Peter Lynn Himself
July  2019
SHOULD TAXES BE HIGHER?
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.

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