What?! Tax?

With prices of commodities rising constantly and oil prices breaking record highs(though they are down to around $116 per barrel now), we, as consumers, bound to start thinking of how to maintain our budgets, wonder if we will get a pay rise to keep up with inflation. However, there is actually something we hardly think about, as we assume that it is unavoidable, is the amount of tax we pay to the government. Sometimes we hear governments say they will do a one-off tax return, or offer tax cuts to low-income population while increasing the tax rate for higher earners(like one of Barack Obama's policies), we hardly ever hear anything like permanent tax cuts. We might wonder if it’s even possible with everything a government has to pay, in this entry, I will try to explore the possibility of that happening.

Tax is the main income for a government. They use it to pay for expenses like roads, social benefits, public services. A government will have a budget surplus if their tax revenue is more than all the expenses while a budget deficit is the other way round. There are many types of taxes the government can impose to increase their income, like the Goods and Services Tax, Income Tax, tax on petrol and many more. With this many ways a government can take money away from us, one might think that it is pretty hard for a government to go into a deficit, and yet, many governments, especially this year, due to economic slow downs, will report red figures. This is because tax earnings are directly related to how people are willing to spend. Even though wages did not necessarily have to have changed during the year, as less people go out to buy things, income for businesses decline and so will directly affect how much tax the government receive.

Before I talk about the possibility of tax cuts, I want to compare the tax rates for a few countries and why they can be so different. First I want to ask many of you a simple question, have you ever wondered why America's tax rates are lower than countries like Germany's or New Zealand's? For simplicity sake, I take the tax bracket of 33%, since both NZ and America has it, the maximum income allowed in that bracket for America, is USD 357,700, while in NZ, the maximum allowed is NZD 60,000. It does not take a genius to figure out what a big difference there is. I know that there are also other taxes payable in the US, like Medicare, Social Security tax and the state income tax, but they only take up a very small proportion of incomes, and some states don't even have income tax. Now, if we compare how much the US government has to pay each year for expenses like health care, the army and others, against how little the NZ government has to pay(the reason i say the NZ government is paying a lot less is because of the small population size), one might start to think why New Zealanders have to pay such high taxes.

Now, back to the thing about tax cut, I remember my high school economics teacher saying, the reason why governments never make permanent tax cuts is that, people will spend all of it and therefore drive up inflation. What she said was definitely true, but that does not mean it is bad for the country at all. Economists say that one off tax returns are better than permanent ones because for one off returns, people recognize it might not happen again, and therefore will save it. But for permanent cuts, people know it will be the same for the future and therefore will definitely spend it. However, what my teacher did not consider was that, when economies are bad, tax cuts are the best way to help spur the economy on (given the inflation rate is relatively low). Oddly, some governments, like the Hong Kong one, do a strange thing when they report budget deficits. Instead of announcing tax cuts, to increase consumer's disposable income, they would increase tax rates and say that the main priority is to get the budget back into positive territory (which I never understand why, nor do my parents, I reckon not many people would understand the logic behind it).

You might ask, if governments report negative numbers, how can they give us tax cuts? The answer is to cut back their expenses. There are many expenses they can spend less on. I understand that the budget for stuff like roads, street lights and public services cannot be reduced, but things like education, insurance subsidies and unemployment benefits can be reduced, and these sorts of expenses take a large chunk of the annual budget. You might ask another question, how on earth can a government cut its education and unemployment benefits budget? Don’t worry, I will explain how to cut the budget for those three examples I mentioned. For insurance subsidies, a government can do exactly what America is going to do, a universal coverage. For people that cannot afford health insurance, the government will subsidise the gap between the price and what they can afford. That way, they don’t have to pay for the full claim of the doctor’s fees from citizens; instead, they would be able to transfer the cost to insurance companies.

The reason so many people stay at home and cannot be bothered to look for work when they can is because the wages a job pays is less than the benefits the government give them. If, however, the government encourages people to work by covering the difference between the wage and the benefits, even if the government pays more than the difference, the budget will still be reduced by quite a margin.

The last example I gave (education) is quite complicated, and it will lead to another entry later on by me, so I will not give any big hints here. But I will say, the proposal I will explain will not only reduce the government budget, but also help improve school, teacher and student quality.

It is clearly quite possible for a government to give out tax cuts, especially when times are hard, when an economy needs a boost. Just an extra note to my readers, the government of Bermuda does not impose any compulsory income tax, just a few percent of a tax of some sort, but it is still surviving. Also, the Vatican does not force anyone to pay them anything, but they try to ask people to donate for them to keep running. I’m not suggesting governments should abolish tax; I’m just trying to say that, tax cuts are perfectly possible. The real problem is not how much we pay to the government, but how the government is spending the money. It is our money after all.