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Your tax burden is my subsidy benefit: the two sides of a coin
By G. Uswatte-aratchi
Marga InstituteNow that running concerns with the government budget 1999 are done away with it is wise to look into a fundamental truth which is frequently forgotten. It is common to hear from otherwise knowledgeable persons that taxes can be collected from a community without placing burdens on them. Members of the government in parliament claim that their tax proposals do not place burdens on people; members of the opposition argue that they could have and that they did in the past collect taxes without placing burdens on the public. I want to demonstrate that these statements are all without foundation and should never be made.
Governments are essential to civilized society. Quite apart from the wisdom of Thomas Hobbes, who wrote that life in a society without government would be nasty brutish and short, one can see the plight of countries such as Afghanistan, Somalia, Liberia and Rwanda which have in our own lifetimes suffered from lack of government. And all governments need tax revenue unless they earn rent from property such as oil under the earth (as in Kuwait, Saudi Arabia or Venezuela) and can spend out of that income. Therefore taxes, far from being a necessary evil, are an essential blessing. Without taxes there would be no government and without government there would be no civilized life as we know it, although some governments destroy all civilization.
Many persons who object to the burden of taxation also speak almost in the same breadth of the need to undertake welfare expenditure on behalf of the poor if not to build more roads to move their products to market. It is well to emphasize that one cannot have the benefits of expenditure without the burden of taxation. There would not be state paid for education( erroneously but commonly called free education) or health services without the state collecting revenue for those purpose most commonly in the form of taxes; "most commonly" because, sometimes government appropriates resources from the community in exchange for newly printed pieces of paper which it calls money; some little amount comes as income from property. In 1997, government did not secure resources by issuing new money. (See diagram below.) Insert chart.
Then why this common perception of taxes as a burden when expenditure of tax revenue brings such benefits to society? The first reason is the desire to be a free rider: you pay taxes and I will receive benefits. This can perhaps be so, where there is a sharp division in society by levels of income and government expenditure is small, so keeping the tax burden light. Such low levels of government expenditure would almost certainly rule out government expenditure on public health, primary education or on economic infrastructure.
A good example of this failure is India, where politicians dare not tax the largest part of the economy, agriculture and therefore do not have the wherewithal to provide education and health services to the public at government expense. Amartya Kumar Sen, the 1998 Nobel Laureate in Economics, speaks of" monumental neglect of social inequalities and deprivations in public policy" in India, consequent upon these practices. Unlike the question of whether a government can provide benefits without imposing burdens, questions as to who bears the burden and who shares in benefits are genuine and important ones.
It is possible to be a free rider and obtain certain goods and services. If one lives near a well kept park, the benefits of fresh air and the sense of expansiveness can be obtained without paying for it. The cost is borne by those who put up the park. If one uses a bridge and saves time and there is no toll for crossing the bridge, one again becomes a free rider. If a better educated population is a more law abiding population ( one has doubts about that in Sri Lanka), then the individuals in society get a free service in the form of a more peaceful life for which they really have not individually paid . Where many wished to remain free riders, there would be little tax revenue and eventually little benefit to go round.
Why would government tax revenue remain low in such a society? Because people do not want to give over to government a high proportion of their income. As a person gives up a rising proportion of that person’s income to government, he/she would rather not earn that extra income that keep only 20 per cent of it after handing over the 80 per cent to government. They would either prefer leisure to work or spend more time concealing their income from government in order to keep all the concealed income with them rather than that some small part after paying the larger part to government. When entrepreneurs prefer leisure to work, societies may suffer because investment falls and employment ceases to grow.
It is again erroneous to believe that those disincentives to work apply to taxes on income and wealth only. When government takes away a part of a citizen’s wages or profits, that person may substitute leisure for work and thus reduce total output and eventually tax revenue of government. Taxes on goods and services similarly reduce real income of persons, because otherwise government would not have command over those resources. To assume that taxes on goods and services have no disincentive effects on work and enterprise, one must either assume that the public are under a beguiling illusion that their real incomes have not fallen because of the price rises or that they are not responsive to these taxes the same way as to taxes on incomes and property. There is no evidence to support either assumption.
Then why this widespread enthusiasm for general sales taxes (GST)? For two reasons. First, with GST government taxes almost all citizens and therefore a low rate of tax can collect a large amount of revenue. Who pays taxes is somewhat blurred, but there is little doubt that everyone who makes use of the goods and services, pays the tax in the first instance. Second and even better, the entire burden of collecting the tax is transferred to the tax payer. The seller assesses the tax, collects it and sends it over to government.
The second reason why taxes are commonly viewed as a burden is that tax payers do not see themselves deriving matching benefits from them. They would gladly pay for protecting their property from robbery and theft ( look at the number of private security guards in the richer households of Colombo); they would gladly pay for their own personal health care (look at the very high income earned by private sector physicians and surgeons); they would gladly pay for the education of their off-spring (look at the enormous fees they pay in International Schools in Colombo); however they do not want to pay for police protection to other people, health care services to other people and for the education of other people’s offspring. This reluctance to pay taxes is heightened, if it is perceived that the money collected in tax revenue is unfairly paid to politicians and to government servants. Unfairly, because politicians collect fat pay checks and fabulously generous pensions after no more than five years of work; because government servants do not work to deserve the pay they receive.
The reluctance or desire to obtain certain services collectively differs among societies, although ardent advocates of the market mechanism would warn us of deep cuts in human welfare were resources to be allocated collectively. There is also the notorious consumers’ surplus lost on account of price distortion, which Marshall discovered. Citizens of Denmark, the Netherlands, Norway or Sweden part with more than forty percent or more of their income to government to be spent as collectively determined; those of Japan part with no more than seventeen per cent and those in Myanmar no more than 13 per cent. Note that the highest percentages of collective expenditure are in high income Europe, except for Botswana and Kuwait. Those dire warnings of deep cuts in human welfare seem out of place.
These differences are cultural and learnt over time. They depend on the preference of societies for equality and solidarity over liberty, two of the great political concepts to rise out of the Enlightenment in Europe and continue to be central points of political debate to date. Those who uphold liberty as the supreme political virtue see much value in unfettered markets; those who value solidarity see much virtue in collective action; communist parties and governments were one extreme realization of these values. Societies in the former USSR and eastern Europe which preferred collective action once now seem to abhor them. Economists of the strict Chicago school are at the other end of the extreme.
Movement of societies away from inequality is greatly supported by collective action. The large populations of Bangladesh, India and Pakistan remain mostly illiterate, because those societies cannot agree to put their collective resources to educate the poor at government expense. Those who have the means would spend great deals of money on educating their offspring to very high levels. To quote Amartya Sen again, "There has been astonishing failure of public action in expanding elementary and secondary education in India".
The population of Sri Lanka is by and large literate because that society, complaints to the contrary by ethnic minority groups notwithstanding, has seen greater virtue in collective action. Indeed, that part of the population in the plantations whose health and education had been left to the benign neglect of the market place until the mid-1970s, were quickly brought up to the national average in these respects after their education and health care became matters of government attention (statistics collected by Dr. Vidyasagara). Limits to collective action to bring about equality are imposed when a society decides that limits to its willingness to part with resources have been reached and would rather work more if it were permitted to allocate its resources privately. Those are, in part, the motives behind movement for less government in the United States of America.
However, the tension between liberty, on the one hand and solidarity, on the other, is perennial and will remain the central problem of political philosophy. Societies will shift between one set of values and another depending on their convictions and experience. Wherever they rest on that spectrum, taxes are a burden to society in the same way as expenditure is a benefit. They are two sides of the same coin.
