Solutions To Bad Taxes - And Bad Government

The Idea Shop has an excellent post on Bad Tax Policy:

There’s a lot of evidence that people aren’t always rational, and suffer from a range of cognitive biases. But thanks to arbitrage, rational people stand to profit when irrational people let prices and wages stray from efficient levels. That’s what justifies the economist’s assumption of rationality—a small number of rational profit-seekers keep markets rational as a whole even when many participants aren’t.

Unfortunately, tax policy has no such mechanism.

Chamberlain then goes on to dispair of the chance of ever getting good tax policy. And the problem of bad tax policy is the same as the problem with bad government in general, so this kinda sucks. The key point here is that non-libertarian results of democracy are not an accident, and not something that can be addressed by minor changes or even powerful rhetoric. They are the natural result of the system of incentives that a democratic government has. Chamberlain is right - in the current system.

But we are not stuck with that system forever. If we can profoundly change the incentive structure, we can get profoundly different results. I've been searching for years for the solution to that, and many other libertarians have been searching for decades. So far I've seen three candidates which I find somewhat plausible:

Crypto-Anarchy— The idea here is that if everyone uses untraceable digital cash for everything, the government can't tax them. The problem is that I just don't see the physical world as going away any time soon. Yeah, people will be able to earn and spend virtual money w/o paying taxes. As a semi-professional online gambler, I just might know a few people who go that route. But the government can always tax goods and services in the real world, and those are going to be important for quite awhile.

Market Anarchism (or Polycentric Law, Anarcho-Capitalism)— I think this system of competing governments has great promise. It may be achievable and it might be stable. But that's not really clear, since we have a dearth of empirical evidence. It may simply be the natural tendency of anarchies, like Iceland, to eventually develop a central government. I see potential here, but no guarantee and no clear path to get there from here.

Dynamic Geography— My own contribution. The basic idea is that if we can dramatically lower the costs of starting a new country, and switching countries, we transform the governing industry from a crappy oligopoly into a competitive market. This is much like the ability in ancap to easily create new government service providers, or switch them, except its done by physically moving. This is only possible in places like the ocean and space, which are empty, homogenous, and have very low transportation costs. The main concerns are economic viability in these resource-poor environments, and interference from existing nations. The advantages include a clear path to get there (unlike ancap), and less concerns about the system devolving into statism because people can move away so cheaply (unlike ancap or minarchism).

If anyone else has a good candidate, let me know.

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Note that the "moving unit"

Note that the "moving unit" in dynamic geography does not need to be the individual or the family. For example, I can certainly imagine the standard platform being for ~50-150 people - the size of our ancient tribes. On that platform would be a close community, ties with others would by necessity be less close. If the platform moved from one city to another, it would be bringing a unit of close friends with it.

But I certainly agree that community ties weaken the political advantages of moving.

While I love the idea of

While I love the idea of Dynamic Geography, one problem with it is that humans by nature are closely tied to their community and families.

I completely agree. Although I think Dynamic Geography would be better than the current state of affaires. I think that the transition cost will always be high (even in outer space) to move a family, make new friends, find a new school for the kids, etc.

I agree that an Anarcho-Capitalist society would be difficult to keep from dissolving into democracy or some other sort of tyranny. Individuals would have to value their liberty and be willing to take care of themselves.

I feel like a lot of people like that the government is so paternalistic. I think this is why it's so important now to talk to people and encourage them to read and what not, so there are more individuals who value liberty.

Look at the current case of

Look at the current case of those of us who live in California. By any measure, California is far, far worse than Nevada in terms of public policy, taxation, regulation, zoning, etc. Yet here I am in California, the Bay Area no less. Why won’t I move to Nevada?

I don't know why you don't move. I'm leaving Irvine, and moving to Georgia. The wife, dogs, and I hop in the truck this Sunday morning @ 5 AM (great mother's day present for the mother-in-law, huh?).

Yeah, the emotional attachment is a big thing. But once you realize that the goals you have for your life can no longer be achieved in the fashion you want, in the place you live, the choice becomes a lot easier. We're moving to a nice house, in a good neighborhood, with public schools that are actually good enough for me to send my kids there (when I have kids, that is).

All you have to do is think about the situation rationally, and the answer becomes clear. That is, unless you already own property (which we don't), in which one of the major reasons for leaving California (the high property values, high cost-of-entry), becomes moot.

