The fiscal policy of taxation fosters the institutional incentives for a Prisoner’s Dilemma. It is probable that most tax policies and discourses regarding the instrument for collecting public revenue devolve into a myriad of uncooperative games. Fundamentally, it is in the state’s interest to tax its citizens to accumulate funds to finance public goods and services. In contrast, it is the best interest of individual constituents and business organizations to avoid or minimize the number of taxes they are obligated to pay. This dynamic creates the institutional friction between the government and taxpayers; both coalitions generally have few incentives to compromise. Sure, purported conservatives give a tax break here and there, like liberals, they have a litany of public projects that they have a desire to fund, making taxation a necessity for their objectives. The only distinction between the two American political factions is what they prefer to squander money on and whether they provide lip service to the virtue of low taxes.
The tension between the citizenry and the state on the issue of taxation is paradoxical. Why? Because voters demand more public goods from the government (infrastructure, social programs, defense, regulation, etc.) but simultaneously do not want to pay for it. Adding another dimension to the vast series of Prisoner Dilemmas taxation policy engenders. The state’s need to collect more taxes is propelled by the public’s demand for more public services. Public schools, courts, administrative agencies, a standing army, regulators, entitlement programs, and infrastructure are not free! There is no greater fallacy than when a naïve constituent refers to public education as free. If an individual participates in the workforce and owns any property they are paying for this service. This elementary confusion validates the logic behind the concept of dispersed costs and concentrated benefits; if there is a disconnect between taxation and spending (Fiscal Illusion) voters do not tend to consider the cost. Therefore, many people are okay will the government providing goods and services; but irrationally have a distaste for taxation. The negative perception of direct tax collection has led to the development of backdoor taxation. Manifesting in the form of helicopter money, quantitative easing, and deficit spending. Policies that only further obscure the link between government spending and the cost to the voter.
Whether the government provides services due to voter preferences or other ulterior motives is immaterial. At the core of this conflict is contentious incompatible interests. This century-long conflict has resulted in suboptimal results for society as a whole. These consequences extend far beyond the scope of a Fortune 500 CEO’s bank account. After all, a Prisoner’s Dilemma is not complete without adverse ramifications that are avoidable through cooperative behavior. Taxation is the same as another policy prescription implementation will have a nonneutral impact on the decisions made by participants. Altering the rate of taxation does not put the game on pause but influences how various economic agents will adjust their behavior. Raising taxes has myriad adverse outcomes for the citizens of a country or dependent lower level jurisdiction (municipal or state/provincial level).
Tax policy proposals, such as Elizabeth Warren’s wealth tax, may sound reasonable for a nanosecond; but are they effective? Why not require Americans with deeper pockets to pay more taxes and take some of the stress off of the little guy? On a superficial level, this policy may appear to be equitable and even tenable; in the words of Bastiat, such a policy does not account for what is “unseen”. A feature of taxation fleshed out by Bastiat’s most proficient interpreter Henry Hazlitt:
“…This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. A particular group of bridge workers may indeed receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge, a dollar will be taken away from taxpayers. If the bridge costs $1,000,000 the taxpayers will lose $1,000,000. They will have that much taken away from them that they would otherwise have spent on the things they needed most. Therefore for every public job created by the bridge project a private job has been destroyed somewhere else..” (Page 19).
Ultimately, Warren’s vision does not consider how taxation could realign the incentives of affluent Americans to invest their money elsewhere. The phenomenon of capital flight occurs when onerous taxes in one jurisdiction drives investors to invest their money in economies with less stringent taxation. Here is where Bastiat’s “unseen’ comes into focus, as what we do not see is all the new jobs firms failed due to the high taxes. The relationship between taxation and job growth is inverse, implying that high corporate taxes have a trickle-down effect that negatively impacts the average hourly employee. Beyond the consequences of employment and overall business growth, inordinately high taxes can rob government programs currently implemented. The logic of the Laffer Curve perfectly embodies the Prisoner’s Dilemma between state officials and the taxed citizens. The fallout from taxation going from an acceptable level to an oppressive one will permeate from the top-down.