Reforms to make the tax system flatter, fairer, or simpler etc. do very little good because they ignore the nature of taxation itself.
When it comes to meeting the needs of society, it’s not that we are using a great tool badly. Rather, there are a series of essential defects with the tool we’ve been trying to use. There are eight of them – and they all follow from the first one.
Coercion/Force. You do not get to choose how much money to give to the government based on their efficiency, their impact, or their results. The same amount of money will be taken from you regardless.
Guaranteed unlimited revenue. Since you have no choice in how much the government takes from you, government can and does easily increase its revenue without limit. Therefore, it has no practical need or incentive to curb waste, spend wisely, or even monitor whether its spending solves social problems.
Massive concentration of money and power. The system of collecting money by force ensures that just a few people make decisions on how large amounts of the people’s money are spent. This makes it worthwhile for special interests to seek favors from politicians, and is the essence of political corruption.
Disincentivizes quality in social services. Since people cannot send their tax money elsewhere, organizations that would address social needs more effectively or efficiently than government agencies are either underfunded or never see the light of day. Moreover, that lack of competition prevents us from fairly judging the effectiveness of government solutions against all of the better solutions we’ve been prevented from having, so the quality of those government solutions falls unchecked.
Not responsive to real-world outcomes. Since the collection of tax money is independent of the human consequences of how it is spent, we don’t even properly measure the outcomes, much less respond to them. Money taken by taxation is deployed in a manner that does not consider the individual circumstances of the people it affects, fails to deliver on intended objectives, and has negative unintended consequences, all of which go unmeasured. Taxation underpins a “one-size-fits-none” system.
Increases waste. Organizations in the voluntary sector (businesses, charities) have to earn their money by providing quality services with limited resources. They therefore have to reduce waste. Competing with other organizations puts further downward pressure on waste and the cost of delivering those services. In contrast, since taxation guarantees funds for government to spend, regardless of outcomes, and since it can be simply increased to cover waste, waste in the spending of tax money rises unchecked.
Lack of accountability. You cannot vote with your tax dollars: you have no direct say in how your tax dollars are spent, and you can’t spend them anywhere else. Therefore, the mechanisms of accountability that we rely on everywhere else are missing from every system of taxation.
Crowds out compassion. A compassionate society is one in which people feel their moral responsibility to their fellow men and women, and act on it freely. They look for suffering and need, and make a choice to help another at a material cost to themselves. The system of taxation gives people the false impression that their responsibilities to each other are already being met, eliminating their incentive to see the needs of others; and their means to meet any such needs that move them. To give freely is compassion; to be made to give is taxation.