Just a Gwai Lo fun within prescribed limits [?]

In Chapter 6 of The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, James Surowiecki tackles the question of why people pay taxes despite knowing that many people cheat on their statements and almost despite being coerced to do it.

Getting people to pay taxes is a collective problem. We know what the goal is: everyone should pay their fair share (this says nothing, of course, about what a fair share is). The question, then, is how? The U.S. model—which is, by global standards, successful, since despite Americans' vehement anti-tax rhetoric they actually elude taxes far less than Europeans do—suggests that while law and regulation have a key role to play in encouraging taxpaying, they work only when there is an underlying willingness to contribute to the public good. Widespread taxpaying amounts to a verdict that the system, in at least a vague sense, works. That kind of verdict can only be reached over time, as people—who perhaps first started paying taxes out of fear of prosecution—recognize the mutual benefits of taxpaying and institute it as a norm.

This, as I suggested, must get libertarians in a knot. I see it argued that the threat of government coercion to induce people to pay taxes is immoral, and it's here where Surowiecki concedes the point that that may have been the original reason people paid their taxes. But over time, that becomes not so much less of a reason to pay taxes as not the only reason to pay taxes. Surowiecki later argues in the book that public choice theorists have long argued there is no public interest, and that, in a democracy, voters are concerned with their self-interest only, as they would in a market. Surowiecki says that the public choice theorists state it as a fact without offering proof of their assumption, and he (Surowiecki) argues that individuals have either more than their self-interest in mind (in both markets and democracies, but especially the latter), may not even know what their self-interest is, or both.

Zimran: “There is a very good reason to not tax savings -- it's very inefficient. Savings can run around easily to avoid tax. Companies can hide profits through depreciation schedules, debt payments, share buy-backs, and a hundred other things taught in first year business school classes. Investors can house money offshore, in various financial instruments, in nonprofit annuity schemes etc. People can simply move savings into things like houses which can be classified as consumption, come with tax breaks, but really are an asset just like anything else. The inefficiency from taxes chasing this money come from 1) the high auditing cost to try and pin this money down and 2) the dead weight loss (economic distortion) that comes from the forgone opportunities that these shenanigans preclude.”

Daniel Weintraub: “Normally, an unequal distribution of income is considered bad for society. Flattening the income distribution curve, on the other hand, is supposed to be a good thing. But California's experience since 1999 shows that what might be desirable as social policy is not so good for the state's fiscal health, at least given the current structure of the tax system.”

Weintraub is saying that if you want to tax the rich more, be prepared to argue that the rich should maintain or increase their incomes, because dependence on taxes from the rich can backfire if the incomes of the rich decline.

Victor asks the questions unasked by Weintraub: “many Democratic candidates have suggested that we move toward an income tax system heavily reliant upon the prosperity of the uber-rich. If we do this, however, just how much more income volatility will we be exposing ourselves to? Maybe this isn't so bad for the federal government that can run deficits ... but what about the states, most of whom use the federal definition of AGI to build their tax schemes? With what frequency can we expect to see this in the future?”