Transaction Costs: The Best Argument Against High Taxation

Vigorish, as readers will recall, is a term famously used by the Mafia to describe the seizure (skimming) of the profits of a business under the threat of force. [1]  Percentage varies according to the mob's need for cash and calculations about what the market will bear.  Our tax system is nearly analogous.

Persons (outside government) who favor increasing taxation seem unaware of the losses in the tax system, arguing -- and wrongly assuming -- that collected revenues will go, more-or-less dollar for dollar to support various projects and causes they favor.  One wonders if they would remain sanguine knowing the amount of monies diverted from tax purposes.


Relatively lean charities that conscientiously manage their overhead often consume ten percent or more in the operation and maintenance of the institution.  Similarly, management consultants estimate that about twenty percent of business earnings are lost to waste; this among well-run enterprises (absent established six sigma or other super-lean initiatives) that emphasize careful accounting.  In the former case costs are kept low out of altruistic zeal, and in the latter the profit motive.

Now we turn to government.  In expanding bureaucracies voluntary concern about costs hardly exists.  Rather, the primary goal is almost always career advancement and increasing political power.  Altruistic zeal and the profit motive are virtually unknown, and they are barely accountable to oversight if they are politically astute.

Owing to creative (deceptive and self-serving) accounting methods government agencies show little concern about monies diverted from their intended purposes.  Agencies spend a great deal of energy (and taxpayer money) in the creation of a good "image" of themselves to maintain good relations with the public at large and especially with the congressmen who support their funding.  If they have lobbied skillfully with the congress, they will seldom be held accountable, even in the face of bad reports [2] from the GAO.

Given the state of artful or simply sloppy accounting (above) within and outside the agencies, it is nearly impossible quantify the percentage of tax dollars that actually reach their intended destination.  Based upon what I know about typical losses in businesses, I would estimate diverted revenues to be in the 50 - 60 % range.  As with vigorish [3] huge losses are skimmed in the form of waste, fraud and abuse and in the maintenance of bloated bureaucracies.  As agencies grow, so do maintenance costs, and the larger the agency the less effective become efforts at oversight. 

Utopian and other advocates of increased taxation might find their enthusiasm somewhat dimmed by the notion that perhaps sixty cents of every dollar they are willing to pay fails to reach the objectives they support.



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1.  It also applies to winnings in gaming.
2.  This essay is broadly generalized, but for readers interested in the obscene specifics a few of those (itemized by Heritage) are listed at this link.
3.  Here, the analogy collapses almost entirely.  Vigorish at its worst pales in comparison to even modest government waste. Still, it's worth noting that government and the mob have things in common -- the threat of force and the taking of money for purposes of self-aggrandizement.

Below the masthead the image, lower right, is entitled, A Reluctant Tax-payer