The Purpose of Taxes
I recently watched a
fascinating video made by the Director at the Hutchins Centre on Fiscal And Monetary
Policy in the US. In the video, he
describes why the US tax system doesn’t shrink the gap between “rich” and
“poor” as much as some might think.
The central premise seems to be that the tax system should
reduce the gap. In other words, it
should re-distribute income from the wealthier to those less well-off.
Wrong?
Tax came into being as a means for English kings to finance
their various wars. The purpose of tax nowadays
is to fund government expenditure on services that benefit their citizens (e.g. education, medical services, roads, police,
fire fighters, armed forces).
If you use the products or services someone provides, you
should pay for them. I know very few
people (except charity volunteers) who work or sell their products for free.
High taxes don’t necessarily mean higher standards of
living, except in a very few Scandinavian countries. They are not
a means of achieving some kind of socialist Utopia. There are “rich” people in Scandinavia… Scandinavia also benefits from relatively small
populations.
What the video showed me was that, in theory, the “rich”
have a sizeable chunk of income after they’ve paid their taxes left to put back
into the economy by purchasing goods and services that others don’t. This in turn should create demand for the
products and services they buy, in turn creating jobs (and thereby income) for
those who work in those industries, as well as additional tax receipts for the
government from the new taxes they receive.
Some call this the “Trickle-down effect”. So far so good?
Maybe not. The vexing
questions that arise are:
- Do the “rich” indeed spend more of their disposable income on additional goods, services and investments?
- Is it “fair” that some should have more than others?
- Should those who work hard, take risks and make sacrifices be rewarded and, if so, to what extent?
- What is the government’s duty to those truly “in need”?
- What is “society’s” duty to those truly “in need”?
- How can we make society a better place for all?
The best way is for any government to look to creating
“wealth-earning” capacity, which generates jobs for those able (note I do not
use the word “willing”) to work. This
maximises productivity of citizens as well as their contribution to the country
and increases the country’s wealth.
To ensure this, citizens need the knowledge and skills to
work in industries that produce something
that others want and at a price they
are prepared to pay. In the 1970s, Britain
saw its car industry decimated by continuous strikes and the advent of reliable,
cheaper, foreign alternatives. It now
has a reputation as a higher-value manufacturing centre.
Taxes and prices need to remain under control. There’s no point in people earning if they have
to give it all back to the government or can’t afford even basic goods. One should be better off in work than on
social security. This implies that
government spending also needs to be kept under control, and that it can
collect taxes. The last is one of the
main causes of the current Greek deficit and some of the UK’s problems (many of
which arise from its Byzantine tax regulations).
There will always be a “richer” class of citizen, some of
whom may actually deserve it because
of their hard work, the risks they undertake, or other good reasons. There will always be “Haves” and “Have Nots”
in any society (especially those run on a Communist philosophy). To
simply think that tax can be used to redress this problem is to over simplify
the issue.
I have spent more than half my life delivering change in different world markets from the most developed to “emerging” economies. With more than 20 years in international financial services around the world running different operations and lending businesses, I started my own Consultancy to offer solutions for improving performance, productivity and risk management. I work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services. For strategic questions that you should be asking yourself, follow me at @wkm610.
Labels: Leadership, Social, Strategy
posted by William Martin @ 09:27
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