GLEN TENNEY At the Margin Advertisement

The biennual Nevada legislative session has begun, and the state is faced with a rather substantial projected budget deficit for the coming biennium. So the question of whether or not to raise taxes in order to fund this deficit will undoubtedly be a major focus this year. As we consider this question, it is important we approach it using reasoned logic rather than mere opinion.

In general terms, logic suggests our concerns in this area should focus on the question of whether or not any additional tax dollars will be better spent by those in charge of state government than they would be spent by the individuals from whom the taxes are obtained. This is indeed the key question that deserves our attention.

There are two approaches to thinking about this all-important question -- the economic approach and the non-economic, or political, approach. According to the ever-popular political approach, the perceived benefits of extra tax funding are "weighed" against the perceived costs of extracting more from taxpayers, and changes in tax laws are the result of this "weighing" process. Or, saying the same thing in a more negative way, the political approach suggests the costs associated with cuts in state spending are weighed against the benefits of continuing to fund existing programs, and changes in tax law are the result.

The insurmountable problem with the above approach to taxation is that even though such a process is couched in economic-sounding terms (such as costs and benefits), it is really not an economic approach at all. Such a process is, in fact, in distinct violation of a very important economic principle. Economic reasoning holds that costs and benefits are subjective, personal, and individual by nature, and that any process of weighing costs against benefits is meaningful only when the same person bearing the costs is also reaping the benefits.

One person weighing the costs and benefits for another person is a dangerous and unscientific exercise. This kind of talk commits a basic elementary error economists have a special name for -- an "interpersonal utility comparison." In economic reasoning, the interpersonal utility comparison is considered a logical fallacy because it does not respect the subjective and personal nature of both costs and benefits. It erroneously assumes that costs and benefits are the same for everyone, while actual mutually-beneficial exchanges in the marketplace continuously suggest otherwise.

The economic approach, on the other hand, is far superior to the political approach because it employs reasoned analysis of logical principles to assess the prospect of increased taxation. In this regard, Hans-Hermann Hoppe, a world-famous economist just recently retired from teaching at UNLV, has provided perhaps the best analysis. In an article entitled "The Economics of Taxation" Hoppe explains the effects of taxation on the economy using sound economic principles rather than the "utilitarian" society-wide cost/benefit approach that is so popularly used by political operatives.

Hoppe's economic approach successfully avoids the use of invalid interpersonal utility comparisons by focusing carefully on the very meaning of taxation itself. Taxation is, in the words of Hoppe, "a coercive, non-contractual transfer of definite physical assets from a person or group of persons who first held these assets and who could have derived an income from further holding them, to another, who now possesses them and now derives an income from so doing."

The essential aspect of taxation -- the distinguishing feature of taxation that makes it so very different from ordinary transactions in the market -- is that it is coercive. It is this involuntary nature of taxation that allows us to say with confidence that taxation itself necessarily destroys real wealth in society. We can say this with confidence, but not because we can compare the losses in utility to the taxpayers with the increases in utility provided to those who are expected to benefit from the spending of the tax dollars. After all, there is no scientific way to make such a comparison. Instead, we can feel confident taxation destroys real wealth in society because we know -- by definition -- the very act of taxation transfers wealth from producers to non-producers.

With this transfer, the marginal utility of producing is decreased, the marginal utility of consumption and leisure increases, and there will be a shift from productive activities to non-productive ones as a result. This feature of taxation -- while rarely mentioned in popular discussions -- is very telling. Taxation changes people's behavior at the margin because of its coercive nature. This is the heart of the economic case against taxation, and it is important to note its truth does not depend on one's subjective opinions about specific utility functions of thousands of individuals.

While the economic case against taxation is clear, it is interesting that the moral analysis of taxation also starts from an understanding of the coercive nature of taxation, and the moral argument is equally compelling. Taxation constitutes perhaps the most blatant and regularized violation of property rights exists in our society today. It is, in fact, so regularized some people almost begin to view it as morally legitimate. This is highly unfortunate.

Taxation is so devastating economically because it is so pervasive in our society, and it is so pervasive in our society because people generally fail to recognize it as coercive. But regardless of erroneous popular opinion, it is nice to know the idea of higher taxes in Nevada is rejected soundly by both economic reasoning as well as an ordinary sense of morality. Higher taxes are both economically devastating and morally objectionable.

(Glen Tenney teaches economics and finance at Great Basin College in Pahrump. He can be reached at glent@gwmail.gbcnv.edu.