To Tax or Not to Tax - That is the Question
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To tax or not to tax - this question could have never been asked twenty years
ago.
Historically, income tax is a novel invention. Still, it became so widespread
and so socially accepted that no one dared challenge it seriously. In the
lunatic fringes there were those who refused to pay taxes and served prison
sentences as a result. Some of them tried to translate their platforms into
political power and established parties, which failed dismally in the polls. But
some of what they said made sense.
Originally, taxes were levied to pay for government expenses. But they
underwent a malignant transformation. They began to be used to express social
preferences. Tax revenues were diverted to pay for urban renewal, to encourage
foreign investments through tax breaks and tax incentives, to enhance social
equality by evenly redistributing income and so on. As Big Government became
more derided - so were taxes perceived to be its instrument and the tide turned.
Suddenly, the fashion was to downsize government, minimize its disruptive
involvement in the marketplace and reduce the total tax burden as part of the
GNP.
Taxes are inherently unjust. They are enforced, using state coercion. They
are an infringement of the human age old right to property. Money is transferred
from one group of citizens (law abiding taxpayers) - to other groups. The
recipients are less savoury: they either do not pay taxes legally (low income
populations, children, the elderly) - or avoid paying taxes illegally. But there
is no way of preventing a tax evader from enjoying tax money paid by others.
Research demonstrated that most tax money benefited the middle classes and
the rich, in short: those who need it least. Moreover, these strata of society
were most likely to use tax planning to minimize their tax payments. They could
afford to pay professionals to help them to pay less taxes because their income
was augmented by transfers of tax money paid by the less affluent and by the
less fortunate. The poor subsidized the tax planning of the rich, so that they
could pay less taxes. No wonder that tax planning is regarded as the rich man's
shot at tax evasion. The irony is that taxes were intended to lessen social
polarity and friction - but they achieved exactly the opposite.
In economies where taxes gobble up to 60% of the GDP (France, Germany, to
name a few) - taxes became THE major economic disincentive. Why work for the
taxman? Why finance the lavish lifestyle of numerous politicians and bloated
bureaucracies through tax money? Why be a sucker when the rich and mighty play
it safe?
The results were socially and morally devastating: an avalanche of illegal
activities, all intended to avoid paying taxes. Monstrous black economies were
formed by entrepreneuring souls. These economic activities went unreported and
totally deformed the processes of macroeconomic decision making, supposedly
based on complete economic data. This apparent lack of macroeconomic control
creates a second layer of mistrust between the citizen and his government (on
top of the one related to the collection of taxes).
Recent studies clearly indicate that a reverse relationship exists between
the growth of the economy and the extent of public spending. Moreover, decades
of progressive taxation did not reverse the trend of a growing gap between the
rich and the poor. Income distribution has remained inequitable (ever more so
all the time) - despite gigantic unilateral transfers of money from the state to
the poorer socio - economic strata of society.
Taxes are largely considered to be responsible for the following:
- They distorted business thinking;
- Encouraged the misallocation of economic resources;
- Diverted money to strange tax motivated investments;
- Absorbed unacceptably large chunks of the GDP;
- Deterred foreign investment;
- Morally corrupted the population, encouraging it to engage in massive
illegal activities;
- Adversely influenced macroeconomic parameters such as unemployment, the
money supply and interest rates;
- Deprived the business sector of capital needed for its development by
spending it on non productive political ends;
- Caused the smuggling of capital outside the country;
- The formation of strong parallel, black economies and the falsification of
economic records thus affecting the proper decision making processes;
- Facilitated the establishment of big, inefficient bureaucracies for the
collection of taxes and data related to income and economic activity;
- Forced every member of society to - directly or indirectly - pay for
professional services related to his tax obligations, or, at least to consume
his own resources (time, money and energy) in communicating with authorities
dealing with tax collection.
Thousands of laws, tax loopholes, breaks and incentives and seemingly
arbitrary decision making, not open to judicial scrutiny eroded the trust that a
member of the community should have in its institutions. This lack of
transparency and even-handedness led to the frequent eruption of scandals which
unseated governments more often than not.
All these very dear prices might have been acceptable if taxes were to
achieve their primary stated goals. That they failed to do so is what sparked
the latest rebellious thinking.
At first, the governments of the world tried a few simple recipes:
They tried to widen the tax base by better collection, processing,
amalgamation and crossing of information. This way, more tax payers were
supposed to be caught in "the net". This failed dismally. People found ways
around this relatively unsophisticated approach and frequent and successive tax
campaigns were to no avail.
So, governments tried the next trick in their bag: they shifted from
progressive taxes to regressive ones. This was really a shift from taxes on
income to taxes on consumption. This proved to be a much more efficient measure
- albeit with grave social consequences. The same pattern was repeated: the
powerful few were provided with legal loopholes. VAT rules around the world
allow businesses to offset VAT that they paid from VAT that they were supposed
to pay to the authorities. Many of them ended up receiving VAT funds paid the
poorer population, to which these tax breaks were, obviously, not available.
Moreover, VAT and other direct taxes on consumption were almost immediately
reflected in higher inflation figures. As economic theory goes, inflation is a
tax. It indirectly affects the purchasing power of those not knowledgeable
enough, devoid of political clout, or not rich enough to protect themselves. The
salaries of the lower strata of society are eroded by inflation and this has the
exact same effect as a tax would. This is why inflation is called the poor man's
tax.
When the social consequences of levying regressive taxes became fully
evident, governments went back to the drawing board. Regressive taxes were
politically and socially costly. Progressive taxes resembled Swiss cheese: too
many loopholes, not enough substances. The natural inclination was to try and
plug the holes: disallow allowances, break tax breaks, abolish special
preferences, eliminate loopholes, write-offs, reliefs and a host of other,
special deductions. This entailed conflicts with special interest groups whose
interests were duly reflected in the tax loopholes.
Governments, being political creatures, did a half hearted job. They
abolished on the one hand - and gave with the other. They wriggled their way
around controversial subjects and the result was that every loophole cutting
measure brought in its wake a growing host of others. The situation looked
hopeless.
Thus, governments were reduced to using the final, nuclear-like, weapon in
their arsenal: the simplification of the tax system.
The idea is aesthetically appealing: all tax concessions and loopholes will
be eliminated, on the one hand. On the other, the number of tax rates and the
magnitude of each rate will be pared down. Marginal tax rates will go down
considerably and so will the number of tax rates. So, people will feel less like
cheating and they will spend less resources on the preparation of their tax
returns. The government, on its part, will no longer use the tax system to
express its (political) preferences. It will propagate a simple, transparent,
equitable, fair and non arbitrary system which will generate more income by
virtue of these traits.
Governments from Germany to the USA are working along the same
lines. They are trying to stem what is in effect a tax rebellion, a major case
of civil disobedience. If they fail, the very fabric of societies will be
affected. If they succeed, we may all inherit a better world. Knowing the
propensities of human beings, the safe bet is that people will still hate to see
their money wasted in unaccounted for ways on bizarre, pork barrel, projects. As
long as this is the case, the eternal chase of the citizen by his government
will continue.
About the Author
Sam Vaknin is the author of "Malignant Self Love - Narcissism Revisited" and
"After the Rain - How the West Lost the East". He is a columnist in "Central
Europe Review", United Press International (UPI) and ebookweb.org and the editor
of mental health and Central East Europe categories in The Open Directory,
Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor
to the Government of Macedonia.
His web site: http://samvak.tripod.com
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Article Published/Sorted/Amended on Scopulus 2007-11-04 00:08:13 in Economic Articles
