Letter To The China Post On Taxation

Sirs,

I am responding to an editorial of yours published yesterday (May 10th) entitled "Paying taxes is one's duty, not a form of 'charity'...". I agree that Finance Minister Chang Sheng-ford's (張盛和) comment equating taxation to charity was indeed bizarre, however the argument as to why taxation is a "duty" rests on a questionable assumption...

"A business like the TSMC needs stable power and water supplies, a healthy and well-educated work force and a good infrastructure, among other things, to function properly. All of these can only be provided by the state."

Whilst it is of course true that electricity, water, healthcare, education and infrastructure are all necessary things for a large business like TSMC to function properly, it does not follow from the mere fact of their necessity that they can only be provided by the State. Let us go through these in the order that they were mentioned.

Electricity. Putting aside for the moment off-grid forms of electricity generation (e.g. photovoltaic cells and diesel generators) it is obvious that a national electricity grid to transmit large voltages of alternating current is what economists would call a "natural monopoly". The vast costs of constructing and maintaining several such competing grids would far offset any gains from competition. Yet there are two questions to be asked here. First, why is it necessary that the national grid operator be state owned and administered? In other countries such as the UK, the national grid operator is a private company floating on the stock exchange. Second, how does the generation of electricity at the power stations that supply the national grid also qualify as a "natural monopoly"? Why cannot these be privatized to allow competition between different forms of power generation?

Water. Unlike electricity, water distribution depends to a very large extent on gravity. So for obvious engineering reasons a water distribution network cannot reach across an entire nation and is thus quite different from the "natural monopoly" situation of a national electricity grid. Instead, water distribution networks are regional and local; they begin at regional reservoirs and generally carry water downhill either for regional irrigation networks (e.g. the Chianan irrigation system) or for local industrial and residential use. Although Taiwan's water conservation and distribution infrastructure is still under State administered national monopoly, this is again not the case in other countries: to take the UK again, regional water conservation and distribution infrastructure is run by private companies floating on the stock exchange.

Healthcare. As in other countries such as the UK, the provision of health insurance in Taiwan is an "artificial monopoly", rather than a "natural monopoly" i.e. it is one that has been put in place by political force, in order to - ostensibly at least - secure equitable access to an extensive list of medical products and services. In historical terms, State sponsored systems of universal healthcare are a relatively recent development of 20th century politics, and in some countries such as the UK and the US, these were preceded by voluntary mutualist societies and other forms of cooperative insurance.

Education. As with healthcare, education in Taiwan is also an "artificial monopoly" rather than a "natural monopoly". The necessity of state involvement in education can be questioned by reference to historical facts, including E.G. West's seminal documentation that by 1840 the literacy rate in the northern United States was as high as 97% of the population - a full twelve years before Massachusetts became the first U.S. State to introduce compulsory schooling. The fact that State education has continued to this day may be taken as evidence of its "necessity", or it may be taken as evidence of rent-seeking and the incentives for political indoctrination. The voluntary nature and continued expansion of free access online educational resources further underlines the question mark that must be placed beside the "necessity" of compulsory State education.

Infrastructure. Certainly most modern trunk roads, freeways and highways and certainly the railways are a development of compulsory purchase - known in Taiwan under the Land Expropriation Act. The attempt to buy up land to construct a freeway can be stymied by any number of intractable property-owners refusing to sell out, or holding out for unaffordable prices. Whilst land expropriation obviously "solves" that problem, it is not necessarily the only means of doing so. Options and contingent contracts are two of several ways in which the incentives behind the classic "hold-out" problem can be altered to encourage property owners to sell out without applying State coercion. Moreover, whilst land expropriation is only the most obvious way of solving the "hold-out" problem, it only "solves" it at terrible cost. First there are the costs borne by those who have their property taken away from them; second there is the standing threat this power, when coupled with the inevitable rent-seeking behaviour, poses to the integrity of a system of private property rights; and third, there are the unseen costs borne by the rest of society through the fact that the advantage of compulsory purchase wipes out the incentives for market experimentation with alternative forms of transport and related infrastructure.

Sirs, in conclusion, I do not think the claim that paying taxes is a "duty" can be substantiated by the claim that "only" the State can provide electricity, water, healthcare, education and infrastructure. As I hope to have indicated, there are ample economic, technological and historical reasons for regarding this argument as suspect at best.

Yours freely,
Michael Fagan.
Tainan.