What if the government paid everyone?

Sometimes a little thought experiment is needed to understand simple issues.

At issue today is the size of the U.S. government. On one side of the issue are people who see no problem with the increasing footprint of government. On the other side are those of us who are alarmed by the implications of a bigger government.

Proponents of bigger government like to purport that every dollar collected by the government is a benefit and every dollar not collected by the government is a cost. They claim that maintaining the current tax rates instead of increasing them represents a cost to the economy.

So, let's imagine a world where everyone's entire income was determine and allocated by the government.

So, the government would take the entire pie and give everyone their "right" slices.

Let's leave aside, for a moment, the incentive effects of such an arrangement.

How would the government accomplish this?

Value in an economy is created by people expending time and effort to produce things and sell them at prices others are willing to pay. When I choose to pay a $1.50 for a cup of coffee, you know that I valued that cup of coffee at least as much as I paid for. You also know that the cost of producing that cup of coffee was less than $1.50. We are both better off. Value is created.

Now, if the government is going to determine the entire income of everyone, it must tax away that entire value. Then, it must determine the "right" amount of income for everyone and pay them.

Of course, this cannot happen magically: Some people must be employed by the government for the sole purpose of making sure every last cent of value is extracted from private citizens, and then distributed according to some rule that determines the "right" amount of income for everyone.

The government employees would also have to be paid.

But, they do not produce anything.

All they do is to take from some and give it to others, while keeping a portion for themselves.

So, the total amount taken from private citizens will be less than the total amount distributed back to them.

See, if I want to give Bob $100, I would just give Bob $100. I would have $100 less and Bob would have $100 more. I would be happier because, presumably, I gave Bob $100 because the happiness he derived from having an extra $100 was more valuable to me than the happiness I would have derived from doing other things with the $100. Bob, of course, is also better off because he has more money with which he can buy things he wants.

Now, if the government takes a $100 from me ... Well, they have to pay someone to do it. So, now, they have, say $75 dollars, which they give to Bob.

Notice that I am still $100 short. But, I am less happy than before.

Why? Simple: If I had wanted to give $25 to the government bureaucrat and $75 to Bob, I could have easily done so. However, in the absence of a law saying the government bureaucrat can take my money, I did not choose to do so. That means having to give the bureaucrat $25 and Bob $75 is worse from my perspective than just giving Bob $100.

Clearly, I do not derive any benefit from the $25 that went to the bureaucrat. I know this not because he is a bureaucrat, but because I had the option to give him $25 and chose not to do so.

I still derive happiness from the fact that Bob has $75 extra, but that is not as good as him having an extra $100. Bob is also less well off than if I had just been able to give him $100.

The government is a leaky bucket.

Taking from people who work and produce stuff to give to people who do not produce stuff cannot increase the total amount of resources in the economy.

Bigger government cannot make a nation wealthier.

If that were the case, we should all work for the government.

Finally, what determines the "right" amount everyone should have to live on?

Most proponents of redistribution have in mind some version of from each according to ability, to each according to need.

Such a system encourages people to overstate their needs and fall short of fully utilizing their abilities.

The evidence is before your very eyes if you choose to see it.