The Free-rider Problem and Progressive Taxation
An evolutionary, reasonable, proposal for re-framing tax codes and understanding why they don’t work.
First, let’s start with an assumption: humans evolved. This assumption has a lot of repercussions. One of them being that our shared evolutionary history has given us species-wide similarities. So, while from the outside out appearances might vary, anything underneath the skin is basically the same. This is evidenced by the fact that organ recipients do not need to be the same race as organ donors. The heart from a white girl beats just as well in the chest of a black man (mind blowing video with feelies below).
The evolutionary claim also has another, less discussed, assumption: that all human minds are also generally the same. This does not mean that we all think about the same things or hold the same things to be important. Rather, it means that all humans, regardless of race or ethnicity, have the same cognitive abilities to think about things.[1] So if you think of the mind as a computer, all humans have the same operating system installed. Some of us, through education, might have a software program or two that lets us process calculus or engineering or computer programming, that others don’t, but they all could have that program installed.
This simple observation has revolutionized our understanding of societies (1), religions (2), and even economics (3). Here, I’m going to go out on a limb and explain why it is that “progressive” taxation schemes are problematic from the perspective of human evolution (the use of scare quotes is explained later). (Progressives, bear with me now, I’m not saying that they never work, examples of “progressive” taxation exist, and you will come out scoring some points at the end of this). Furthermore, I’m doing to do it without the totally irrational and offensive idea that “social darwinism” is somehow the answer to our problems — an idea that is now back in vogue (4).
I argue that, by understanding the psychology underlying human culture, we can better understand the hurdles that “progressive” taxation faces.
One of the things that evolutionary psychology looks at is “coalition detection,” which is fancy jargon for knowing who is in your group, and who isn’t. It is believed that we developed this ability in order to live more efficiently in groups. By knowing who is, and who is not, in our group, we know who we can rely on and who won’t cheat us when we need to cooperate to get something done.
Experimentally, our coalition detection mechanisms appear extremely easy to trigger. Social psychologists found decades ago that just by telling a group of strangers that they are in the same group, they will behave as such; they donate more to their group, they’re more competitive with people outside the group, the generally act “groupish” (5–9).
However, one thing that this mechanism also does, as I hinted at, is it also helps us detect who is not in our group. One of the reasons is that (in principle) outgroup members are not as likely to be invested in our group, to meet our goals, to support “us” generally. So, we want to make sure that we don’t let those individuals impact our group in a negative way.
One way we do this is through “free-rider detection”. A free-rider is an individual that does not put up equally for a group and instead leaches on the support of other group members. It is a way for us to discern who isn’t “putting enough skin in the game”. Evolutionary psychologists have noted that in many small-scale societies, like those that our ancestors would have lived in, we used extremely costly rituals to ensure that someone was a committed member of a group. Basically, by making someone walk across the hot coals (sometimes literally) individuals signal that they are committed members of a group (10, 11).
While putting someone through an extreme experience or initiation might work to bind small scale societies in our evolutionary history (12) this is totally impractical in our current secular society, and empirical evidence suggests this to be the case as well (13).
Nevertheless, we need a mechanism to bind our groups together into large cooperative groups. For this, we’ve created large bureaucracies that utilize money taken from workers in a population to pay for things that (in principle) benefit the group. For example, in the US, there is no initiation for natural born citizens. They are born, live, and pay their taxes until they die. In a way, we can frame the paying of taxes as the sort of group buy-in that signals that they are interested in being part of the group and helping the group to attain its goals.
Here, we can reframe taxation as an element of our society that would activate our evolutionary psychology in a fairly predictable way. By understanding the way that money is redistributed into a society we can better understand how it is that taxation implicates our psychology.
Let’s take the United States as an example. The US very much views taxation like a cost of being in the group. Many are unaware that Americans are one of the only nations on earth that tax their citizens just for being citizens, regardless of where they live and work (even the monarchies of Europe have abandoned this practice).
In the US, they have a “progressive” taxation scheme whereby the lowest income brackets do not pay anything, this is because through the standard deduction ($6,350) and personal exemption ($4,050), any income below $10,400 is readjusted in the US tax code to 0. Above this, there are then 7 tax brackets that individuals pay into.
