Taxation the Burden on Our Society

You know how they say that nothing in life is more certain than death and taxes? Since the ancient times, the governments of every country has focused on taxing the population either directly or indirectly. Labels like VAT, Income Tax, Inheritance Tax, Corporate Tax and many more are heard every day in the media.

Taxes are the main source of income for governments that reallocate resources in the economy. They are also the source of income and influence of civil servants from the prime minister to the tax inspector. Systems vary of course. Under communism, almost all of the resources are reallocated based on government decision-making while there are some few countries where the government is small.

What has been proven and universally accepted of course is that the ability of the government to reallocate resources is inefficient. In economics, there is a term that is used to describe this fact called government failure. Peoples in the USSR were poor because the government did not manage the country based on performance but based on ideologies like equality and competition with the other countries whether in military, space or other areas. Market economics prevailed and therefore it was proven that it is the individuals acting in their own self-interest that drives progress. As Gordon Gekko from the movie Wall Street (1987) put it "Greed is Good".

Nevertheless due to the inequality under the market system and the need to supply such public goods as education and healthcare that governments today remain big, representing a sizable chunk of the GDP.

It took me only a few minutes to research this topic and I came up with some interesting findings. I used public revenues as a percentage of country GDP as the measure. This measure I believe works best to estimate the size of the government.

The US with its free market and entrepreneurial society beliefs came out with a relatively smaller government than average with 19.6% of GDP. France and the UK had relatively large figures of 41.8% and 38.1% while on the lower end, the smallest government in Europe appeared to be in Switzerland with public income representing 18.4% of GDP. Moving east, Poland and Russia had approximately 32% each, while China and India had 10.3% and 13.6% respectively. ¹

It is clear that the size of the government in general across countries varies from 10-20% on the low end and more than 50% on the high end. Today, as governments hope to stimulate the economy by investing public funds to support failing businesses this share is likely to increase even further.

Can regulation be the answer to the problems that are attributed to small governments? I don't believe so. It is possible that more effective regulation can stabilize the financial markets possibly at the expense of productivity for one, but they cannot solve the fundamental problems such as poverty, inequality and the provision of public goods to all.

The second lesson is of course is corruption. The legislation system i.e. rule of law and the size of the government have been critical factors affecting the levels of corruption. Government officials are always motivated to cheat and if there is no tough penalty to make it unattractive enough, they will cheat.

The problem is that big government breeds corruption and corruption is paid for by the same tax payer since all costs are at the end of the day are passed on to the consumer.

Finally...

Big government is evil. Period. It is not been proven anywhere in the world that the bigger the government the better but in so many countries governments have grown over the last few years (and were large during the most part of the 20th centaury). USA, UK, Italy, Russia are just a few examples that come to mind. Who pays for the hundreds of thousands and even millions of civil servants? Although we tend to think of taxes more often in terms of VAT and income tax, we actually in the end pay all the taxes created including duties. For example when President Obama decides to protect the US car tire industry, he decides to raise duties on foreign tires imported from China. What we should know about this is that a) a significant % of US consumers were purchasing those tires (i.e. voting with their money for them) and b) that the US consumers will have to pay the US government the extra duties if they want to continue buying Chinese tires since Chinese manufacturers will have no choice but to transfer the extra cost to the consumer.

This is not the only case. Governments in every country do this to protect domestic jobs but in the end this is just a way to slow the death of a sick animal. The government is taking money from all citizens to essentially pay the salaries of the tire industry workers so they don't lose their jobs. The only way to compete against countries where the cost of labor is lower is to continually retrain workers and put them to work in higher value-added industries such as those based on unique technology and intellectual property. By protecting failing industries, the US government prevents the economy from restructuring and becoming more efficient. You would think that the government would support these forces rather than working against them.

^{1 - World Bank Data for 2007}