California is definitely

California is definitely dying a slow death. I fully expect that the state will closely resemble France within the next 10 to 15 years. Schwarzenegger is the last gasp of those trying to rescue the place and once he fails that's it. All of the growth now is people who love the idea of a socialist paradise on the beach.

Which is why I plan to be gone in the next 2 to 3 years, max.

Patri, While I love the


While I love the idea of Dynamic Geography, one problem with it is that humans by nature are closely tied to their community and families. To leave your community is a big decision and things would have to get REALLY bad in order to do that. By the time they get THAT bad, you might be looking at a totalitarian dictatorship that won't allow emigration, a common enough phenomenon.

With Dynamic Geography, your first wave of emigrants from bad policy would be the young, childless, professional intelligentsia. Their early departure might even serve to accelerate the decline for those who stay behind. In fact, I have no doubt of that. The Reich's downfall was certainly quickened by the departure of all their brilliant jewish physicists..

A given Dynamic Geography's collapse could be much more rapid than what we see today in, for example, California, which is dying a slow death. :mrgreen:

Look at the current case of those of us who live in California. By any measure, California is far, far worse than Nevada in terms of public policy, taxation, regulation, zoning, etc. Yet here I am in California, the Bay Area no less. Why won't I move to Nevada?

A "spending limitation"

A "spending limitation" Amendment seems fairly easy to get around. California does it regularly (like every budget year). You need only look at the Federal deficit, budget and Social Security "Trust Fund" to see how easily that could be manipulated. The problem here is not whether the politicians would or would not manipulate it (they would) but rather that the citizens WANT bread and circuses. OTOH, I don't want bread & circuses, I would much rather live under a government that did little or nothing aside from providing military protection and perhaps law enforcement (although I tend to think that private law enforcement schemes would be preferable). Since I obviously can't get that in the waning days of our Republic, Dynamic Geography would be a great alternative.

Patri, while the oceans theoretically could work, I think the issue on the oceans is similar to the issue of power always going upward that you speak to. I don't imagine that most national governments would willingly give up power (and tax money) very easily, especially since it seems likely that the immigrants to such Dynamic Geographies would be more productive folks (check statistics on immigration to N. America and migration to the frontiers).

Between Andrew Jackson,

Between Andrew Jackson, Abraham Lincoln, the Fourteenth Amendment and FDR, states' rights is dead. The things that seem like such large differences between the states are miniscule in reality when compared to the difference in economic, civil and individual liberties that existed in this country before 1830. The reality is that the individual states do things differently at the sufferance of the federal government, not in spite of the federal government. If you think you are "more free" in Wyoming than in California, I would refer you to the Supreme Court.

Marc - It seems to me that

Marc - It seems to me that theoretical and empirical evidence points rather strongly against your suggestion. People may be moving to states w/ less economic regulation - but most regulation is at the federal level, and that shows no signs of changing. And just when have you seen power move downwards? It looks to me like the vast majority of empirical evidence is that power moves upwards. We had strong states, and it didn't last, and there is no way the fedgov is going to let it happen again.

And the general logic of public choice, of ratching government growth supports the idea that this sort of thing is almost inevitable. Additionally, the high cost of moving between states (a cost which becomes *even higher* when the states are more different because of competition), greatly limits competition. The difference between states can be pretty large and its still not worthwhile to move.

So while it would surely be nice to have lots of strong states competing with each other fiercely, I just don't see it actually happening or remaining stable if it did happen. I'm looking for solutions that could actually come into being, and then actually remain stable.

You are making this WAY too

You are making this WAY too complex. The REAL solution is to shift power from the federal government to the states. This allows for competition among the states in every area, including economic policies, while maintaining national borders, security, and a nation-wide recognition of civil rights. This is already taking place, as people voluntarily move to states with less economic regulation.

Brad - could work, but it

Brad - could work, but it seems likely to me that the govt. would find a way around the wording of any such amendment. ie different types of taxing, different types of spending, pseudo-governmental bodies, printing their own money...

Brian - as you can see from

Brian - as you can see from my May Day post, I am not optimistic about methods involving violent revolution.

