Saturday, September 3, 2011

Why You Won't Get Rich from Not Paying Taxes

I have a secret to share: I seriously considered becoming a Republican in the late 80's. I just figured it was time to take a fresh and critical look at the various government programs that the Democratic Party had erected since the New Deal. We had had a steady expansion of government for decades, and it was probably time to take a break from that and put some serious thought into identifying what hadn't worked and pruning it back, as well as considering how we might improve the things that had worked. From a strictly taoist perspective, after the left-wing surge of the Sixties, it seemed like we could probably benefit from pausing and having a look at things from the other perspective. But then Newt Gingrich and Movement Conservatism came along and that put an end to any thoughts of affiliating with the GOP.

But I still secretly yearn for a conservative movement that is sane, serious, and constructive. And so when I look at conservative web sites and papers, I'm not just purely looking for wing-nut lunacy I can make fun of. There's always a part of me that is hoping to encounter some real thinking that could guide serious reforms of the liberal institutions erected during the 60 years of the liberal ascendancy. But no luck.

Today's example of right-wing nonsense is a new entry: I found a flyer for this thing, and I went up to have a look at it. is a project of the Independent Institute, which I guess you could describe as a leading center of libertarian/conservative research, and the research director of the Independent Institute is Alex Tabarrok, the co-blogger with Tyler Cowen at Marginal Revolution. Tabarrok has co-authored a nice introductory textbook to economics, and many times has given signs that he is a serious economist, rather than just another hack working in the Koch Archipelago. So I entertained some hopes that might not just be another exercise in wing-nut propaganda.

Wrong. Sigh. is primarily an online calculator that will help you assess the impact of Federal spending on you personally. As we all know, the conservative movement became extremely concerned about the Federal deficit just as soon as Barack Obama became President. They are terrified that Obama will actually get rid of the deficit by raising taxes on the rich. So the conservative movement has a full court press going to try and make people angry about Federal spending and taxes. And that brings us back to

When I fed my personal stats into the calculator, it spat out three numbers which you see in the picture. The first two numbers/columns are projections of my estimated share of Federal spending, and my estimated Federal taxes, both numbers being for the rest of my estimated life. I have no idea of how accurate these estimates are, but compared to the nonsense that we're about to look at, the accuracy of these estimates really is not important, so let's just accept them on face value.

The nonsense comes with the third projection: "What Your Taxes Could Have Earned for You." It tells me what I could have earned if I had been free to invest that tax money into the free market, rather than hand it over to Uncle Sam. estimates that I will pay the Federal government $253K  over the rest of my life. If I could invest it instead, it would earn me $587K! Those rotten Washington bureaucrats are clearly just wasting my money, and if they would only let me keep it, I could do so much better on my own! Freedom!

Or is that freedumb? Never mind.
For 10 points, who can see the fundamental, economic fallacy that is committing here? You got it? Good. But for the benefit of Dr. Tabarrok, author of textbooks on economics, let me lay it out more explicitly. Hell, let me quote from his own book.

"Modern Principles: Microeonomics" by Cowen and Tabarrok, page 4: "Every choice involves something gained and something lost. ...if you don't understand the opportunities that you are losing when you make a choice, you won't recognize the real trade-offs that you face. Recognizing trade-offs is the first step to making wise choices."

That's exactly right.  When you put money into investments, you have to give up whatever you were going to buy with the money. I don't take all the money that I spend on food and put it into an investment account, because I would have to give up food. I don't take all the money that I spend on clothing and put into an investment account because I need clothing. You always give up other things when you choose to put money into investments. That's econ rule number one.

But operates on the implicit assumption that if I stop paying taxes, then all of that money will be available for me to invest. Apparently, I won't need to spend any of it in trying to replace the government services that the taxes pay for. And that's ridiculous.

This becomes easier to see if we look at a specific case. Let's take Medicare. MyGovCost estimates that I will spend $45K in Medicare taxes between here and my death. If I, instead, invest that $45K into Wall Street, projects that I will make $101K by the end of my life. But obviously, just because I'm not paying into Medicare, it doesn't mean that I'm not going to need medical care. If I'm not receiving Medicare, then that $45K is going to be spent on buying medical care from the private market. We can argue about whether free market magic would reduce my medical costs in the absence of Medicare, or whether insurance company gouging would increase my costs in the absence of Medicare, but the point is that I certainly won't have that $45K as spare cash to drop into a mutual fund generating interest for the rest of my life. 

And that makes the third estimate from, the estimate of what I'd earn if I didn't have to pay taxes, a piece of complete nonsense. You may as well tell me about all the money I'd make if I didn't have to pay for gasoline, but ignore the issue of how I would get around. You may as well tell me how rich I'll get if I stop giving money to Safeway, and ignore the fact that I'll just be giving that same money to somebody else in return for food. The third number is a pure load of right-wing, propaganda nonsense.

As much as libertarians hate to admit it, we get things from the government in return for the taxes we pay. And most of those things are extremely important to most of us. If we stop buying them through the government, we're just going to have to try and buy them somewhere else, as best we can. We won't have that money to just drop into an investment account and forget about it.

Just to make sure I was understanding correctly, I went to the "Methodology" section of and found that "The estimate of the alternative value of tax contributions considers a scenario where all the money an individual is projected to pay in future taxes is instead deposited into an account and earns a standard rate of return. The assumed real rate of return is 6.09%, the average since 1871." So, yeah, it really is just as silly a piece of propaganda as it looks.

I looked through the rest of the Methodology section and found a quick overview of the data sources and analytical methods that went into building the calculator. They have had recourse to a lot of different data sources and tools, but I have to say it seems silly to have gone to as much work as they did if they were just determined to put out propaganda in the end. Seriously, if you're going to ignore the fundamental economic fact of trade-offs, cost, and choices, then why go to all the trouble of doing research? Why not just make up the numbers? You end up with crap either way, and making up numbers is a lot faster. Trust me, the Tea Party won't notice the difference.

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