Someone finally gets this subject into the papers! Jamie Whyte:
Measuring the deadweight cost of a tax system is difficult. You cannot observe all the valuable things that are not made or done but would have been if not for taxes. But economists are clever, and estimates have been made (I will spare you the methodological details). Most put the deadweight cost of raising £1 of tax revenue at between 20 and 50 pence.
Though systematically ignored by politicians, this is a fact of the greatest importance. It means that just to break even, government spending must deliver a return of 20 per cent (or probably more).
Some of it passes this test. The most obvious examples are those where the Government provides public goods: that is, goods that people benefit from even when someone else buys them.
Rubbish collection provides a good example. If your neighbours pay to have their rubbish collected, then you need not. You can simply stuff your rubbish into their bins overnight. Since everyone can figure this out, no one will pay to have their rubbish collected, and soon we will have a public health crisis.
Without tax-funded local council spending on rubbish collection, it might not happen at all. And the return on this spending surely exceeds 20 per cent. The value people place on the aesthetic and public health effects of rubbish collection is far greater than its cost.
But most government spending is not aimed at avoiding such “free rider” problems. Most merely provides people with what they would otherwise buy for themselves, such as education, healthcare, housing, unemployment insurance and pensions. Given the enormous cost of raising funds by taxation, such government spending is ludicrous.
For example, a tax-funded school with an annual budget of £10 million costs society more than £12 million. So, to avoid imposing a net cost on society, state schools must provide education worth at least 20 per cent more than the educations provided by private schools with the same budgets. But how could they?
More than half of all government spending replaces what would otherwise be private spending. So Mr Cameron is wrong that tax is at its acceptable limit. It is at least double what it should be.
Right on Jamie!
There are of course people who have been trying to point this out with reference to the US agitation for tax funded health care, just as an example.