Friday, October 24, 2014
Upon Further Review: 1/4 Cent Sales Tax Increase
Within the realm of public choice theory (politics without the romance) is the proposition of: Focused benefit and diffused costs.
Focused benefit and diffused costs is an observation regarding special interests through politico enablers. The special interest, be it the education establishment or any other special interest, want to acquire a focused benefit upon themselves through a small incremental price extracted from a diffused group.
The insidious mechanics are as follows:
(1) the special interest desires additional funding for their particular constituents making up the aggregate special interest,
(2) the special interest knows that a small incremental price (tax) increase will not be rationally opposed by any one individual in a large diffused group,
(3) the special interest is highly organized and knows the unorganized/diffused group, that the price is to be extracted from, is not organized,
(4) the special interest then recruits politicos to champion the additional funding, with the implicit assumption that the constituents of the special interest will become constituents of the sponsoring politico,
(5) the politico sees an opportunity for a political constituency building exercise through other people’s money (the unorganized/diffused group),
(6) the special interest, with resources supplied by its constituents, mount a very focused campaign for the increased funding while the diffused group has zero resources and a diffused constituency that is highly unlikely to form a focused campaign against the increased funding.
The insidious stratagem of the special interest depends heavily upon: A small incremental price (tax) increase that will not be rationally opposed by any one individual in a large diffused group. An example might help. Jane Goodfellow, one of many price payers (taxpayers) is not going to expend one hundred hours of research to fully understand the issue, spend many evenings attending multiple meetings and become fully aware of the issue proposed by the special interest. Jane Goodfellow’s rational position is to forgo the research and meetings and merely pay the increased price (tax) as the increased price (tax) is a smaller price than the price of the research and meetings.
Moreover, the special interest knows the chances are remote that many Jane Goodfellow(s) will organize themselves together around a particular and small incremental price (tax) increase as the Goodfellow(s) are diffused with no organization.
Insidious to say the least.
An additional observation is the rational choice by individual constituents of the special interest. What rational choice? The individual constituent is in effect campaigning to raise his or her individual price (tax). That is, the individual constituent of the special interest faces the same price (tax) increase as the unorganized/diffused group. However, it is rational for the individual constituent of the special interest to support a price (tax) increase upon themselves if the benefits flowing to such individual constituent is greater than the price (tax) increase experienced by the individual constituent.
Therefore, in the particular case of ¼ cent sales tax increase, the aggregated ¼ cent sales tax increase, across millions of dollars of taxable purchases (conceivably billions of dollars of taxable purchases), becomes a very large number of aggregated additional tax collected. The large sum collected is then dispersed to the small focused benefit group of which the constituent is a part. As long as the benefit bestowed is perceived to be larger than the self imposed price (tax) increase experience by the individual constituent of the special interest, then it is totally rational to support a price (tax) increase upon oneself as the price (tax) is less than benefit bestowed.
The rational choice by the individual constituent of the special interest, to increase price (tax) upon themselves, explains a nagging question of why someone feverously supports a price (tax) increase that they themselves will experience. How so? In the main, the outward political position of the individual constituent of the special interest supporting a price (tax) increase, that they themselves will experience, is that such increased price (tax) will create/facilitate some altruistic endeavor. Meanwhile, the inward focused benefit being greater than the individual’s price (tax) is a motivating factor, if not an overriding factor.
Even more insidious, huh?
Welcome to public choice theory, politics without the romance.
Labels: focused benefit and diffused costs, political economy, public choice theory, special interests
BS Economics, cum laude, Private and Public Sectors, 1979, West Virginia University, Morgantown, WV. Undergraduate Minor in General Insurance. Chartered Life Underwriter (CLU), Huebner School of Economics, American College, 1992, Bryn Mawr, PA. Life Underwriter Training Fellow (LUTCF), 1986, National Association of Life Underwriters, Washington D.C.. Currently enrolled and completed one half of Chartered Property and Casualty Underwriter (CPCU) from the American College. 38 years insurance industry experience.