To Tax or Not to Tax - This is the Question

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

Boston Globe

Central Texas venture investing dollars, deals drop in second quarter Austin American-Statesman, TX - 46 minutes ago Nationwide, venture capital investing in the second quarter was up about 4 percent from a year ago and flat compared with the first quarter. ... Venture investing rises 5.5% in state Boston Globe Venture Capital Investment Holds Steady at $7.4 Billion in Q2 2008 ... MarketWatch US venture-capital funding reported steady Seattle Times Hartford Courant - PR Newswire (press release) all 205 news articles

The Savings Game: Dividend investing has risks, rewards Salt Lake Tribune, United States - 8 hours ago Or if you reinvest the dividends in additional shares, your investment can compound faster. Of course, stocks of all kinds can go down sharply. ...

Jamaica Gleaner

Investing in mutual funds Jamaica Gleaner, Jamaica - 12 hours ago I have read about CI Investment, AIC Funds, and the Scotiabank Canadian Growth fund. Are there other banks or brokers that are agents for overseas mutual ...

The Free Lance-Star

Stafford investing to woo Germanna NEW GERMANNA VP SETS SIGHTS ON ... The Free Lance-Star, VA - 9 hours ago "It's the best investment the EDA has made in decades," said Stafford Economic Development Director Tim Baroody. "This fills a gap for our community. ...

Investing calendar Minneapolis Star Tribune, MN - 16 hours ago Real estate investing 201 seminar. 6:30 to 8 pm, 350 Burnsville Pkwy. W. Free. Call 952-649-1456. Sponsor: Investment Property Guys. ...

LEARNING FROM THE LEGENDS OF INVESTING Economic Times, India - 17 hours ago His investment tenets — simplicity and universality — attracted investors across the globe. Yet he remained an unknown figure among Indian investors. ...

Venture capitalists still investing at steady pace The Associated Press - Jul 18, 2008 THE GOOD: The flow of money going to US startups remained steady in the second quarter as venture capitalists invested $7.4 billion, unchanged from a year ...

Now is the wrong time to stop investing Personal Finance, South Africa - 1 hour ago Most asset managers are following their investment advice to you. They say they are sticking to their guns, even if their short-term performance is negative ...

Investment tips for a shaky market San Francisco Chronicle,  USA - 10 hours ago The most important tip is Investing 101: Think long term. Markets fluctuate every minute and they go through cyclical swings that can last many months. ...

New York Times

Investing in Brazil's Soccer Riches New York Times, United States - Jul 18, 2008 Traffic, a company leading a new and novel wave of investment in Brazilian soccer, is buying up contracts of young players all over Brazil. ...