By James Kwak
A couple of weeks ago, Planet Money did a podcast based on a game of Monopoly. One of the participants was Russell Roberts, who professes to hate monopoly because it teaches the wrong lessons about business and the economy. At one point, Roberts said he would prefer the game if it had a progressive income tax with transfer payments to poor players. “As a result of that, you could get kids to resent taxes at an even earlier age.”
But Daniel Hamermesh, who likes Monopoly, called him on it. Hamermesh pointed out that if you had a transparent system of taxing the rich and transferring the money to the poor, players in the aggregate would be neutral, and might even understand the whole point of taxes and government spending.
Our national hatred of taxes is based on Roberts’s opinion times 300 million. The anti-tax electorate doesn’t realize that many if not most of its members are net beneficiaries of the tax system. If you have a progressive tax system (where the rich not only pay more in taxes, but pay proportionally more), then the tax burden is falling disproportionately on a minority of the population, and hence the rest of the population should be better off. (There’s an assumption here I’ll come back to.)
But people don’t realize this because, like Roberts’s hypothetical child encountering the tax system for the first time in Monopoly, they only see the tax side of the equation. Leaving aside poverty programs (since those do only affect a minority), they forget about Medicare (“keep the government away from my Medicare”), subsidized student loans, national security, police and fire services, public schools, roads, consumer product testing, clean water, parks, unemployment insurance (the middle class lose their jobs, too), the invasion of Iraq (which was wildly popular back in the day), bailouts of the financial system, and all the other things they get from the government. (If you count tax expenditures as spending, the list gets longer, and includes the mortgage interest tax deduction, the 401(k) deduction, and the employer health insurance exclusion–all of which disproportionately favor the wealthy.)
Now, the assumption is that the government is not wasting people’s money, and the intelligent counterargument is that because of government waste (due to political meddling and the lack of the profit motive, among other things), a significant proportion of tax revenues simply go up in smoke. The counterargument is that instead of giving the money to politicians to spend, people should keep it and give it to private companies that provide goods they want. So, for example, if a road needs to be built, some company will build it, and will then charge people who want to use that road.
For some types of services, this might be more economically efficient, in the sense that less money will be wasted on roads that people don’t actually want. (For other types of services, like invading Iraq, it wouldn’t work at all.) But it also means that people will only get what they pay for; that is, the poor and middle-class majority of people will no longer be able to benefit from the taxes paid by the rich minority. So for the median taxpayer, there’s some quantifiable proportion of tax revenues the government would have to waste before taxes as a whole become a bad deal. Yet many people’s starting assumption is that taxes are bad for them.
There are many mysteries about Monopoly, and actually people have been modifying the rules for decades. The thing that I wonder about is the $200 for passing Go. Isn’t that the welfare state in its purest form–money you get just because time passes?
Update: Russ Roberts responds.