[jbay]

> "The only time taxes are required is when people will not freely give money for a project. That is literally the only reason taxes exist. Nothing is stopping people from donating to the government."

This really sounds true, but it disregards game theory. For concreteness, let's say the government proposes to upgrade a waste processing plant for $500 million, and you think it's a pretty good idea. There are varying levels of being willing to "freely give money":

1. You are willing to personally pay for the waste processing plant out of your own pocket. You happen to have $500 million, and regardless of what anyone else in the country thinks, you think the waste processing upgrade is badly needed and you're willing to devote your entire personal fortune to it. Maybe the waste processing plant will be named after you.

2. You are willing to pay for it, but only if your fellow citizens also pitch in. The waste processing plant serves 5 million people in the area. You aren't willing to personally pay $500 million, but you are willing to enter a contract with your 5 million fellows that you'll all pay $100 each.

3. You would be willing to join a pact to pay for it, but not if you can easily get away with being a free rider, where the plant gets built without your support. If a generous billionaire will personally donate to the government to pay for the entire thing, then why should you pay anything? Or, if 1 million of your fellow citizens will happily pay $500 each, then why should you pay anything? But that's not to say you don't think the plant is worth the money. You'd even be willing to pay for it if there were no other way to get it built. You'd just prefer not to waste your own money on it if the plant gets built even when you opt out of the payment contract.

Unfortunately, the common mentality of option (3) usually prevents options (1) and (2) from being feasible, because anyone who doesn't agree to pay still gets the benefit of the plant upgrades. Option (1) can still work for very prestigious projects that make a good legacy-building donation, but probably not waste processing plant upgrades. The free rider problem prevents almost anyone from voluntarily forming a pact to share the cost burden even when the plant upgrades are direly needed.

Fortunately there is a fourth option.

4. You would be willing to pay for it conditional on your fellow citizens fairly sharing the bill. Thus you support entering a mutually-binding pact which will also bind any potential free riders in the municipality who also benefit from the waste processing plant. The pact takes force as long as the motion to upgrade the waste processing plant wins majority support. In order for this kind of pact to be possible, you all (even the free riders) voluntarily agree ahead of time to support the legally-binding force of these kinds of pacts, and the conditions under which the majority will be determined. In other words, you choose to live under a democratic government.

Of course there's also a fifth option:

5. You don't think the waste processing plant needs upgrades, and you don't support yourself or anyone else paying for it.

I often hear from Americans that taxation equates to theft, or slavery, or being held at gunpoint to pay for other peoples' things. But this naively assumes that anyone who doesn't have opinion (1) must have opinion (5). In fact, I think the vast majority of people have opinion (4), because it's the Nash equilibrium for people who support a public works project, but I never hear opponents of taxation even talk about the existence of opinion (4).

Perhaps they haven't imagined that someone would be unwilling to donate $100 to the government, but be enthusiastically willing to have that same $100 forcibly taken from them (as long as it's also taken from their fellows)? I certainly am. That's why I vote to raise taxes even though I wouldn't donate to the government.

[nonbel]

This concern for "free riders" doesn't seem appropriate to me. Who cares as long as you get your waste treatment plant (or whatever) for the stated price?

[jbay]

Was my explanation inadequate? We're not the people in category (2) who are concerned about free riders; we're all the people in category (3) who would be free riders. But we also want our water treatment plant. And we are willing to pay for it, but only if we have no way to personally avoid the obligation ourselves. And the same is true of our peers. We're an entire civilization of would-be free riders. So we're stuck because nobody will personally commit to pay unilaterally, even though we all want to. So how do we make ourselves happy? How do we get together and sign a contract to pay for it, without defecting on each other?

That's what taxes are. They're not there to coerce payment from people who aren't willing to donate. They exist to coordinate payments from a bunch of people who want to get things done but don't want to be the only sucker left with the bill. That's the whole point. And we get our schools and water treatment and garbage pickup and nobody has to make personal donations to the government to make it happen. We won't get our treatment plant any other way.