The increasing rates with increasing incomes is what people have started to call a “progressive” tax code. We’ll set aside the fact that the US tax code is totally confusing in its thousands of pages of exemptions and loopholes put in by lobbyists who are aiming to use the taxation system to argue that they’re products and services give the US an advantage, and thus should be preferentially treated in the tax code; that’s a debate for another time.
Put in evolutionary terms, you have those individuals who are the most successful at gaining resources for the group (as measured by their income) paying more of their income to help the group. “Progressives” generally think that this is the way it should be. However, the unequal tax brackets result in a system whereby individuals automatically believe that they are not just putting in more money in terms of raw dollars, they are putting in more in proportion as well. These assumptions are a mathematical fact.
This, I argue, is problematic because it results in individuals believing that there are free-riders in their group. The issue is deeper than this though. In fact, “progressive” taxation legally enshrines free-rider behaviour. It is the legal and financial equivalent of waiting by the warm fire while the rest of the men go hunting in the winter for fresh meat, and then enjoying your “fair share” when they bring it back to camp.
As an example, we can take three citizens, one makes 1,000,000 a year, one makes 100,000 a year and one makes 10,000 a year. After taking the standard deductions we see that the richest of our three citizens paid $366,152 in taxes, our middle-class person paid $21,504, and our lowest income earner paid nothing. Together, they all paid $387,656, with the highest income earner paying the vast majority of all taxes collected.
From a purely evolutionary perspective, the individual who paid nothing is at risk of being viewed as a free-rider by those who did pay (progressives, hang in there, you’ve made it this far, it does get better I assure you). This assumes that the individual used services and goods that were created, sustained, or offered, through the tax donations of the other individuals in the society. In the US example, we can see that this is indeed the case. The low-income person would be using roads for example and equally reliant on those roads for transportation as any other citizen. There are no “rich folk” roads that are only available to those of a certain class. When the US government builds roads and bridges, everyone is equally able to access them.
Nevertheless, even in todays actual taxation scheme, like our fictive one above, the most wealthy in the US have paid the bulk of taxes in the US budget.
This extends even further, however, the individual in the middle class is also not putting up as much, either in raw dollars or percentages as the richest individual. So they too are at risk of being viewed as a free-rider in relative terms.
We know from behavioural economics, which is a branch of psychology that uses different experiments (usually based on games) to study how we behave in different situations, that when an individual consistently fails to donate as much as others in a group, the group starts to break down and individuals begin to punish the “free-rider(s)” for not putting enough skin in the game.
However, there is a way to allow for individuals to pay “equally” into a society, while still allowing for the lower classes to pay relatively nothing in the grand scheme of things. In this way, they are putting “skin in the game” in such a way that it might manipulate the evolved psychology of individuals in all classes of society to signal that they are putting into their group. Take a look at the table below:
In this system, all individuals pay something, and lower income people pay relatively nothing. However, everyone has signalled that they’re part of the group and committed to its success. How? Well, you may have noticed that the Tax Rate column is blank. In this system, everyone pays 10% of their income. It is called a “flat tax”. It is called that because no matter how much you make, everyone pays the same percentage.
There are serious benefits to this system. 1: the tax brackets are done for. If you make $50,001 in a year, $500,001 in a year, or you make $5 billion, you pay a certain percentage. In this, all individuals are required to pay. So, while in our society of 3 it raises less money (you’d have to have a tax bracket of just of 34.24% to break even in our society of 3), in a society of 300 million, it widens the tax base in such a way that it more than makes up for it, thus allowing the lower and middle classes to keep more of their money and stop unnecessarily paying into a complicated and broken system.
Now, it is largely heralded by “progressives” that in the US our income follows a power-law distribution in the US. This is the case everywhere (even in “egalitarian” countries like Norway). So what we can expect is that by widening this base out, we begin to collect less money from far more individuals. In recent years, almost 50% of the US got away with paying $0 in taxes. This has been documented multiple times.
No that isn’t a typo, they paid zero dollars in federal tax.
The fact is, while we blamed the recession on the 1%, they were the ones that bailed the US out. Now, I’m not saying we owe them anything for what happened, or that the 99% is owed anything. The fact is that, if we are a group, that is, if the United States is to be a nation of individuals that wants to succeed, we have to acknowledge that when times get tough, we all need to pay our fair share.