Ashish - you have a good point that corruption would be a "public bad". And its harder for legislators to hide what they are doing from each other than from the public. Still seems like there would be some bribery. But your point is good enough that I will raise other objections :razz:

This gives legislators incentive to exploit natural resources rapidly during their terms, or do other things that produce short-term gains and long-term losses. It does not protect civil rights, as those are not part of GDP. But it would certainly help fiscal responsibility.

We could always find some

We could always find some failed 3rd world state and invade it with our own private army and set up "Libertopia". :) I suppose that's sort of Option 3.

Patri, You wrote: "It

You wrote:
"It has a clear public good problem - actions which contribute to increased GDP benefit all current legislators. Actions to benefit the guy who is paying you off benefit just you. If I can reduce GDP growth by $1B, and it earns someone $200M, and they pay me $50M, that is almost certainly more than my “commission” would be on that $1B."

The public goods issue is two-way street!
Actions to illegitimately benefit your financer will reduce the GDP and thus will reduce the commissions of other public officers too! Thus corruption also becomes a public goods issue. Even if some of the public officers are relatively honest, they will now a personal bone (their GDP based commisions will be harmed) to pick up with dishonest and corrupt officials.

Thus, in other words, those who wants to benefit by paying off public officers will have to pay a lot of them.

Robin Hanson has a variation

Robin Hanson has a variation on Ashish's suggestion, called "Vote on Values but Bet on Beliefs":

Basically, you let the democratic polity decide what ultimate objective function it wants to optimize, and then set up a market to decide what policies actually optimize said objective function.

Ashish & Patri, I had

Ashish & Patri,

I had thought of something along similar lines. Why don't we set up a constitutional amendment that government spending can only be x% of GDP? We're currently at about 20%. While it's certainly not elegant, it has the advantage that lawmakers must realize that to increase their own ability to spend, which is their underlying goal, they must favor policies designed to grow GDP to get there. While it will ensure that the absolute size of government keeps increasing, it might allow us to make sure that the relative size does not. And it might help to get more reasonable economic and social policy, if lawmakers actually decide to start thinking about economic growth.

(BTW, I realize it will never happen, and it's got a heck of a lot of problems, especially from those of us who want to see government reduction, not just a halt of growth, but it seems better than our current situation).

Andrew, I'll let Uncle

Andrew, I'll let Uncle Murray answer that one:

As we have discovered in the past century, no constitution can interpret or enforce itself; it must be interpreted by men. And if the ultimate power to interpret a constitution is given to the government’s own Supreme Court, then the inevitable tendency is for the Court to continue to place its imprimatur on ever-broader powers for its own government. Furthermore, the highly touted ‘checks and balances’ and ‘separation of powers’ in the American government are flimsy indeed, since in the final analysis all of these divisions are part of the same government and are governed by the same set of rulers.

What about constitutional

What about constitutional solutions? Hayek and others favored something like an economic bill of rights banning price controls, discriminatory tax policy, trade barriers etc. at the constitutional level. While less imaginative than competing "sealands," it at least has the advantage of having an historical precedent...

Eric - yeah, I agree that

Eric - yeah, I agree that patterns of "freedom at the frontiers" are a good indication. Obviously I disagree with you about the oceans - I think they are going to be economically viable long before substantial space colonies. But space is the future.

Ashish - I don't think that works. It has a clear public good problem - actions which contribute to increased GDP benefit all current legislators. Actions to benefit the guy who is paying you off benefit just you. If I can reduce GDP growth by $1B, and it earns someone $200M, and they pay me $50M, that is almost certainly more than my "commission" would be on that $1B. I can think of other objections too, but that one seem telling enough already.

One possibility is that we

One possibility is that we promise our representatives a deferred compensation (payable only when they are out of power) based on the GDP (or any other criteria of aggregate national income or welfare) at the time of payment. Advantage of this scheme is that our elected representatives have a strong incentive to have policies that affect agregate incomes (or measure) and thus create fair and just policies. Plus they will be able to pay for their election finances without resorting to crony capitalism.

Actually Patri, I think

Actually Patri, I think Dynamic Geography bears a lot of promise. It's why I'm ecstatic to see space engineering progressing again, since I don't think the oceans will really work. And, if you think about it, the migration from Old Europe to North America and from the eastern United States to the Western US territories gives us a fairly strong indication that it can work. In fact, that migration pattern seems like a primitive version of it.