[nonbel]

>"And we are willing to pay for it, but only if we have no way to personally avoid the obligation ourselves. And the same is true of our peers. We're an entire civilization of would-be free riders. So we're stuck because nobody will personally commit to pay unilaterally, even though we all want to. So how do we make ourselves happy? How do we get together and sign a contract to pay for it, without defecting on each other?"

How do people get together to invest in anything in this world you describe? How do you get 100 people to invest in your real estate venture without defecting on each other?

Sorry, but I don't see it. It seems like a solved "problem", even when there is no desire guaranteed to be fulfilled at the end.

[jbay]

In my real estate venture, the dividends are paid exclusively to the investors who are my shareholders. So there are no free riders; the people who don't invest don't get the same benefits as those who do. For ventures like this, we don't need the government to coordinate anything.

For projects like waste treatment plants, it's very hard or impossible to ensure that only the "investors" (ie, people who volunteered to fund it) get the benefit. If the waste gets treated, the tapwater is safe to drink, that weird smell in the streets goes away, the coliform count goes down, the beaches are open for swimming in the summer, and fewer people get sick. That's wonderful but how do we limit the benefits to the shareholders of the waste treatment plant, so as to convince people to invest in it?

[nonbel]

>"In my real estate venture, the dividends are paid exclusively to the investors who are my shareholders. So there are no free riders; the people who don't invest don't get the same benefits as those who do."

The investors don't care if there are free riders as long as they get the expected benefits. The neighboring property values may rise, for example.

>"That's wonderful but how do we limit the benefits to the shareholders of the waste treatment plant, so as to convince people to invest in it?"

I just can't get past this. This is just not something I consider in any way when choosing to make an investment/donation. I simply do not care if other people may benefit, that is not my concern.

I mean lets take a smaller task:

Say I feel like doing the dishes so I can have a clean plate later in the day. Once I get going with doing dishes, its not a hassle to finish them.

Should I be upset if someone else uses one of the dishes I cleaned? Should I not do the dishes, even if I want to, because eventually someone else may do them? If it was likely for someone else to take care of it, why hasn't it already been done?

[jbay]

I'm not sure why this concept is such a challenge for me to convey. I'm probably not doing a very good job of it.

The investors aren't particularly concerned about small positive externalities such as the increase in surrounding property values. (If the positive externalities are very large, they would probably attempt to capture them somehow -- such as buying up the whole neighbourhood before proceeding with the development. This is why profitable train companies in Asia build train lines to where they own the land, and develop the area around their stations into shopping malls and residential complexes).

That's very different than having free riders. If you give your investors the option of paying $100 per share, or $0 per share, and in either case they'll get the same number of shares, then you suddenly won't find any investors willing to pay. Even if it's a profitable endeavour at $100 per share!

Why would you be offering such a strange deal to your investors? Well, you wouldn't, because it would totally undermine your ability to get your project funded. But it's exactly the model you're proposing when you suggest that private citizens might donate to the government if they really want public infrastructure to get funded! The ones who don't donate are paying $0/share, and the ones who do are paying $100/share, and they all get equal use of the infrastructure.

The free rider problem is not when you try to get investors to buy into your project, even though a few people who don't buy in will also benefit slightly. It's when you try to get investors to buy into your project, even though anybody who doesn't buy in benefits just as much.

Having said this, now let me put it in the context of your quote:

> "This is just not something I consider in any way when choosing to make an investment"

When you consider purchasing shares of a company for $100/share, do you not consider in any way the possibility that these shares might be available for a lower price from another seller? I would expect you would do research and pay the lowest price that is on offer. And if someone is offering them for $0/share, wouldn't you consider that when deciding whether or not to pay $100?

edit: Let me bring this back to the example. How are you going to pitch investors to pay to upgrade a water treatment plant, when they'll reap exactly the same gains from it as their neighbours who didn't contribute a dime? Or, after attempting this and failing to raise any funds whatsoever, let alone the required $500 million, how might you alter your fundraising strategy to make it more successful?

To simplify, let's assume that every one of the 5 million citizens has equal wealth, and the identical preferences, and is willing contribute up to at most $200 for this project, but prefers to pay the minimum possible amount and will always opt to pay $0 if the treatment plant gets built regardless.

[Firadeoclus]

The price per person goes down if everyone pays.