The issue with the current “progressive” taxation system that is currently implemented, and that the left wants to push further, is that it isn’t “progressive” at all! It is detrimental and is effectively creating free-riders within the US system. While progressives decry that they want the 1% to pay their fair share, the fact is that they’ve paid more than their fare share. Mathematically, everyone above the lowest tax bracket has paid more than their fair share because the taxation system has decided that the fair share is 10% of their income. Yet, the top tax bracket pays that fair share almost 4 times over.
The graph to the left is a simple demonstration of how this is currently working. Basically there are tons of people in the lower income brackets, and very few individuals who make absurd amounts of money (for qualitative demonstration and laughs, I’ve just labelled them after Amazon.com’s CEO who currently tops the Forbes Billionaire list. What we see is that a huge chunk of PEOPLE, despite it being a smaller amount of money per person, are falling into the “free-rider gap”. A flat tax that applies equally to everyone would move the red line (currently set at $10,400). This would result in everyone who takes from the system to put into the system, not equally by amount, but equally as a percentage of total income.
This would allow us to all put something in and take something out. Billionaires don’t take out of the system “more” than others, they don’t use more roads, they don’t use more military. When it comes to it, from a standpoint of citizenry, they are just as equal to everyone else. They don’t get their own roads or sidewalks or public schools. If they want to have their own, they have to build private schools, and those are reliant on non-governmental funds (with very few exceptions).
This free-rider issue demonstrates that, even at the purest mathematical level, progressive taxation isn’t progressive and has nothing to do with a fair share. It is mathematically unbalanced so that certain individual pay more than their fair share while other individuals free-ride on this work.
Now, I’m sure I’ve alienated many progressive readers with a mathematical argument, but the issue is that the far left contingent of the democratic party (I’m referring to Bernie Sanders and his crowd) have correctly identified a problem in the US. That is, there are people who are benefiting unjustly from this system. Namely, large corporations and the government itself. The amount of money that the US gives to the lowest class is problematic from an evolutionary perspective. However, financially, the biggest free-riders are not the lowest classes. It’s the corporations that pull-down billions of dollars in tax breaks that has resulted in some of them paying $0 in taxes (as Sanders was 100% correct to point out). These corporations are far more problematic than lower-class individuals who are currently scraping by (and indeed they reinforce the broken US welfare system). By instituting a flat tax, we do away with all the tax breaks that have caused such artificial inflation in the cost of living (particularly in cities).
The other big free-rider here are government officials themselves. People like Senators who claim that they need private jets or that they have to be paid $180,000 a year or they can’t live. This is total and utter b#!!$&!t and any working class citizen knows it. By instituting a flat tax that all Americans pay, it means that there is no reason for the IRS to exist as a government agency as it does today. Its personnel can be cut back to a fraction of its current size, as the only thing we would need at this point are a (relatively speaking) few people for auditing, a few people for keeping computers on to calculate what X percent of your income is, and a few people to deal with those individuals whose incomes are not based on direct payments (e.g. independent contractors). Otherwise, we can start to cut back the massive size of the IRS as well as other branches who have relied on the “progressive” taxation arguments to take unjustifiable amounts of money to pay off companies in a wide range of industries to keep their lobbyists happy.
So, if nothing else, for those of you who make it to the end of the article, I hope you come away with the idea that we need to incorporate cognitive psychology into the way we do policy. Psychology leverages some of the most well attested to aspects of our minds and how we act and re-act. So if we want to create policies that create a better country, we have to start with the organ that has evolved to deal with countries, actions, and reactions: our mind.
References
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11. D. Xygalatas, The Burning Saints: Cognition and Culture in the Fire-Walking Rituals of the Anastenaria (Equinox Publishing Ltd., Bristol, CT, 2012).
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[1] Naturally, this is not the case for individuals who have different cognitive deficiencies or developmental abnormalities. For example, people who have low functioning autism are unable to process certain things the way we do, while other individuals with autism (like Ken blah blah from Rain Main) are able to do some things far better than the average human and appear to have cognitive abilities that the general human does not.
