Saturday, February 12, 2011

The Rationale for Taxes

As I describe and discuss in my book, Organizational Economics: The Formation of Wealth, there is a good rationale for taxes.  As I describe in the book and discuss in the post entitled "Political Value", any organization can generate mediated political value, in terms of real dollar savings.  Actually, dollars, Euros, or any other currency are artifacts and work products of mediated political value.  And as I describe in my book and post entitled "The Purpose of Government", there are three purposes for a government or for a non-government organization, governance.  These purposes are: security, standards, and infrastructure (You will find posts on each of these). 

In brief, good governments provide external and internal security to their citizens so that the individuals do not have to spend much of their time and accrued value defending what little they have.  Many movies illustrate what happens when this is not so, as do all dictators (dictators provide internal security at the expense of living--I define living as at the nexus of existence and chaos.  Existence is merely surviving in a highly structured setting, while chaos is surviving in a lawless region, as depicted in the "wild west" movies.  Security benefits everyone, as the anarchists tend to forget, and enables them to create value (form wealth) in a reasonable way.  However, the citizens must pay for the collective security.  Paying for this security is reason number 1 for taxing a portion of the increase in value that the citizens accrue.

Reason number 2 is that good governments and governance decide on policies and standards, which, as I discussed in my post entitled "The purpose of Laws, Regulation, Policies and Standards", is to reduce inter-/intra-organizational process friction.  Process friction is very expensive.  As discussed above, simply having a standard currency greatly reduces the cost of transactions (selling and buying products and services).  Many of these standards save lives.  For example, if everyone could choose which side of the road to drive on, or when to stop or not at stop signs, driving would turn into an existing and deadly demolition derby.  The consequence is that civil and highly technological organizations and societies live and create wealth based on laws, regulations, policies, and standards.  While these can be perverted by unscrupulous individuals, like the greedy individuals, organizations, industries, religions, and dictators attempting to create "unlevel playing fields" (turning mediated political value into exploitative political value), still mediated value provides the opportunity and possibility for all citizens to create value and wealth--that is, standards are a value multiplier.  They don't create value themselves, but they do multiple the value of the products and services produced.  In fact, the manufacturing industry has used "group technologies" to build products based exactly on this type of standardization.  For example, these firms only allow a certain maximum number of fastener types in a product, even if the fastener is stronger, longer, etc., and costs more than "exactly the right" fastener.  The reason is that standardization greatly reduces support costs and therefore Total Cost of Operation (TCO).   Consequently, some portion of this wealth must be taxed to ensure that useful laws, regulations, policies and standards are enacted, enforced, mediated and/or adjudicated, and audited.

Reason number 3 for taxes is that all organizations require an infrastructure that is accessible to all members of the organization.  Again, having good roads, bridges, reliable electrical power, safe drinking water, good educational services, and even phone, cable, and Internet services all reduce the process friction for the processes that create value.  Again, they must be paid for.  If they private and unregulated products and services, they become monopolies with all of exploitative political costs associated.  Therefore, they should be public, paid for by taxing a portion of the value created by having this infrastructure available.

Now comes the hard.  All of these security, standards, and infrastructure services of government can easily be paid for by their value multiplicative effects through the reduction in process friction.  The question is how to distribute the rest of the increase in value they create.  Until the 1930s in the US, the answer was that it went to the people that "directly" created value or the owners of the private concerns (i.e., the Wall St. investment banks).  However, under FDR and his "New Deal", an additional large percentage of the value created by governance was put into a "safety net" for those out of work in the hope of restarting the economic engine and relieving suffering.  LBJ went very much further with his "Great Society" entitlements.  These have drained funding from security, standards, and infrastructure to the point that, in the US, all of these are tottering.  The politicians have forgotten the linkage between value creation of governing and the amount of value that these can create.  Additionally, many, many special interests fight to have their "fair share of the pie" increased. 

The consequence is a faltering economy.  President Obama should be applauded for attempting to focus government on its core business, security, standards, and the infrastructure.

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