Here is an example of unintended (and very sad) consequences of tax policy. While visiting the DeGrazia Gallery in the Sun art gallery in Tucson, Arizona, I copied down this quote from a book by the artist DeGrazia. It refers to the effects of an inefficient tax policy that interfered with the decision-making and behavior of producers, in this case, an artist.
“On May 12, 1976, in the Superstition Mountains, east of Phoenix, I burned over one-hundred paintings at a place called Angel Springs in the heart of the mountains. It was a five-hour ride on horseback. There it was – a quiet place – very spiritual and peaceful with clear running water. By now, I had been painting for over fifty years…. My burning of the paintings was a protest against the inheritance tax. You see, all of the arts, be it painting, music, sculpture or literature, the law says that only the cost of the materials may be deducted for taxation. When a piece of art is donated to a non-profit organization or a museum, I may deduct for taxation only the cost of the material used to produce the art work. But on the other hand, upon my death, the people from Washington, D.C., the Revenuers, want 50% of the value of the paintings. With this kind of law, the only thing I could do was to stop painting. For a while, I did a lot of nothing.” (Quoted from DeGrazia in Graphics: 1949-1979 30 Years, (1980). DeGrazia Gallery in the Sun: Tucson, AZ., p. 30.)
The DeGrazia paintings destroyed by the artist’s own hand somewhere in the mountains of Arizona are part of the deadweight loss result of inefficient taxation as well as a reduction of artistic beauty available to the rest of us. Deadweight loss analysis already accounts for the benefits of the revenues collected. We’ll look more closely at the concept of deadweight loss below.
What is a principle from Catholic social doctrine that helps us understand tax policy? The Church’s doctrine generally asserts that social institutions including the state exist to serve human needs. It sees an important function of government to be the maintenance of institutional, legal, and political framework within which individual freedom and private property rights are protected. “The fundamental task of the State in economic matters is that of determining an appropriate juridical framework for regulating economic affairs, in order to safeguard the prerequisites of a free economy, which presumes a certain equality between the parties…” (352)
“Tax revenues and public spending take on crucial economic importance for every civil and political community. The goal to be sought is public financing that is itself capable of becoming an instrument of development and solidarity.” (355)
St. Paul reminds us to pay taxes “to whom taxes are due.” (Rom 13:7).
Church doctrine acknowledges that positive effects can come about through “just” and “efficient” public financing, as this may encourage employment growth and support both business and non-profit activities. (355)
However, Church doctrine also cautions against government “that goes beyond the limits willed by God” and seeks to concentrate political control over all aspects of life. (382) Perhaps the United States government has not exceeded such limits. Perhaps in some areas it has. Whatever the case may be it is important to bear in mind the cautionary wisdom of the principle of a “limited role for government” in this context. There’s room for disagreement over the precise nature and exact extent of the role of government. But it seems clear especially after the twin totalitarian evils and government excess that characterized both Nazism and Communism that the Church perceives limits to government power.
What analytic tool from economics can be applied to help us understand tax policy? One of the most basic is that of deadweight loss analysis which looks at the costs of given taxes. Imagine a head tax, or equal per capita tax on each individual in an economy. The excess burden to taxpayers is zero because the costs of paying the tax is equal to the amount collected in government revenue. (Thanks to the Becker-Posner Blog for this example.)
But taxes on income or on capital wealth do carry an excess burden because their costs exceed the amount of revenue collected. This excess burden can distort economic activity. Consider that taxation usually discourages the underlying activity upon which the tax is levied. Consequently, taxing income beyond some point discourages work effort from which income is derived and thereby reduces potential output when compared to the non-taxed output case.
A way to visualize what’s going is to look at what are called Harberger, or deadweight loss triangles.
Conceptually, we imagine a simple supply and demand diagram in which the intersection determines the untaxed market price and market quantities of a given good both supplied and demanded. The imposition of a tax positions a new supply curve higher and to the left of the original supply curve by the amount of the tax. The excess burden is the amount of consumers’ and producers’ surpluses which are reduced by an amount greater than the tax revenue generated. This is called deadweight loss. The area of deadweight loss may be seen here if you scroll down a bit. The larger the deadweight loss, the more inefficient and costly is the tax.
The burden of the deadweight loss of well intentioned but misguided tax policy weighed especially heavily on the artist DeGrazia on the night of May 12, 1976.
