Whose Taxes Are Going Up?

Commentary No. 285, July 15, 2010

Everyone knows the old saying that there is nothing inevitable except death and taxes. But most of us spend a lot of energy trying to postpone both of them. Taxes are a very unpopular idea, everywhere. Few people complain that they are not being taxed enough. The problem is that almost everyone wants many of the things paid for by taxes.

Just recently, there were amazing poll results in France. France has one of the highest tax rates in the world, yet a majority of the population believes that further tax rises are inevitable. Even more surprising, despite the fact that France now has a rightwing government, more voters on the right expect a rise in taxes than voters on the left, more well-to-do voters than poorer voters.

The simple fact is that there is hardly any government in the world today, national or local, that has enough income to meet the level of expenses that are mandated by law plus those desired by the majority of their constituents. So, these governments borrow money and get (further) into debt, which is unpopular, and/or they reduce expenses at the expense of someone. However, the reality is that neither borrowing nor cutting expenses seems to be enough.

The net result is that all governments, everywhere, are increasing taxes, and will continue to do so in the coming years. But most of them are denying that they are doing this. How can one hide raising taxes? There are multiple ways to do this.

Way number one is to increase the cost of government services. If a government raises an application fee for a document or a license, that is a tax increase on the applicant. If the government postpones the age of eligibility for a pension, that is a tax increase on the prospective pensioner.

Way number two is for a government to eliminate a subsidy to which it previously committed itself. If this was a subsidy to an enterprise, that is a tax increase on the enterprise, which often (but not always) can be passed on to consumers. If the subsidy went to an individual – for example, unemployment insurance – eliminating or reducing it is a tax increase on the individual.

But the most important reduction of subsidy, because the least obvious, occurs when a national government reduces one of the pervasive monetary transfers to a local government. What this does is simply shift the locus of the tax increase from the national level to the local level. The local government has then two choices. It can increase its taxes to make up the shortfall, say by increasing property taxes. Or it can reduce its expenditures, say by reducing what it invests in education at the local level.

If the local government spends less on public education, it is reasonable to suppose that the quality of education being offered is thereby lowered. This may lead to a response by the better-off residents, those who can afford to provide privately for the cost of education of their children. The poorer people get poorer education or no education. The better-off people get increased costs, which are in effect a tax increase, but one that does not benefit the whole of the population.

Taxes are inevitable indeed, and no time more so than when the world-economy is in poor shape, as at present. What is not inevitable is the group or groups on whom the greater burden lays. It’s all a question of whose ox is being gored. Some people audaciously call this the class struggle. It is being waged rather ferociously these days.

The only slogan to which no one should give credence is the slogan, “lower taxes.” There is no way whatsoever to do this. There are however fairer and less fair forms of taxation. The question we all face is whose taxes will be raised, and via which channel. This is one of the key political battles of our time.