Treat people fairly and they are more likely to pay taxes
An excerpt of the article below was published in the Financial Times on January 7, 2010.
Government deficits around the world are at risk of spiraling out of control. Aside from the obvious choice, to reduce spending, policy makers should take a step back and look at what may be the most effective way to raise revenue. How about simplifying it into two very basic parameters: public trust and the rule of law.
The vast majority of people are willing to pay their fair share in taxes. But when faced with taxes and regulations deemed unreasonable, people will get creative – call it market forces at work. This may be as simple as postponing a sale to avoid capital gains tax; or it may give rise to a shadow economy.
Italy’s recent tax amnesty yielded over US$100 billion in repatriated funds in a sign of how deep the mistrust in government is. A shadow economy extends to regulations as well, though: take China, where it is no secret that it is one thing to create laws, but another to enforce them. The shadow economy in China keeps the country running, even if it deprives the country of tax revenue.
However, if people mistrust their government because of onerous taxes or regulations, yet enforcement is flawless, the result may be a totalitarian regime akin to the Soviet Union. Crime may have been low in the Soviet Union, but there were chronic shortages of goods and services. With the fall of the Soviet Union, the rule of law imploded and a shadow economy quickly filled the vacuum.
The best way to maximize tax revenue for governments may be to earn the trust of their citizens. What’s fair is, of course, in the eye of the beholder. Generally speaking, however, the simpler the tax code and the simpler the regulation, the higher the odds that people will have income to report and pay taxes. A bonus tax in the UK, for example, may backfire as institutions shift future banking business elsewhere.
When it comes to reducing systemic risk in the banking system, policy makers would be well served to work with market forces and implement reasonable regulation (e.g., move derivatives onto regulated exchanges), rather than try to regulate greed away. Ultimately, this may lead to a more stable financial system and higher tax revenue.
Axel
Axel Merk
Author of Sustainable Wealth – order now.
President and Chief Investment Officer, Merk Investments
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If you are interested in a very fair tax system that I believe we should impliment to replace the heinous structure that we are currently subject to, please take a moment to visit fairtax.org and click on the tab “About the Fairtax”. It is very simple and fair, it does not burden any income group unfairly and will bring in the same amount of revenue that is collected now without all the wasted time and energy that goes into record keeping and reporting that goes on now. It also collects tax from people that escape the current system, so the honest citizens won’t be paying as much as they do now. I strongly urge you to take 5 minutes to visit this site and learn about this system that could save our economy! Thanks!