That tax needs to be collected to pay for government services is universally accepted, but views as to how extensive these services should be are widely divergent.
The operation of government, the courts, police, and defence are universally accepted, as are, (in New Zealand), provision of a social safety net, the highway system, national parks/conservation, and major roles in health and education. At local level, roads, water and sewers are regarded as core services, generally paid for by property taxes.
Where there is most disagreement is in the extent to which government should be involved in economic activities and how extensive the social safety net should be. While there are high earners who support higher taxes and strugglers who reject hand-outs, not surprisingly, this split is generally predicted by self-interest. The not-so-successful (by talent, application or luck) generally want more government support, and the higher taxation this requires. They say 'make the rich pay more', but high achievers already pay most of the taxes in democratic countries. In NZ, the top 3% of earners pay 24% of all income tax.
Increasing taxes at the top end causes high achievers to go to places with lower rates, or to work less- neither of which is helpful.
In democracies the setting of tax rates is subject to various inherent distortions which tend to push taxation ever higher.
- Politicians use tax money and imprudent borrowing (deferred taxation), to buy votes.
A New Zealand example is from 1975, when Robert Muldoon's National Party promised tax-funded universal pensions while the rival Labour Party proposed contribution funding. National won that election of course, and consequences were higher taxation, less incentive for saving, and no investment fund to support business and infrastructure projects. Another is when our Labour party promised to make student loans interest free during studying in 2005, and, in 2017, to provide 3 years tuition free university by 2025. They won both these elections and have saddled NZ with unnecessarily high taxation, a blow-out in student debt, and many people engaging in education that's not useful for them or the country. Australia has a similar problem:
- Public servants vote themselves higher incomes, better conditions and more security.
Any party campaigning on increasing the size of government gets immediate and almost total support from state servants- while any party that campaigns on reducing the size of government will be opposed by this substantial bloc vote.
- Political parties "farm" the poor and disadvantaged for their votes.
Parties who's support comes from beneficiaries are unlikely to support policies that reduce their numbers and are not always above promoting policies that create more- providing they don't get blamed directly of course. Not that this can be publicly admitted.
- Recipients of transfer payments operate as a voting bloc to keep the money tap turned on.
Using New Zealand as an example again: From the tentative beginnings of our welfare state in the 19th century, cradle-to-grave care has expanded until now, just 25% of New Zealanders are net taxpayers. Approaching 400,000 working age New Zealanders depend on some form of state assistance for a major part of their income. This is a big enough voting bloc to prevent any reduction in transfer payments and the taxation that supports them, as no party proposing reductions can have any realistic expectation of gaining a majority. At some stage this situation could reach a tipping point, after which payments and the taxation necessary to support them will increase out of control- until there is an economic collapse.
These are the reasons, I think, why democracies have high taxes than alternative forms of government- and the more democracy they have, the higher their taxes tend to be.
But is this a bad thing? Although measuring happiness is difficult because it's subjective, there are measurements of wellbeing that are objective: Life expectancy is one, infant mortality is another. By these measures higher taxed countries generally rate higher, though correlation is not causation, and in this case, it could be that they are able to support higher tax rates because they are better functioning countries- which is also why they have high life expectancy and low infant mortality.
But there is a negative side to higher taxes which is that they strangle growth- as even a casual look at global economic data clearly shows.
Quantitatively, when the total government share of an economy exceeds about 45%, sustained growth rates above 2% appear to be unattainable.
European countries with government sectors significantly above this are almost stagnant. Countries like Singapore where the government sector is less than 25% have sustained phenomenal growth.
Fifty years ago they were a third world country, now Singaporeans are much wealthier than the average European. China, when it was a communist state (government monopolising the economy) had almost no growth, but from when it embraced private enterprise in 1978, its growth rate hit 10% and has stayed near to that for 40 years- which is why China has caught and even overhauled many other countries.
The US is somewhere in the middle, having avoided excessive taxation so far, and has growth rates well ahead of Europe- but at the cost of less social support for its citizens.
So, it seems to me that there is a choice: High taxes, extensive social support networks and low growth. Or, lower taxes, less social welfare and higher growth. If we take the high tax path, our lives can be comfortable and secure- for now.
But countries are not isolated and disconnected. Not even North Korea can keep the world at bay for ever, and any country that falls behind others, sooner or later gets exploited and bullied- militarily as well as economically. That we may passionately wish that this shouldn't happen doesn't change the reality.
And the competition for democracies that are choosing to eat more of their cake now and keep less for the future is from autocratic style governments ruled by unelected elites who are much less subject to the perverse incentives outlined above.
Not that the advantages all lie one way- governments that are more autocratic are subject to various other inefficiencies; like corruption, the high cost of running police states, and mis-use of citizens (more than a million Chinese Uighurs are incarcerated in 're-education camps').
Voters in democracies can continue to ramp up tax rates and enjoy ever stronger social safety nets until they barely have enough people actually working to pay for them - the current situation in many European countries. But if they do this, they will be overtaken and lose control of their futures.
It's a test of character.
Peter Lynn, Ashburton, New Zealand, July 1st, 2019