Confession of a Compliant Taxpayer; D. Lee

You have all heard, and most of you believe, that honest taxpayers are victimized by tax evaders. In an April 1995 Money magazine article, for example, Teresa Tritch tells us, "All told, individuals and corpora tions are expected to shortchange their fellow taxpayers by an estimated $150 billion this filing season. That adds $1,932 to the average tax bill of every honest taxpaying u.s. house hold." This sounds plausible enough at first glance, but it is based on two naive assump tions about how government operates: first, that the government needs some fixedamount of money and so if it receives less from one taxpayer it compensates by taking more from another; second, that we are better off when the government spends more of our money. Neither assumption is supported by our ex perience with government, or by the logic of the political process. If the government required only a fixed amount of money each year, we could hope to reduce the federal deficit by increasing tax revenues. Unfortunately, the federal govern ment spends more than a dollar for every Dr. Lee is Ramsey Professor of Economics at the University of Georgia.

dollar it gets. The budget deficit fluctuates from year to year, but over recent decades it has tended to increase as federal revenues increase. So if some of my fellow taxpayers pay more taxes than required, my taxes are not reduced. Quite the opposite. The govern ment would respond to the additional money by committing to new spending that will grow faster than anticipated, with yet more money and larger deficits being required, and I end up with a larger tax burden. Conversely, if some taxpayers underpay, my taxes will be lower, not higher, than they otherwise would be. And government spending will also be less. But if I benefit from additional government spending, I might be worse offeven if my taxes are lower because others underpay. What I gain in lower taxes might be more than offset in lost government benefits. But do I, or does anyone else, benefit from additional govern ment spending?

This may seem like a silly question. Some one alwaysbenefits from a transfer, a subsidy, or a service when the government spends more money. But those benefits always have to be paid for by someone. So the important question is, are the benefits from additional government spending worth the costs? When the government spends more money, are the additional benefits I receive from expansions in my favorite programs worth as much as I have to pay for expansions in the programs 144 of others? For most Americans the answer IS no. Up to a point, federal spending for defense, law and order, and other necessities is worth more than it costs. But the logic of the political process suggests that we are well beyond that point. Consider that political decisions are far more responsive to relatively small groups, each organized around a com mon concern, than to the general public. For example, a water diversion project concen trates large benefits on relatively few farmers who are strongly motivated to form a coalition supporting the project. The cost of the project is spread so widelyover the general public that few taxpayers know the cost, and almost no taxpayer sees any advantage in organizing opposition to the project. Politicians know that a vote favoring the project will be deeply appreciated by the few getting the benefits and ignored by the many paying the bill. Thus, government projects are funded beyond the point where they are worth what they cost.

For example, in California water that costs taxpayers over $200 per acre-foot to provide is sold to farmers for $3.50 per acre-foot so they can grow rice in the desert. Wasteful Government Spending Farmers are not alone in using the political process to capture benefits worth less than they cost taxpayers. Indeed, the fiscal rela tionship between local governments and the federal government causes everyone to sup port wasteful government spending. About 66 percent of our tax dollars now go to the federal government (up from about 33 per cent in 1929), with most of these dollars be ing returned to states and localities through federal spending on a variety of programs, projects, and transfers. Taxpayers everywhere want their political representatives to retrieve 145 as many of their federal tax dollars as possible, and they are not particular about how those dollars are spent. They will accept almost any project, no matter how little it is worth rela tive to cost, since the benefits accrue primarily to them and the cost is paid primarily by others. Their tax burden will not be increased noticeably if more federal spending is secured locally, nor will their tax burden be reduced noticeably if it is not. No matter how much the public may oppose wasting tax dollars ,in general, each local constituency prefers that more be wasted in their district rather than in others.