Taxes Are Like Damage

When I was thinking of a good metaphor to explain the affect of taxes, I like to use the internet itself as an example, although the human body and immune system is also a good analogue.

The economy, businesses and individuals trading with each other, constitutes a very smoothly running system which works for all parties: when a trade takes place, all parties who are part of the trade, when there is no external force affecting the outcome of the trade, agree to a fair price which works for everyone. eBay is a perfect example of this in action.

When an external force which is not part of the deal, like the state, inserts itself in the way of taxes and regulation, then the participants in the previously smoothly working system have to expend resources in order to modify the deal in order to keep it happening and all parties in agreement. Since the state provides no value add to the deal, steps need to be taken to mitigate the “damage” done by the state to the deal. These resources are a drain on the business or individual as well.

So like the internet, when portions are damaged by disaster, the routers in the internet route traffic in a different way, but it still gets to its destination. Or like the human body, when bruised or infected, it directs its resources to work around the damage, and possibly expel it.

The state, being blissfully unaware that it has an effect, expects its actions will simply be taken by those businesses and individuals affected, which is the exact opposite of what happens. We actively monitor the damage and the “damage to come” – for example the possible upcoming ending of the Bush tax cuts (who some would call the start of the Obama tax hikes) and take steps to lessen the damage these things do.

So when the state assumes that it will get $X in revenue from a specific kind of damage that it will inflict, we change our way of working in order to lessen that damage, and then the state takes only X/2, or less. So the state basically can never take as much as it expects to.

Therefore, tax increases can never work, and the only way to balance the budget is to cut spending. QED.