Tax base rotation
During a light moment in this week’s Econtalk episode, Russ Roberts and Bruce Yandle briefly joked at the analogy between farmers harvesting crop and governments harvesting tax-revenues. I have always wondered whether this analogy could be pushed a step further. Namely, the practice of crop rotation in agriculture has been a fundamental discovery for the development of our agrarian societies. Also, it is an established fact that taxation discourages economic activity and that in the long run people change their behavior to avoid paying too much in taxes. It is quite possible then that the current streams of tax-revenues are increasingly harder to maintain and become less and less productive over time. If so, the government might then adopt the following strategy:
1. announce big tax cuts, hence get a lot of positive credit from voters;
2. cut taxes in “fields” already depleted of resources by years of excessive taxation;
3. Point 1. and 2. are the visible actions. Behind the scene, find new activities to tax. Virgin green pastures that have gone untouched up to now, or activities that had been taxed in the past but were given a chance to build some strength for a while and become fertile again.
4. Wait a few years then go to point 1. and repeat.