It is commonly believed that taxes are “returned” to us in the form of some goods produced by the state. In Ukrainian society, the entire political discussion is focused precisely on the fact that too great losses arise during this process. Ordinary Ukrainians consider corruption to be the cause of losses, the more advanced — an imperfect state machine.
However, taxation causes harm on its own. This is not difficult to see if one understands that the economy is a process of creating wealth by people. The last word in the plural is very important, for with the exception of Robinson Crusoe’s economy, all other economics is based on division of labor and the fact that we are tightly dependent on each other. If you live in society, and not on a deserted island, then your wealth directly depends on your ability to make other people richer.
Let’s imagine that you produced something and exchanged it for 500 dollars. That is, another person valued your goods higher than their 500 dollars, and made the exchange. However, at that moment the state appears and takes 200 dollars from you in taxes. You have 300 left. That is, you can exchange them only for goods that you value above 300 dollars, while you could have exchanged them for 500. Thus, your exchange partners will not receive as much as they could have. Overall wealth will grow, but significantly less.
And that’s not all. Because part of your income was seized, some acts of exchange will not occur at all.
That is, even if in a society that uses exchange and division of labor, you tax just a single person, it will hit the entire society. The “society as a whole” will be poorer.
We are told that money forcibly taken goes to certain benefits that we consume. In such cases, I propose conducting a thought experiment (although such an experiment would be wonderful in real life as some kind of reality show). The essence is as follows. Currently our state redistributes 44.5% of GDP through the budget. For the experiment, I will take 44.5% of your income and (minus my upkeep) spend it on your needs. In order for this process to resemble a state, not you, but I will establish a list of goods that I will buy with this money, that is, decide what you need and what — no. I will also choose which specific goods and of what quality to purchase. I will also compose a completely arbitrary list of goods that you are prohibited from purchasing even with your remaining money, and I will punish you strictly if, God forbid, you happen to want to acquire them. You can bet on how long you will last.
And this, by the way, is a very lenient analogy. In reality, things with the real state are even worse.
Well, finally, let’s imagine a completely ideal society in which there is neither corruption nor transaction costs, the state itself consumes nothing and feeds on the Holy Spirit. Moreover, in this society everyone receives from taxes exactly in accordance with their contribution, that is, a certain sum is simply taken from them, and then at some arbitrary moment the exact same sum is returned to them.
Let us have two societies, A and B. In the first society there are no taxes at all. In the second society the state seized a certain sum from each person, and then, after some time, returned the same amount of money to them, with neither the process of seizure nor the process of return accompanied by losses.
Suppose in society A and in society B there are individuals who plan to assemble from ready-made parts a computer of a certain power. Both begin the process, when in society B the state appears with its taxes. The person in society A will after some time assemble their computer and the story will end there. In society B the person will be forced to change their plans, since now they will not have enough money for the parts they need. They will start assembling a cheaper model, but then the state returns to them exactly the amount that was seized in taxes. But the process has already started. Some parts have already been purchased. The more powerful computer required, for example, a different motherboard and a different case, but we have already bought these parts, and they will allow assembling only a less powerful machine, despite the fact that we have been returned the money taken earlier.
Let me remind that we examined the ideal case, when everyone receives back exactly as much as was taken from them, and the state does not influence people’s choices in any way, that is, does not palm off allegedly free roads and other delights on them. I note in parentheses that if someone is now experiencing bewilderment and asking the question: “but why did the state need to take taxes at all?”, this person is very close to the truth, for if one disregards the goals pursued by the people who constitute the state, taxation indeed looks like complete absurdity.
Returning to our example, let us note that if we assume that people’s propensity to make mistakes and other factors of their activity were constant, then society A will be richer than society B, since a more powerful computer appeared in it, and in society B — no.
This happened because people’s activity to achieve certain goals always consists of stages and always takes time, and very often — quite significant time. Taxation is usually considered a static and instantaneous process — they took so much, “gave back” so much, all conversations in our kitchens go only around how much was stolen along the way, and what would be better to “give back” that rather than this. However, the main blow of taxation is struck at the very process of creating wealth, for if part of income is not seized from people, they will be able to achieve more valuable results. The resources that people lose during taxation are needed by them to achieve certain goals, and even if we assume that they “receive” something from taxes, still with taxes they can achieve only less valuable results. This is illustrated by our example with parts. Goods are never interchangeable, and the very process of creating a new good takes time. Since this effect concerns the very process of activity and, consequently, is present in the activity of everyone, regardless of whether they know about it or not, it is absolutely obvious that a society in which there is no taxation, all other conditions being equal, is always richer than a society where it exists.
P.S. For those who like to calculate. We take very conditional figures in a very conditional example. The figures illustrate not the real value of parts, but the fact of non-complementarity of goods and the circumstance that when the process of creating a good (and we with you are always, at any moment in time, in this process) is disrupted (for example, by taxes, but of course not only by them), the output is a less valuable result.
So, suppose we had 1500 dollars. The “more powerful” computer we want to assemble consists of a motherboard for 500, a case with power supply for 500, and a processor and memory for 500 dollars. Then the state took 500 dollars from us in taxes. We had 1000 left. We revised the plan. Now our “Plan B” is a less powerful computer, for 1000, namely, a motherboard for 300, a case with power supply for 300, everything else — for 400. We bought the motherboard and case, we had 400 dollars left. Then suddenly the state returned the previously taken 500 to us, and now we have a motherboard, a case, and 900 dollars. These 900 dollars will in no way help us realize our original plan, since this plan costs 1500. And if we even sell the available parts, we will inevitably lose on this and will still be forced to follow the less socially useful Plan B, although (and this is extremely important!) from the state’s point of view everything here is “absolutely fair.”
This example is still very and very favorable. In most cases of real life, the intermediate results we have achieved following some plan (in the example — the case and motherboard we bought) are very difficult, and often completely impossible, to exchange for something else if the plans are suddenly forced to change. For example, you studied to play go for 5 years. But then the state banned go. Your money is thrown to the wind.
P.P.S It will be said to me that the effect of non-complementarity always manifests itself as part of the normal market process. This is true. Candles are replaced by gas lamps, and gas lamps — by electric ones. Those who bet on candles lose. However, in this case, society receives greater value in the form of cheaper better-quality lighting. In the case of taxation, however, there is only a strict loss, without any positive effect.