Joe Stiglitz on Taxes

Taxation is unlike most transfers of money from one individual to another: while most other transfers are entered into voluntarily, taxation is compulsory. In Chapter 5 we saw some of the reasons why the contributions to support public services need to be compulsory: because of the free rider problem, unless support for public goods is made compulsory no one will have an incentive to contribute. We showed, in particular, that all individuals might be made better off by voluntarily agreeing to be compelled to contribute to the support of public goods. Yet the ability to compel individuals to contribute to the support of public goods may also provide the government with the ability to compel individuals to contribute to support some special-interest group: the government has the power to force one group to give up its resources to another group. This forced transfer has been likened to theft, with one major difference: while both are involuntary transfers, transfers through the government wear the mantle of legality and respectability conferred upon them by the political process. In some countries and at some times, the distinction becomes, at best, blurred. The political process becomes detached from the citizenry and is used to transfer resources to the groups in power.

This is from Joseph E. Stiglitz, Economics of the Public Sector, Second Edition, 1988. I used the textbook in a policy analysis course at the Naval Postgraduate School in the mid to late 1990s.

I find the order of his reasoning in the above fascinating.

The first sentence makes clear, in no uncertain terms, that taxation is compulsory.

The second sentence is the typical case for taxation to finance public goods, something that he might have learned (if he hadn’t already known and he probably did know) at the knee of his mentor, the late Paul Samuelson. It also contains the standard exaggeration: no one would have the incentive to contribute? I don’t know of any such examples. Even for the economist’s typical example of national defense, if some foreign invader is coming at me, I’m going to defend myself. Is the amount of defense enough? Probably not. But my incentive is not zero.

The third sentence reminds me of James Buchanan when he channeled Knut Wicksell. Buchanan took seriously Wicksell’s idea that the only way to be sure everyone benefited from government spending is to require unanimous consent for every tax/spending program. Of course, in practice this is unworkable, but it’s a good reminder.

The fourth sentence lays out the huge downside of relying on taxes: taxes can be used to redistribute wealth. Indeed, that is the main thing they do in most countries. Here Stiglitz is channelling Public Choice theory.

In the fifth through seventh sentences, Stiglitz is way more radical in an anti-government direction than I ever would have expected.

There’s so much I like about this textbook. I don’t think he would write it even close to the same way today.