Carnival of the Capitalists

Carnival of the Capitalists
Welcome to the Carnival of the Capitalists. I hosted the COTC back in December 2003 and a lot has changed in the world of blogging. There are so many more people writing great stuff on business and economics. My weekly reading of the COTC had waned in...

Patri wrote: This gives

Patri wrote:
This gives legislators incentive to exploit natural resources rapidly during their terms, or do other things that produce short-term gains and long-term losses. It does not protect civil rights, as those are not part of GDP. But it would certainly help fiscal responsibility.

Remember, the compensation is deferred and is dependent on future GDP and not current one. Therefore, legislators have a strong incentives to work for long term benefits. Also, don't forget that all public officials (judges, top military brass, president and so on) can be compensated using the same scheme. Their tenures will be different. Therefore, it will be difficult for anybody to act for short term GDP growth.

See my article.

Patri- I guess that you have

Patri- I guess that you have worked out solutions to "dynamic geography" but one thing you should think about is to inhabit and operate a Gulf Coast oil-drilling platform. A big one would probably hold about 50 or more workers and if they bring their families perhaps to 150 people and are far into international waters. You and a group of pioneers could contract with an oil company to operate one of these permanently. This would solve two big problems, how to earn money for your colony and what to do with the endless hours of time during your life in utopia. There would be no building codes, drug laws or other impediments.
As long as you produced enough oil you could do things your way when you lived there permanently. Now oil rigs aren’t much fun. Companies have to pay people big bucks to work on them and there are tons of rules. No drinking, no sex, no smoking except in designated areas and they test you for drugs. Usually a mean boss tells you what to do and he can fire you. A helicopter or crew boat visits every day and brings in pretty good food. Still the workers can’t wait to get to shore. If you get sick or injured the helicopter takes you to an onshore hospital. So you see you are still attached to the United States which could present problems. Unfortunately there is no private law out there. If you murder someone you get taken to shore instead of walking the plank, but maybe you could change all that. You will need to make provisions to evacuate your new home before a hurricane, so don’t lose your passport. The Oil Company can pay for hurricane repairs or move you to a new rig once the oil runs out. Hopefully your wives will get along,enjoying a premanent vacation in the Gulf or perhaps they could learn aquaculture. This would occupy their time and at $8.00/lb. for red snapper would help support the colony as well as providing food. Not too many kids will fall overboard. The Coast Guard will help you find the bodies if they do fall in, as well as search your home/workplace for drugs and safety violations. Oh well, forget it. Maybe it won't work after all.

jomama - yes, capital is

jomama - yes, capital is very mobile, and hence gets good terms. People are not so mobile, and hence get bad terms. We see lots of special tax deals for corporations - not so many for individuals.

Ashish - just how long are you going to defer the compensation? They are going to want to get paid eventually! Natural resources management has a lifetime of centuries - senators are going to want to be paid sooner than that!

Competitive tax

Competitive tax jurisdictions are already a fact and the giant sucking sound of capital flight has been underway for some time.

Hi Patri, I'm partial to

Hi Patri,

I'm partial to social policy bonds:

What are Social Policy Bonds?
Social Policy Bonds are non-interest bearing bonds, redeemable for a fixed sum only when a targeted social objective has been achieved. The bonds would be backed by government or private bodies, floated by auction, and freely tradable at all times.

A Social Policy Bond regime would:

1. Inextricably link rewards to outcomes rather than inputs, outputs, activities or institutions; and

2. Inject the market's incentives and efficiencies into the achievement of social and environmental goals.

The effect of a Social Policy Bond regime is to contract out the achievement of social and environmental goals to the private sector. Because they do not prejudge how objectives shall be achieved, the bonds would encourage diverse, adaptive solutions. Social Policy Bonds could target any quantifiable social and environmental goal: less pollution, less crime, better health and education outcomes, and higher literacy rates, for example. At the global level, Social Policy Bonds could address climate change and violent political conflict (war, civil war and terrorism). A Social Policy Bond regime would enhance the efficiency, stability and transparency of policymaking.

For detailed descriptions of the Social Policy Bond principle, see below. For essays about how to apply Social Policy Bonds to different policy areas, click on "Applications" in the navigation bar. To see how Social Policy Bonds would address current policy issues and to make comments, visit the Social Policy Bonds blog. A (sometimes) slightly more up-to-date version of this site is maintained at