first academic economist to do so. It involves two serious errors.

First, spending money on a takeaway curry or Netflix actually is a burden. Suppose I buy a takeaway curry for $10. One good thing has happened. I have got myself a curry. But something bad has also happened. I have lost $10 that I could have spent on something else.

Of course, since I chose to buy the curry, I must figure that I had no better use for that $10. I must have thought the curry was worth $10. But this does not stop spending $10 from being a burden. If the curry had cost only $1, I would have been $9 better off. The burden would have been $9 lighter.

By Dr Chang’s logic, walking a mile to a water hole is not a burden for the rural Kenyan women who do it because it provides them with the water they want. Nor is having your foot cut off a burden when it saves you from gangrene. Dr Chang must behold people who shop around for low prices with utter dismay. If only they realised that paying for things is not a burden!

His second mistake lies in failing to see the fundamental difference between buying a curry and receiving services, such as healthcare and education, that are funded from your taxes.

To see what the difference is, imagine a man with a gun knocked at your door and presented you with a new laptop computer and demanded $1,000 in payment. If you don’t pay, he tells you, he will lock you in a metal box for a year.

Would this be a burden to you? If you were planning to buy precisely this kind of laptop computer, and planning to buy it right now, and could not have found it a better price than $1,000, then you might not be too upset.

But this is unlikely. There is a good chance you didn’t want a new laptop now. You might have planned to use the $1,000 to buy a new suit or to go on vacation. Or, if you did want a laptop, you probably wanted a different model. And you could probably have got a better deal. After all, why should someone willing to threaten you with a gun shop around for a good deal?

Though taxes are now rarely collected by armed men arriving at your door, they are still extracted by the threat of imprisonment and, if you resist, violence. The services we get from the taxes extracted from us are thus compulsory purchases.

Buying a takeaway curry is voluntary. You get a curry only when you think it is worth the burden of paying for it. You pay for tax funded services whether or not you think they are worth the cost. That makes paying for tax-funded services doubly burdensome.

That paying for something is burdensome, and that being forced to pay for something is even more burdensome, are facts you might expect a renowned Cambridge University economist to know. Which just goes to show how risky the myth busting game can be.

 

Former Director of Research

Jamie Whyte is the former Research Director at the Institute of Economic Affairs. Prior to joining the IEA, Jamie was the leader of ACT New Zealand as well as the Head of Research and Publishing at Oliver Wyman Financial Services. He has previously worked as a management consultant for the Boston Consulting Group, as a philosophy lecturer at Cambridge University and as a foreign currency trader.


2 thoughts on “Sorry, Ha-Joon Chang, but tax really IS a burden”

  1. Posted 20/06/2017 at 07:35 | Permalink

    Tax is a part of our consumer lives. Each day we spend we face the the facts! Almost everything that has a dollar value come with the added fees. Living in California for most of my adult life I enjoyed the spare change in my coin purse because thats where the tax cost was covered. It’s such a crazy fact that California has the highest tax rate in the nation. I would definitely have to agree with author Jamie Whyte that paying tax is a burden. Despite the grand idea by Dr. Chang that paying taxes leaves you in receiving in return an array of public services such as health and old age care, education, flood defense and the military, It still doesn’t necessarily add up to a worthy value. We start with the idea on the value of spending and if it is worth it or not. We consider the idea of opportunity cost. If I spend this budget of $250 on a weeks worth of groceries I will be better off on meals each day for the next seven days. What if I didn’t spend that $250 dollars on groceries and instead bought myself a concert ticket for my favorite band that was going to be performing for a once in lifetime opportunity at the local concert hall 10 minutes away from my neighborhood. I am faced with a scale of whats more important to the least. We are in the dilemma of opportunity cost. Aside from that I have to face the idea that there is a tax bearing fee added to either likely purchases. I understand that there is a good purpose to where the tax collected and the money is distributed. My children at one point have attended public school and received free health care for a very short time of their lives and to tax payers (which includes myself) I say great! The fact of the matter is that taxes are to high! The amount I payed for that given year for taxes was more than I actually would have spent on the healthcare used within that year. The demand can only destroy an average Joe’s earning income. The economy seems to grow and it only seems like a win win situation right? The minimum wage rate is rising but look at all the cost around your consumer eyes.We aren’t blind, there just isn’t much”we the people” can really do. Cost have gone up! Your truly a beneficiary if your earned income within a given time frame falls within the threshold of being qualified for health care that is considerably free. In the meantime, tax will always be a burden.

  2. Posted 18/08/2017 at 12:52 | Permalink

    It’s a burden yeah and people resent it in so many countries because we all know that taxes are only for the poor and middle classes. 99 of Europe’s largest 100 corporations ‘launder’ money through offshore jurisdictions, or tax havens, and are largely unaccountable. The rich simply don’t pay. Ask Warren Buffet. But in an ideal world we wouldn’t have to pay taxes…..(I’m an anarchist)
    Another point. You’ll do yourself no favours with those oversimplified undergraduate models… $1 spent isn’t $1 lost… and forget the curries too. LOL
    The other point worth mentioning is that Chang’s speciality is development economics and his reasoning applies far better to developing countries. IEA is fond of touting Hayekian, free market economics and anti-socialism for poorer countries around the world. Anyone who has travelled a bit will realise that the average country is poor made up of 95% dirt poor and 5 % elites. so (cut a long story short) free markets and free trade only ever impoverish the majority more. I’m all for Anarcho-capitalism, but only in the minority of already developed states 🙂

Leave a Reply

Your email address will not be published.


SIGN UP FOR IEA EMAILS