Although they are necessary, I have yet to find anyone who likes paying taxes. However, there is no shortage of people who like it when others meet their tax bill for them, which is why I love the lottery. Consider the 1990 imposition of luxury taxes on expensive cars, jewelry, furs, private airplanes, and yachts. What is there not to like? As I consume none of these goods, then those who do presumably reduce my tax bill (or lessen the amount of government borrowing that I will have to pay for later).
Unfortunately, these very popular luxury taxes did not quite work according to plan. The $31 million in revenues the taxes were supposed to have raised ended up being only $16.6 million; as those who would have paid the luxury tax just bought their yachts and jewelry in other countries or switched their consumption to other goods they valued not covered by the tax.
At the same time, the drop in demand for luxury goods led to the elimination of an estimated 330 jobs in jewelry making, 1,470 in aircraft manufacture, and 7,600 in the boating industry. These job losses ended up costing the government $24.2 million in lost income tax revenue and unemployment benefits. So the tax on "them" actually produced a $7.6 million hole in the government fisk that had to be made up somehow—presumably by taxing you and me or cutting the government services we receive.
The surprising news is that the government always seems to learn its luxury tax lesson very quickly. Congress repealed most of the 1990 luxury taxes in 1993, and had apparently done the same in 1965 after similar shenanigans.
However, we sometimes observe a very similar (and equally destructive) "let them pay" attitude in large companies. Often large, multi-divisional companies will contain certain services that are available to all groups and businesses within the company. Information technology or facilities management are good examples. One of the most popular ways to pay for these services is for the company to add up all of the expenses and assess them across the different business groups in the form of a tax. Unfortunately, as everyone pays into a common pool and receives communal services, the incentive is for the different businesses to make excessive demands.
For example, a business may demand complicated and costly additional services from IT that may only yield marginal value. The same business may also make excessive use of facilities management—ordering the whimsical movement of walls, painting and repainting, frequent office swapping, and expensive furniture and fixtures. The business groups assume that while they pay for some of the services they receive via the assessment, any expenditure in excess of the tab will be picked up by the contributions of other businesses. This "let them pay" attitude is very quickly adopted by the other businesses, which are quick to drive up their own expenses. As a result, the "tax" needed to cover the communal services has to be raised every year. Expenses quickly spiral out of control and lead to conflict between the businesses, who complain that the support services cost to much, and the support services, who complain that the businesses ask too much of them.
The solution to this all too common problem is the internal market. If business groups pay directly for the support services they receive, then they will tend to consume only those services that produce the most value for the business. Although not unique to MBM, internal markets are very much a part of it. Because, to paraphrase Milton Friedman, when you spend someone else's money on yourself, then you are really going to have a good lunch!
Comments