The Purpose of Taxation
Understanding the real function of taxation leads to a more efficient alternative.
It is said that taxation is the price we have to pay for civilisation. Since the advent of civilisation, people have been expected to contribute a portion of their income to the government, or pay a premium on any goods or services purchased, purportedly to pay for the provision of public goods and services. Governments decide how much of a person’s income he or she has to hand over, and they take it, usually without the person’s consent. The government may also charge a sales tax on every economic transaction that takes place in society. If a person does not pay taxes, then they will potentially lose their freedom and be put in jail. Over the years it has become accepted that people have to pay taxes. How else would the government be able to provide public services? We take taxation for granted because most people exist within the purchasing paradigm and only take a cursory look at what taxation actually achieves. In the purchasing paradigm, the purpose of taxation is viewed as being the funding of government so that they can provide public goods and services, hence the need to pay money to the government to achieve this. A more in-depth examination from the perspective of the bartering paradigm shows that the purpose of taxation is to reallocate resources from private uses towards public goods and services. Understanding this, we can then ask if there are alternatives to achieving this purpose other than using taxation. The bartering paradigm provides an alternative by viewing the actual interaction taking place as an exchange of goods and services between the government and the public. The government does not have to be paid in money, but rather its members, namely workers and contractors, must be compensated in goods and services provided by the members of the public. In the bartering paradigm, the public doesn’t pay for public services with money, rather they exchange their private goods for the public goods provided by the government, without the need for taxation.
Tax is the amount of resources a society allocates to public goods and services.
Problems with Taxation
Why is taxation so wrong? You first have to understand that in a free market, all parties are equal. Even the government is not a special participant. It is just another market participant, providing goods and services to others. The difference is that the government specialises in the provision of public goods and services, rather than private ones, which most of the other participants provide. The government should not have special privileges that regular participants in the economy don’t have. If your neighbour cannot confiscate a portion of your salary, then the government should not have that ability either. Yet this has been happening for centuries, and people have just come to accept it. Taxation is theft. It has to end if we are to have a healthy economy.
One of the major problems with taxation is that it is difficult, if not impossible, to accurately determine what each person or organisation should pay as their share. It is also necessary for the government to keep track of everyone’s income and/or all transactions for the purpose of a sales or value-added tax. There is a lot of overhead involved and a significant amount of resources has to be put in place to ensure taxes are paid correctly. These are resources that could be utilised in a better way to benefit the economy. People have to report their income, but some may choose to under-report it in order to pay less tax. In fact, people who have the means usually put in a lot of effort to make sure they pay less taxes. There is also the question of everyone paying their fair share. It is pretty much impossible to determine what a person’s fair share is. It is popular to suggest that people with higher incomes should pay more percentage-wise since they can afford it, in a so-called progressive tax. But in general, income measures how much value a person is providing to society, so progressive taxation increasingly penalises you as you create more value for society.
Defining Tax
In the purchasing paradigm, which is the current standard viewpoint, tax is defined as a compulsory fee levied on the income or property of individuals or organisations, or on the production costs or price of goods and services. In the bartering paradigm, people do not pay taxes to the government, so what might be a good definition of tax in that paradigm? The bartering paradigm is a resource-driven paradigm, unlike the purchasing paradigm which is money-driven. As mentioned before, what taxation actually accomplishes is to reallocate resources from private uses to public uses. So in the bartering paradigm, we can define tax as the amount of resources a society allocates to public goods and services. Despite the fact that individuals and organisations do not pay any money to the government as taxes, we can still find an alternative way to achieve the reallocation of resources to public uses and eliminate taxation in the process.
A Toy Example
To illustrate the inefficiency of taxation as practised in the purchasing paradigm, let’s go back to our islanders who we have seen in previous articles. Let’s say there are three individuals P, Q, and R who constitute the main economy, and one individual G, who sometimes helps them organise their activities. Suppose the islanders want a new road, and the following is true: P will build the road and has 70% of the labour and resources needed for the job, Q has 30% of the resources needed, and R has no resources needed for the road. There is an implicit assumption that they all have some income or money from which they can contribute to the building of the road. G steps in and partners with P, promising to organise the building of the road. G needs to raise funds for the project, but first, she has to determine how much money each of P, Q, and R have. For simplicity, assume P, Q, and R have the same wealth so that each must contribute one-third of the cost of building the road. G adds a fee for her services, of course, and collects the money from P, Q, and R. Notice that she collects money from P also who is going to build the road. G takes her cut for her services and then gives the remaining money to P. Now P has 100% of the money that will cover the cost of building the road. P keeps 70% of that money which is compensation for the labour and resources that he is going to contribute to the building of the road. He uses the remaining 30% to purchase the remainder of the resources needed from Q. Now P has all the resources he needs to build the road. Q has contributed some resources and some money. Note that Q gets most of his money back from P. R contributes only in money but not in resources.
