On Government Spending… Beating a Dead Horse Once Again
By Jason on Feb 25, 2008 in Articles of Interest, Our Theory
In a recent Reader’s Digest article entitled, “The Government is Wasting Your Tax Dollars,” the authors Ryan Grim and Joseph K. Vetter concluded that an estimated USD 983.5 billion is overspent on just a handful of government projects each year.
To put that number in perspective, the United States Government’s (USG) total tax revenue for 2007 was estimated to be around USD 2.568 trillion versus an expenditure of about USD 2.731 trillion for a deficit of USD 163 billion [CIA Factbook]. This overspending then, is comparable to about 38% of all the taxes it collected in 2007.
From an economic standpoint, taxes are a necessary evil. Idealistically, it raises money to fund services by redistributing wealth to certain areas of the public sector to which a market system is non-existent or incompatible - such as the case with civil infrastructures (standard levels of education, roads, museums, parks, what have you) and national security. However, as a consequence beyond that of the costs incurred by the tax payer, taxes also tend to throw market efficiencies into disarray. The result: Deadweight loss. Put simply, Deadweight loss is the reduction in efficiency that results from a price disequilibrium between the buyers and sellers for a good or service in a particular market.
To illustrate this phenomenon, take the following scenario:
Firm A supplies Product X to the market price at a price $1.00. Product X is demanded by the Consumer.
In an untaxed system, the price incurred by the buyer of the product is equal to the incurred cost of the seller and therefore the supply and demand of the products are both satisfied and the market reaches equilibrium and market efficiency is achieved.
Now add a 5% sales tax to the system.
The product now costs $1.05. Therefore, the producer must either take a loss of 5 cents per product, which means it would be out of business quite quickly, or it would have to pass this cost onto the consumer, which means would shift the demand downwards. The producer now, still makes a profit but on a smaller margin as fewer consumers can afford to buy Product X. Overall, both the producer and consumer are worse off.
This example demonstrates a very basic understanding of the effects of taxation but the overall point should be clear: taxes, or any duties levied by the government such as quotas or tariffs, disrupt market efficiencies. In addition, the government body also compounds the problem in that its allocation of funds inadequately strives to perceive the needs of a community.
Overall, in an age in which politicians opt for government intervention more than the laissez-faire attitude of yesteryear, government-derived market inefficiencies are bound to occur. Some of these inefficiencies are necessary and should be tolerated but, when it comes down to it, it is perhaps best to leave the market to figure itself out.
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Well then my question would be how do you construct public goods? For example, it is very costly to build highways across the country. Would you rather that we all pay tolls for each road. What about national defense? This is pretty costly to provide, with no payoff for the producers unless there is a tax. The government uses public funds for many stupid things, but they say they use them for public goods (goods shared by everyone but owned by no one, such as highways and national defense). Should we privatize everything or should we leave some things for the government to run, and if the government does run them, how do they pay for it?
Ocean | Feb 27, 2008 | Reply
Don’t get me wrong - As I stated, “taxes are a necessary evil” but, at this point, I am under the impression that there should be more oversight on how, where, and when the taxes are spent. It’s hard, if not impossible, to run a country where everything is built on an as-needed basis but we probably don’t need to be spending 20,000 USD on a mini-fridge or 1,000 on a hot plate either; regardless of how ‘expedited’ the service may be. If anything, perhaps there should be an incentive mechanism for people to participate in politics and government oversight wherein they would have something to gain by providing feedback - say a 38% cut in their income taxes?
Jason | Feb 27, 2008 | Reply
Well those were Pentagon expenditures. If you’re in a submarine for any extended period of time you need to eat, so you need plates, but if you get attacked the last thing you need is shards of plates and glass crashing into your eyes. Everything for most of these military vehicles has to be custom made. I’m not saying they’re not a waste, but I don’t think you or I know enough to judge what is. So who should decide? Experts? But that is what the government does already.
Maybe voters should decide, but they already do. People do have an incentive mechanism to participate in politics, and they do gain something by feedback. It’s called elections.
Ocean | Feb 28, 2008 | Reply
… too bad that these expenditures had nothing to do with items being custom made. Instead, the problem was (still is?) with the Dept. of Defense’s “Prime Vendor Program” wherein, the DOD promoted to their agencies to make their purchases from a select handful of firms which, in turn, allowed the firms to charge the exorbitant prices do in part by the lack of competition. In addition, the DOD claimed that their new system actually allowed for timeliness and cost savings since the new just-in-time delivery system removed costly warehousing expenses. Unfortunately, the last claim proved to be false. Here’s a more in-depth look to the whole conundrum from the Seattle Times: http://seattletimes.nwsource.com/html/nationworld/2002578085_pentagon23.html.
Jason | Feb 28, 2008 | Reply
Just read this headline on CNN.com and I thought I’d bring it to light: “IRS spending $42 million on rebate reminders”. That’s right, the govt is spending $42 million just to remind Americans about their tax rebates as part of their ‘economic stimulus’ plan. My thoughts: ^#@#$!%, seriously? :)
Here’s the link to article on CNN: http://www.cnn.com/2008/US/03/08/tax.letter.ap/index.html?iref=24hours
Jason | Mar 9, 2008 | Reply