# Why doesn't government work more like a company when it comes to taxes?

In government, the revenue is fixed (most of the time); you don't have to anything extra to get money from your "investors", i.e citizens. Similarly, from a citizens' perspective, whether the government reduces the cost of doing business will not have a direct effect on the taxes they will be paying (more of less). Plus, they probably wouldn't even know how cost-effective the government is and wouldn't change who they vote for.

So, overall, the government doesn't have any real incentive to operate in a cost-effective manner.

But, let's consider this. The government & parliment (as usual) outline what they what they will fund in the next year, and outlines the overall cost. Then, the percentage of taxes (income, wealth, capital gain) are determined [with a fixed proportion; cost = (%a of income tax) + (%b of wealth tax) + ..., where a,b,.. are fixed] according to that cost.

This way, for a citizen, how cost-effective the government would have a direct consequence on their own personal economy, so they would vote for government who could/do work cost-effectively. They would vote for representatives who pushes for cost-effective reforms.

Question:

Have there been such governments in the history? What would be the downsides of such a scheme?

• I've upvoted for an interesting question, but I'm not sure the premise of the question is sound. Governments do not have any incentive to reduce money costs, and they rarely have any incentive to make outright attacks on the workforce, but they do have an political incentive to increase productivity, because they can either deliver more of an existing service or reappropriate a fixed labour capacity to deliver new kinds of services, and those will be rewarded both in terms of political allegiance and the pride/vanity of public administrators who usually do have regard for the public interest. – Steve Jul 4 at 16:59
• Bear in mind, systems of public administration do not normally promote self-serving sharks, or tolerate a culture of conspiring against the public interest, in ways that are quite typical of private enterprise, so the absence of the apparent incentives or mechanisms which drive or control private enterprise are not especially relevant. – Steve Jul 4 at 17:02
• I am not the down-voter but I am voting to close down because it needs focus and I am not surprised someone gave you downvote (although it’s bad etiquette not to also provide you with reasons for that). There are several reasons why I am voting to close down. 1. first half of your post is not necessary for the question itself at the end. Moreover many claims there are unfounded. For example, can you even provide evidence for the claim that for government tax revenue is fixed? Also I don’t know of any company that would manage to grow exponentially or even theory that would say they can. Yet – 1muflon1 Jul 4 at 17:48
• @onurcanbektas with all due respect to you how is making unfounded and empirically invalid statements providing perspective? That does exactly the opposite - no wonder that the answer you got actually has nothing to do with your actual question – 1muflon1 Jul 4 at 18:02
• @user253751, I'm not sure that incentive is naturally present, without strong media manipulation of the populace. Most taxation systems are somewhat redistributive, and most services are somewhat established and refined and broadly accepted as useful, so the majority of the populace rarely has any interest in "saving" the money administered by a government. If a government can manage to find a politically salient sum of spare money without attacking existing services, then in general it has the incentive to either deliver something new or to take over a private service. – Steve Jul 6 at 12:36

Getting the facts straight

First before addressing the question, lets get the facts straight as arguing based on incorrect premises is not good and in this case this is also relevant to the answer.

In government, the revenue is fixed (most of the time)

This is completely incorrect. In fact government revenue varies quite significantly most of the time.

According to OECD data on government revenue the tax revenue varies a lot as you can see in the graph I made in R below. Even the countries for whom the lines look flat they look that only because of the scale but if you would 'zoom'in you would see quite a large variation in government revenue.

Second, it is also not true that government has no incentive to operate efficiently. There is already an incentive for government to be cost-efficient as in the long run government must balance its budget. That is in the long-run all taxes $$T$$ must be equal to all government expenditure $$G$$.

A less cost effective government will have to ultimately impose higher taxes than more efficient government. Since people dislike paying taxes government officials already have some incentive to be cost effective. Arguably this incentive is not strong due to all political and public choice considerations. See for example Public Choice III by Dennis Mueller which provides wide overview of literature on public choice which also discusses why inefficiencies arise in government provision of public goods and redistribution.

