Taxes and Commitment

An American tourist in a foreign land surveys the surroundings. Down on the river he sees a boat at a distance coming into town. The men are being whipped as they row the boat filled-to-the-brim with fresh produce. Angered at the sight, the tourist rushes down to the dock to meet them as they unload. He tells the men of their value and worth. He yells at the man who whipped them. Then, a twist happens. The men explain that they were concerned they would not row fast enough and therefore were worried the fresh produce would spoil before getting to market. They hired the monitor to ensure they all rowed fast.

The source of that apocryphal story is unclear, but the economic content is rich. The men were concerned with the free-rider problem and sought a commitment device to ensure their fast rowing. How often are we willing to suffer the lashes of inefficiency to obtain some measure of the public good?

As Adam Smith writes in the Theory of Moral Sentiments, “What institution of government could tend so much to promote the happiness of mankind as the general prevalence of wisdom and virtue? All government is but an imperfect remedy for the deficiency of these.”

Government can be an imperfect remedy for the dearth of wisdom and virtue. Government can be an imperfect remedy for the problem of people free-riding when they should be contributing. Here is an important graph from my paper with Mark Isaac in Public Choice. What it shows is that when free-riding was low (contributions to the public good “GRPX” in the first stage were high) that taxes were also low. People only suffered the lashes of inefficient taxes (20 percent of collected revenues were wasted) when group members revealed they were free-riders.

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