Let’s look at the net effect of what has happened. In terms of movement of resources, this was just a roundabout way of reallocating P’s 70% labour and resources, and Q’s 30% resources towards the building of the road. P already had his 70%, so all that really happened was moving Q’s 30% to P. In the resource-driven bartering paradigm, moving the resources from Q to P and then compensating P (70% of the cost) and Q (30% of the cost) for their contributions is sufficient. R does not directly contribute to the road but will do so indirectly through other exchanges with P and Q. This process provides an avenue for the creation and injection of money into the economy under the bartering paradigm, where money is created as credit rather than as debt. I will discuss this further in a future article. In the money-driven purchasing paradigm, we require P, Q, and R to contribute directly to the cost of building the road. Thus the money given to P by G is constituted of contributions of one-third the cost of the road from each of P, Q, and R. Given that P contributes 70% of labour and resources while Q contributes 30% of resources, the net transaction that took place is that R transferred money worth one-third the cost of the road to P, while Q transferred 30% of the resources needed to build the road, plus 3 and one-third percent of the monetary cost of the road to P. The net transaction is much simpler than the convoluted process of going through the government, G. The question is can we get resources and appropriate compensation into the hands of public service providers without the convoluted process of taxation, and can we do it at the scale of a large economy. The answer is yes, and the bartering paradigm provides us with a path.
Public Services as an Alternative to Taxation
As noted above, in the bartering paradigm, R does not have to contribute directly to the road. She does so indirectly through other exchanges with P and Q. I raise this point because a lot of people conflate contributing to society and contributing to the government, and they believe that if you don’t pay taxes or contribute directly to the government, then you are not contributing to society. This is a myopic way of looking at things. I have mentioned that there are both private goods and public goods. Paying for or providing public goods is not the only way to contribute to society. Providing private goods is also a way to contribute to society and as we will see in the new currency system I want to propose, providing a private good is an indirect way of contributing to public goods and services. Thus when you get your groceries from the supermarket, the owner of that supermarket has just done a public service, making an important contribution to society. Similarly, when you work for your employer, your work is a public service and just as important a contribution to society as paying taxes. In the bartering paradigm, this is recognised, and these public services replace taxes.
No taxation in the bartering paradigm does not mean that people should not contribute to the provision of public services or the compensation of public service providers. Rather, without taxation, they can start contributing the right way: with minimal overhead and maximum efficiency. The use and acceptance of taxation is a consequence of the purchasing paradigm viewpoint. As I’ve mentioned before, the market is about parties exchanging goods and services for other goods and services, using money to make the process more efficient. This is true at all scales. Thus at the national scale, what you should have is the government providing public goods and services to the public in exchange for private goods and services from the public. When the government provides the public with goods and services, the public is not obliged to provide them with money. They are obliged to provide the government (workers and contractors) with goods and services in return. This new viewpoint turns the idea of taxation the right way up. People contribute to the provision of public services by providing private goods and services, rather than money, to public service providers. You might wonder how efficient it could be if every member of the public had to provide a good or service to the government. As explained above, not every member of the public has to do that. Some contribute directly to public service providers, while others contribute indirectly by providing public services to individuals and organisations, as in the example of the supermarket owner and the employee above. Currency makes the process efficient just as it makes private exchanges efficient.
It is worth noting that even with the current paradigm of taxation, when you look at the full picture, people and businesses still contribute goods and services as compensation to public service providers. In other words, they are being taxed twice, first in terms of money, and then in terms of goods and services. Only one of these is correct. However, you will see that in terms of goods and services, wealthy people and businesses provide the most towards the compensation of public service providers, and in fact towards society in general. They are rich, in terms of money, because they provide the most goods and services to the public. This is the correct way “taxation” should work. The “tax” people pay is the goods and services they provide to others in society (including government, individuals and organisations), i.e., they provide public services to others, and the more they provide, the more money they earn. Progressive taxation on the other hand prescribes that the more goods or services a person contributes to society, the more money that should be taken away from them.
Now that we know what taxation’s purpose is, i.e., to allocate labour and resources towards public goods and services, the question to ask is how do we implement the new no-taxation proposal under the bartering paradigm. It is done with a different kind of currency which I will introduce in the near future. Recall that inflation is a form of taxation. It should therefore come as no surprise that the creation and injection of money into the economy is closely related to taxation, and that there is a way of doing this correctly which eliminates the need for taxation.