There would be several downsides to such a proposal. You state that:

The government & parliment (as usual) outline what they what they will fund in the next year, and outlines the overall cost. Then, the percentage of taxes (income, wealth, capital gain) are determined ... according to that cost.

This is terrible idea as it does not allow government government to have counter-cyclical tax policy which is undesirable and destabilizing for economy.

The standard textbook policy advice (see for example Blanchard et al. Macroeconomics: an European Perspective) for a government when it comes to spending ($$G$$) and taxes ($$T$$), over business cycle is that government should run deficits during recessions $$G>T$$ and surpluses during expansions $$G in order to help smooth the business cycle. Yet at a core of your proposal is that in short run $$G=T$$ which would prevent government to fiscally respond to recession. Now, as discussed before in long-run $$G=T$$ as government has to ultimately respect its intertemporal budget constraint, but this should be done by balancing deficits and surpluses over business cycles not every year.

Moreover, you make your tax proposal too vague to make any historical comparisons. On the balanced budget part there were historically countries that run or tried to run balanced budget. A recent example would be Germany, but such proposals are usually always abandoned during the recessions for the aforementioned reasons.

• Could the counter-cyclical policy be up to the central bank instead of the government? – user253751 Jul 6 at 12:54
• @user253751 unfortunately at zero lower bound monetary policy gets impotent so that cannot be done always. Furthermore, this kind of intertemporal constant change in taxes around business cycle would change people’s expectations. If people expect heavy taxes during recession where gov. rev. drops due to drop of output then people would get an extra incentive to substitute consumption (C) in crisis period for C in boom period literarily actively making boom-bust cycles worse. From, macroeconomic perspective such proposal is no-go as it contradicts even the most basic 101 macro principles – 1muflon1 Jul 6 at 13:13
• then could the central bank alternately loan and take money from the government to counteract cycles? – user253751 Jul 6 at 13:44
• @user253751 1. Monetary policy is already done among other things by borrowing - to be mroe specific by CB lending money to the government through buying up the bonds. 2. The only distinguishing and non vague feature of your tax scheme is that taxes should be always equal to what government needs to cover all its cost. If you abandoned that then you are also abandoning your tax scheme. – 1muflon1 Jul 6 at 16:15

Somewhat straying from the historical question, but I think it's important to discuss the premise of the question:

So, overall, the government doesn't have any real incentive to operate in a cost-effective manner.

I don't think this is a fair characterization of government - this certainly could describe officials in power, but many street-level bureaucrats / managers within agencies have strong motivations of altruism. Many people in the public sector take the pay cut because they want to serve - so, there are implicit motivations to make more impact with existing funds, thereby making the system more efficient.

Additionally, the style of democracy you outline requires a perfectly logical and pragmatic electorate - something that we definitely do not have! There is research into the determinants of voting behavior, but essentially there are other factors beyond fiscal policy that affect voter choice.

I find the question as written to be confusing. I am going to respond to some fundamental issues that I see, based on my interpretation of the question.

One premise of this question is that revenues = taxes, i.e., the budget is balanced. The probability of this happening in practice is nearly zero, as the amount of income and sales taxes are based on nominal incomes, which are uncertain, as they depend upon economic growth. The only way one might enforce equality is to impose a head tax (fixed tax per person), but such taxes are extremely unpopular (and still face the reality that some people cannot pay).

In practice, tax rates are set upon what rates are seen as politically attractive. Meanwhile, governments typically run deficits, as this allows government debt levels to grow in line with GDP.

On the policymaking side, representative governments feature elected officials who set a budget, and the civil service implements policy within that budget framework. The civil service attempts to “get the best value for money,” within the budget framework. Incidentally, large private corporations generally behave in exactly the same fashion - mid-level managers implement strategies set at higher levels.

Finally, it is extremely rare that political parties are divided on the question as to the most cost-effective implementation of a policy, rather they disagree what policy to implement in the first place. For example, what medical services should be provided or paid for by the government?