Saturday, February 27, 2010

Soak the Poor ?

It is well known that the market fails to deliver on its promises of efficiency for many reasons such as the predominance of negative externalities; by products of activities that do not have to be recognized by the market; in addition to the prevalence of Public Goods that are characterized by “free riders”; those that will use a service without paying for it such as public education. But since society should always seek to operate as efficiently as possible the need for an institution that can correct these market failures became universally accepted. Add to the above the arguments advanced by Keynes in his masterpiece “The General Theory” in which he demonstrated clearly that the market economy does not have a mechanism that will ensure full employment of resources, quite on the contrary, the equilibrium level of output will more likely be below that of full employment. Well, all the above can be remedied through the introduction of an activist state that will impose regulations to control the externalities, make sure that there is an adequate supply of the Public goods and act as to guide the economy to reach its full potential.

The role of governments, all over the world, has grown substantially, as a result of the above. But if government is going to be asked to provide infrastructure, social services and to regulate conditions that affect the public good then the government needs a flow of revenue that it can depend upon to provide the expected services. In most cases, government acts as a provider of services and not as an owner of means of production and as a result its revenue is derived from taxing the various activities within its domain. This gave rise to the question of what are the guidelines that are to be used when the government is to levy such taxes?

One of the single most important ideas in collecting the revenue that is deemed to be necessary to further the public good is that taxes should be levied so as not to violate the principle of “ability to pay”. It goes without saying that unless the above principle is adhered to then the taxing system will be unfair, unjust, will increase social inequity, aggravate social tensions and even lead to social unrest. The basic idea behind this principle has been advocated by numerous philosophers; Jean Jacques Rousseau, and JS Mill; for centuries.

Ability to pay, simply stated, is an attempt at providing essential services to those that cannot afford them by taxing those than have the ability to pay. I am sure that no one needs to be reminded that the lucky few who have accumulated a handsome fortune did not do so in a vacuum but in an environment that made that possible and so the simple idea of reciprocity implies that they should, at a minimum, help improve the productivity and equity of the forces that have made their good fortune possible.

A simple analysis based on the above means that a responsible government should undertake expenditures that would alleviate poverty, reduce inequality, decrease the prospect of unemployment and provide social services designed to improve the quality of human capital. This means that the government expenditures should be uniquely driven by the metric of how a government program impacts on poverty. Any project that does not alleviate poverty should be immediately cancelled since society can spend the same expenditures in an alternative field that will improve the quality of life for all.

It would be ironic though if the idea of expenditures does not take into consideration the impact of raising the required revenue.Would it make any sense to promise to provide a poor community with a decent school system but then proceed to tax the same people for that expense? That can be described at best as a diabolical scheme whose intent is not the alleviation of poverty but the maintenance of the conditions that have produced it.

Sales taxes; VAT is a disguised sales tax; are universally referred to as regressive taxes. This is not debatable since a household whose annual income is $20,000 pays a greater proportion of its income in VAT than a household whose annual income is $100,000. Unfortunately this is what the current Lebanese government is advancing, a 50% increase in VAT.Besides questioning the wisdom of the allocation of the expenditures we are faced with a more egregious act. Tax those that can afford it the least in order to create more benefits for those that are least in need. This policy needs to be stood on its head but what are the chances of this happening when those in charge represent the very few at the top of the economic pyramid? You decide.


Anonymous said...

Get real. Do you expect the Lebanese politicians to worry about whether the poor are getting a fair shake? This is Lebanon, the land of exploitation, the land of exploitation.

Ghassan Karam said...

I sure hope that with time we can change the caliber of Lebanese politics. We have no choice but to keep on trying.

Anonymous said...

No one likes to pay taxes but all societies that have a decent system of taxation also have responsible citizens. You don;t suppose that there is a link between the two.


Free Blog Counter