Taxation and a bit of Economics and Philosophy

Whether its tax avoidance by Google, Amazon, Starbucks, football players, or 75% French tax rates, taxation sparks controversy. The question becomes is taxation a good or bad thing? We believe the debate cuts both ways. 

Taxation (and Government itself) is critical primarily for providing public goods and protecting us from externalities.

Under public goods, it is morally and socially important to support the sick, old, those who need our help and are less fortunate than ourselves. (Of course, this can be a tight balancing act – we do not want “welfare” to become the preferred option for those who could live without it – otherwise we might all choose welfare with no one funding it! We want to support those who do not have a choice but to claim “welfare”. This is the issue of “moral hazard”.)

In addition, many types of infrastructure are regarded as public goods. Hospitals, schools, community centres and libraries for example.

Under externalities, it is important to set rules of conduct which prevent dumping of waste, overfishing, poor driving, anti-social behaviour to mention just a few examples of the “free-rider problem” – and why we need to finance the protection of the Rule of Law.

Yet there appears to be many areas where the Government chooses to spend our money without asking how or why?

However, under Rousseau’s Social Contract, there would be “no taxation without representation” but it seems Governments are often spending our money on things we never asked them to. So how much budget transparency have we really achieved? Put another way, does Government deliver its side of the contract? Do taxpayers have the tools at their disposal to demand the service which they paid for even in the most developed countries? Can the taxpayer pay on results achieved? Politicians would argue they do – elections. But isn’t that quite a blunt tool compared to that offered by the private sector. To buy or not to buy – which, in a competitive market, makes the provider more hungry to offer what the consumer wants?

Perhaps for this very reason, as the Nobel-prize winning economist Tiebout found, Government spending often belongs to the Quadrant of expenditure where both Value for Money and relevance are lowest. It scores lowest for efficiency and effectiveness – because Government spends “other people’s money” on “other people” – in short it cares far less than you or I would about spending resources on ourselves or our family. 

As a result Government spending achieves less with more – and the result of this is Government spending which has insufficient payback to be able to pay for its own investment. And when Government projects do not payback, it leads to higher debt. That is quite incredible when, as Keynes suggested, these investments should lead to a multiplier effect – the investment should create a virtuous cycle of more investment and growth. So if public investments did create a positive return, then debt should not rise (apart from the interest payments on previous overspending). But debt is rising almost everywhere, evidence that government spending is not creating a positive economic payback. Other evidence of this is that consumers are increasingly choosing the private sector to provide services which are the “natural” of the public sector such as health and education.

Sure, Government expenditure (and debt) is largely been driven by current expenditure – but much of the reason for that is that is that its capital projects have not generated sufficient payback. When a country is borrowing to pay for its current expenditure needs and interest on debt, there is little that can generate the “payback”. It becomes a hospital case. And increasingly, a private-hospital-case! Its ability not to go bankrupt depends more and more on the willingness of the private sector to buy its IOUs.  

Overall it seems, Government spending is actually likely to “crowd out” more productive spending in the private sector. If we were taxed less, then we might be able to innovate and grow more – and/or be happier. 

By the way, Tiebout also identified that people shop around for the best mix of services and price. This explains economic migration. It explains why people move country for a better lifestyle just as they move from one shoe shop to another for a pair of shoes.

People migrate and businesses migrate to find the Value for Money they are looking for from Government. It’s normal. That’s another thing that Hubconsult helps you to do.

Hubconsult runs a company so you don’t have to!

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