The Limits of Taxation

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was the same old story this Wednesday as the UK government had its
annual spending budget review. Gordon Brown is the latest Chancellor
of the Exchequer to indulge in the paradox of more wealth redistribution
whilst at the same time claiming to be the god-like sustainer and
stimulator of the British economy.

grant that he is good at taking other people’s hard-earned cash
and spending it on inefficient and bureaucratic enterprises such
as public health services. But I deny that he is anything remotely
close to a stimulator of the economy. Like almost all his forebears,
his actions at best either impose a further drag on the economy
or by a zero sum budget of give and take leaves it in the same poor
state as he found it.

businesses initially quivered in optimism as corporation tax was
reduced by varying degrees for startups and tax credits were granted
for R&D budgets. But, they should have known that the Chancellor
giveth and the Chancellor taketh away. And, so, hopes were dashed
as employee contributions to social security were raised 1% to fund
ailing public health services.

British National Health Service is in an unkempt state. This appropriation
of private property (salaries) will increase spending on it from
its current 65 billion to 109 billion over the next six years
(or over 7% per annum in real terms). This quote from the Chancellor
is as wildly optimistic as it is contradictory:

have made our choice – a Budget to make our NHS the best insurance
policy in the world. A British ideal – free at the point of
need, for everyone in every part of Britain. Fairness and enterprise

hoped for revenues rely on projected economic growth of 3.5% next
year. It was the boast of Gordon Brown that Britain was leading
the way out of recession with higher than average growth rates than
Euroland. This can only be a boast when one Statist economy is only
ever compared against other Statist economies for 3% growth is pathetic
and indeed expected when over 40% of GDP is redistributed to monopolistic
government projects and committee-approved interest rates are forever
one step behind the real economy.

nothing new to report as Britain now joins the 40 per cent club
of GDP leeches. Which brings me to a telling little graph I saw
last week. It was the ratio of public spending to GDP for the USA,
UK, France, Germany and Japan since 1870. As expected and longed
for, all governments extracted only 10% from the economy to begin

the graph rises inexorably to the 40%-50% range of today depending
on the country and one wonders how much further it can rise as I
remember a quotation allegedly from Maynard Keynes who stated that
governments should spend no more than 25% of GDP on redistribution

how much longer can this hyper-Keynesianism last? In theory, the
graph will rise to 80%-90% of GDP by the end of this century. In
practise, no income-earning voter will accept such a scenario as
low-tax parties enter the democratic fray and win seats which could
eventually hold the balance of power in coalitions fought out between
larger Statist parties.

the various states approach the ratio of 51% (i.e. the nation spends
most of its time working for the government), one may imagine that
this was a time for a nation to take stock and question the role
of government. It could be argued that this will not happen for
the reason that this level will not necessarily equate to 51% of
a voter’s pay packet due to the burden of taxation being shared
by companies and the psychological impact of overall taxes being
hidden via indirect taxation.

the more important factor may be the theory that increasing tax
rates will decrease tax revenues (e.g. as suggested in the Laffer

way of example, Sweden has the highest tax burden in the world,
which hit 53% of GDP in 1998 but slipped to 52% in 1999. Is this
dip prophetic or merely fiscal white noise? Has Sweden gone ahead
of others and begun to realise that higher taxation means lower
economic growth? (see this link
for a further analysis).

complexity of the perceived benefits of taxation versus the reactions
of voting taxpayers make this a difficult one to call. One can only
watch how Swedish fiscal policy pans out in the next few years.
If taxation stabilises or continues to dip then we may surmise that
tax rates and revenues have reached an equilibrium point.

that does not imply that the current rate of Swedish tax is acceptable
but rather it merely tells us that the government can squeeze no
more out of the economy. So, for once in my life I have begun to
take an interest in Scandanavian politics and I can truly say that
Sweden is a vanguard in taxation – albeit in the negative sense!


Watson [send him
] writes from Edinburgh, Scotland.


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