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Choice in Taxes

Let government determine the amount to be spent, and let the individual determine how that amount is spent.

Written by johnleemk on 1:01:17 pm Jun 27, 2007.

The very concept of a tax is grounded in not giving the individual a choice. That is the purpose of a tax; choice in paying a tax defeats its purpose.

However, that does not mean the individual should not have a choice in controlling how her taxes are spent. That is the reason democracy exists; to give the people control over how their government governs.

But there might also be ways to involve the market in the tax system. The policy is basically this: let the government set the amount to be spent, and let the taxpayer decide which specific item to allocate this set amount to.

An example might illustrate the point better. Let us say the government decides to allocate 10% of its tax revenue to healthcare. In other words, ten cents of every dollar paid by the taxpayer goes to healthcare.

However, why not give the taxpayer a choice in which organisation to give this money to? The taxpayer could have a choice between a government-controlled health agency, a private hospital chain, or a foundation devoted to curing cancer.

(There are of course practical kinks to be ironed out, such as the problem of deciding what options the taxpayer should have available, to check abuse. Perhaps any registered non-profit could be eligible for taxpayer funding.)

Of course, not every taxpayer cares about where their ten healthcare cents will go. Maybe one might care more about funding education, the army, or the environment.

In such a case, the apathetic individual can defer the choice to their government — basically allow the government to decide how to spend that money. So, I could say, "Well, I don't care about the military so the government's free to spend the 20% of my tax money on the military as it wishes, but I want to support scholarships for the disabled, so all of my 10% allocated to education should go to the XYZ Foundation."

What is the point of doing all this? To address the problem so succintly pointed out by Nobel Prize-winning economist Milton Friedman:

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what youíre doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then Iím not so careful about the content of the present, but Iím very careful about the cost. Then, I can spend somebody elseís money on myself. And if I spend somebody elseís money on myself, then Iím sure going to have a good lunch! Finally, I can spend somebody elseís money on somebody else. And if I spend somebody elseís money on somebody else, Iím not concerned about how much it is, and Iím not concerned about what I get. And thatís government.
This proposal addresses the problem of government spending somebody else's money on somebody else by making the individual spend their money on somebody else.

Of course, as Friedman points out, this would normally make the individual care about the cost. But the government has already decided what the cost is, so the individual's only decision is about quality, and hey, we all want the best bang for our buck, right?

The result is that we will move towards a more effective equilibrium, with a better allocation of our funding. The division of labour between individual and government ensures that society will not go wanting for funds, but these funds will be spent efficiently.