The taxing of income is fraught with unresolvable difficulties of definition, administration and compliance. Worse, it imposes severe distortions on the efficiency of markets, engender a toxic politics of resentment under the banner of “fairness” and provides a blank cheque for governmental extravagance.
As if all this self-inflicted harm were not already beyond belief, the ultimate economic outcome diverts resources from production into unsustainable patterns of consumption — even into activity that is counterproductive and results in an inevitable decline in overall prosperity. The simple reality is that to be maintained, and ideally increase, wealth must be invested in productive activity. To the extent that such investment is successful, wealth grows and economic prosperity increases. Repeated experience indicates, however, that expenditure by government at a level of about a quarter of GDP begins economic stagnation, the optimal maximum of revenue for government being somewhat less than that. Almost all OECD economies, having titrated their tax take to near maximum, are now compounding debt in a futile last gasp to maintain deficit spending.
Despite repeated experience of tax cuts resulting in an economic resurgence, almost unbelievably, the political discussion still centres around increasing taxes on the wealthy (i.e. on productive activity), or on tax cuts with no commensurate reductions in government.
Before any wealth can be redistributed it must be produced. Socialism implicitly assumes wealth to simply exist and focuses on its “fair” distribution with little consideration for its production. In this view, wealth is money sitting idly in a vault while the poor languish in unfair deprivation. Capitalism implicitly assumes effort, good management and risk, with wealth as the reward for success. Although both systems have their benefits and deficiencies, the net positive outcome has been overwhelmingly on the side of capitalism in terms of productivity, prosperity and personal freedom.
Under capitalism, wealth, to be maintained or increased, must be productively invested. If not productively invested it soon flows to more productive hands. Individuals risking their own wealth in this way have clearly proven to be far more productive than remote, politically appointed managers with nothing to lose and no demanding owners or customers to whom they must answer.
The underlying reality is that complex dynamic systems, such as economies and ecosystems, cannot be fully understood in real time in a top-down manner. The interacting combinations and permutations of causes and effects plus frequent, erratic and unpredictable forcings render centralised control ineffective. However, nature affords a model solution to this problem in the example of complex ecosystems. These achieve stability and adjust to frequent erratic forcings by having multitudes of diverse participants freely pursuing their own interests with the systems finding a balance in the process. It is also the process by which life itself has come into being and has diversified into millions of different forms.
Productive individuals prefer capitalism. Those in positions mandated by government fiat, or who subsist on handouts from government, tend to prefer socialism, seeing this as “fair redistribution” rather than parasitism or robbery implemented by coercion. While capitalism may not be the best of all possible economic systems it is certainly the least bad of any we have yet tried, so much so that even the communist nations have either adopted it (with remarkable success) or continue to reject it and remain social and economic backwaters of the human condition.
Allocating resources in the direction of greatest return tends to maximise prosperity. Increasing the allocation to government tends to increase non-productive welfare and government mandated activity, most of which is valued so little it could otherwise not exist. Worse yet is a major portion of government expenditure in the form of regulation and bureaucracy that tends to accumulate over time with rarely any assessment of need or effectiveness. This bureaucratic socio-economic tumour is ever expanding. More serious than simply non-production, it is positively counter-productive and has become a major obstacle to almost any useful activity while at the same time curtailing freedom and increasing costs.
The most useful and important functions of government is to provide and protect certain basic rights and freedoms through the rule of law and to develop and maintain such services and infrastructure as may be needed by a society, but which are impractical for private interest to provide. However, the lack of accountability, cumbersome decision making and tendency to bureaucratisation make government management something to be avoided wherever possible.
We need only consider the involvement of government in health care, education, food, housing and energy to see the results. Government involvement in these areas has resulted in huge increases in administrative activity, compliance requirements and costly third-party involvements mandated by government. At the same time diversity and innovation have been stifled while the smaller operators who provided much of this have been driven from participation, leaving the large corporatized businesses as favoured oligopolies. Worse yet, the cost increases from all this have been released from market constraints by government picking up the tab, then dumping it back on taxpayers with increased taxes, deficits and loans that are turning the oncoming generations into a nation of indentured servants owned by government and the banks.
One relatively simple solution could effectively address all this and change the entire dynamics of government for the better. A single tax on all financial transactions as the sole basis for all government revenue would be easy to administer and difficult to avoid if combined with an all-digital currency system, which is coming in any event. Such a system would eliminate the numerous and severe market distortions that have proliferated across the existing morass of taxation. It would replace the whole vast non-productive industry generated by tax compliance and avoidance with a simple service fee imposed by the account keeping institutions on every transaction. With an all-digital currency this would bring the entire cash economy into the tax net and greatly impede most criminal activity. It would also make for a much more stable and predictable basis for government revenue. If it were the sole source of government revenue apportioned between national, state and local levels with a requirement for all to operate within their budgets it would surely impose a much-needed consideration of fiscal reality on the blank cheque, the “magic pudding approach”, now prevailing.
Einstein is credited with describing insanity as, “… doing the same thing over and over and expecting different results.” Still, and despite an overwhelming outcome of socio-economic stagnation, politicians, governments and a growing non-productive portion of the electorate continue to advocate increases in taxation and centralised management of productive activity as a preferred form of government.
The existing income tax was a bad idea to begin with and has only been made worse by attempts to make it better. Unfortunately, the need in politics for certainty, conviction and commitment to belief render recognition of error unthinkable until collapse makes it undeniable. Unworkable ideas in government have a way of remaining entrenched long after ongoing failure has made their ultimate demise unavoidable. Then, when change does finally come, it tends to arrive suddenly and unexpectedly when a leader dares to express the failure and the breaking of the taboo releases a surge of agreement.
So it was with the collapse of absolute monarchies, the advent of women’s suffrage and the fall of communism — and so it appears likely to be with the hysteria about climate change, the war on drugs and the never ending debate over tax cuts, increases and reforms.