“Higher taxes never reduce the deficit. Governments spend whatever they take in and then whatever they can get away with.”
- Milton Friedman
Economists have explained how inflation can be fought through tax increases or cuts in public expenditure. Most of the people around the world feel that a 50/50 combination of the two measures would be a reasonable way to fight inflation and perhaps even be happier if the spending cuts are bigger than the tax hikes.
People usually do not hesitate to pay the increased taxes if they see that their tax money is being used for the betterment of the country, since that will eventually have a positive impact on their lives.
Nevertheless, tax hikes have always been seen as more effective than spending cuts by the governments (or rather by the expert advisers of governments), mainly under two assumptions: a) tax hikes are temporary, b) spending cuts will have a negative impact on the countries long-run social objectives, including health and education, and those should not be sacrificed to solve short-run or cyclic dips in the economy.
Assumptions
These are normally accepted as reasonable assumptions even by the people who do not have any knowledge of economic theories. Most of the people, including a majority of ‘experts’, are not ready to analyse the validity of such assumptions within the context of the situation at hand, which may be completely different from what the theoreticians had considered at the time they formulated such theories. Sri Lankans specially have had enough and more opportunities to learn what happens when fiscal and monetary experts take advice from politicians instead of the opposite of what they really should be doing.
Ill-advised tax cuts have basically forced the resignation of previous President of Sri Lanka after serving about a half of his term and the resignation of the previous Prime Minister of England after serving only forty-four days in the office.
Perhaps, the word ‘tax’ can be a dirty word for people who have had to experience such disasters, butin general, it has been an essential part of community living. History shows that China has been collecting taxes over 3000 years ago and Julius Caesar had imposed a one percent sales tax in Rome.
Religious institutions were also seeking material power through different forms of taxations. Followers had to pay a portion of their crop or the production to the temple, church, or the mosque. In addition to that people were expected to contribute their time, skill and resources in the process constructions and maintenance of infrastructure and taking care of the physical wellbeing of the priests. Modern systems of taxation around the world follow the processes introduced during the expansion of imperial Europe where tribute in kind was less useful compared to monetary contributions.
Taxpayer
There has never been a better time for Sri Lankans to think about and evaluate deeply what has happened and what will happen to their tax money. One of the main reasons why the country is where it is today is the lack of involvement by the taxpayer in the process of spending that money by the government. Citizens have been living in their own comfort zones for the most part of their lives until one or more outcomes of the crises hit home.
People were not worried about things such as: trade laws, taxes the businesses must pay, devaluation of rupee, excessive printing of local currency or the treasury being drained to the last cent until they found out that there is no fuel in the country. When they start seeing the sky-rocketing prices of food, medicine, and other consumables feeling that they cannot afford to live the life they have been living until that time, the first thoughts would be to blame the Government.
We have created hundreds of thousands of world-class engineers, medical doctors, accountants, lawyers, scientists, artists, and all types of other professionals using tax-money over the years. However, most of them bought into the same social contract of success and therefore were not interested in learning or thinking about any of the social, political, and economic factors, other than the ones that demand drastic changes in their spending habits. Each of these professional groups would talk about any such issues or government policies, usually through their trade unions, only if those policies have a direct impact on their earnings or career opportunities.
A tax increase is inevitable. Therefore, instead of protesting against increased taxes the citizens should demand hundred percent transparency to see where their tax money is going. It is the responsibility of each and every citizen to be vigilant and do all they can to, a) stop politicians, corrupt officials and/or the corporate/banking/privately-owned business sectors, from stealing tax money from government coffers, b) make sure that every citizen is paying their fair share including the President, the Prime Minister and the members of the parliament and multinational corporations. Governments usually justify tax hikes as the only option available to them and as one of the main requirements of the creditors. Often the conditions imposed by creditors not only require tax hikes and spending cuts but also require implementing tangible measures to reduce wastage and corruption. Increased taxes will not do any good to the country unless we stop corruption and reduce wastage.
There is plenty of evidence including explanations given by Nobel-Prize winning economists to show that using tax hikes to fight inflation is not a successful method as experts had believed in the past. People should understand that more tax means more spending and no nation has ever come out of debt by spending more.
When the patient’s condition is getting worse due to obvious mistakes of the doctor the very first thing to do is to change the doctor. If the country’s economy fell from bad to worse due to obvious mismanagement by a corrupt group of financial managers and their handlers, would it be sensible to provide more money to the same group of people and expect a prosperous future?
The writer has served in the higher education sector as an academic for over twenty years in the USA and fifteen years in Sri Lanka and he can be contacted at [email protected]