Govts don’t understand tax systems to make economies tick
WILLIAM PETERS – IT is time to wake up and get some facts right and to stop the economic failures that are plaguing the world today. Many people are suffering and starving in different parts of the world because of a lack of understanding by politicians, economists and businessmen alike of how economies actually work.
There are growing numbers of migrants who are looking for a better life elsewhere. Why? Their governments don’t understand tax systems and what can be done to make the economy tick.
Firstly, let us go back to real basics. Mankind utilised the products of the earth, sea and air to provide for their needs and wants. Their production methods changed over the years and the business sector developed and grew and the leaderships became governments, and underneath was a growing population of people.
The basics have not changed and the end products of business and government are the supply of goods and services for the people. There is nothing else. Over the years GDP has become the measurement of economic strength, but the economy has grown with the growth of the population and the standard of living of those people.
Robots And Technological Advancements
When I see articles on these subjects I have to wonder when governments will realise that they need to change their ideas and policies, and soon. The country’s tax base is being eroded, partly because people who are taxpayers are being replaced by robots and robot technology which does not pay tax.
In addition, the cost to government of welfare goes up as people become unemployed.
It goes far deeper when it is realised that the end product of all business is the supply of goods and services to the community and robots do not consume these goods and services. It reveals that people form the market place and will need to work to have money with which to live and for business to survive.
The alternative would be for robots to take over the production of goods and services and people not to have to work, but be given the goods and services they need with governments owning and running the means of production because businesses would no longer operate (a long way ahead, but possibly the shape of things to come?).
Global trade and free markets are all well and good, but they are not the answer unless there is going to be a global government making the policies by which the people live. The economy may be considered to be all about business making money, but governments have to go back to basics.
Their responsibility is to the community and they have a responsibility to ensure that people work and earn a living for one very good reason — they form the market place for business. Few people appreciate that recession as often as not is caused by a reduction in spending power and the cure is to increase spending power in the economy.
Many businesses and governments will stop salary increments, have redundancies and austerity measures in a period of recession while it is the opposite that is necessary to revive the economy. A prime example was the introduction of the Poll Tax by Margaret Thatcher which moved some of the tax burden from the rich to the poor and reduced the spending power of the poor and in particular the teenagers and resulted in a recession. Austerity is another example of poor governance.
Many businessmen do not appreciate that the overall market place for business is provided by the spending power of the community and although a business will supply other businesses which in turn may supply other businesses and governments the end of the chain for the business sector and the government is the provision of goods and services to the community.
There is nothing else. It is difficult for the mining industry for instance to appreciate that their income is reliant on the market place provided by consumers. The mines will produce raw materials for industry around the world and industry will manufacture and sell to other industries.
Nevertheless at the end of the chain there are only consumers to buy the end products. Even the supply of goods and services to governments is in the end for the benefit of business and the community it may be difficult for accountants and bankers to appreciate that their costs which are recovered largely from business enterprises are included in the price of the goods and services being provided to consumers somewhere down the line.
More and more countries have unrest amongst their communities because the people are unemployed or poorly paid.
Look at American history and find that the economy was strongest when the people were working and had a good standard of living. Look at Zimbabwe, under full sanctions its dollar was once worth more than the pound sterling because the sanctions forced the country to develop its internal economy.
Governments need to concentrate the country and business sector on self-sufficiency, full employment and improving the standard of living of the people. The strength of the economy will come from the buying power of the community.
Politicians need to note the economic effects of any taxes that they introduce to see if they increase costs or reduce spending power because they will often do one or the other.
Income tax adds to the cost of employment as do all the other taxes paid by the people. Everyone believes that they pay these taxes and few appreciate that these taxes are in fact paid by the employer because these taxes are paid from his wages and so included into the cost of his employment and they end up in the end price of the goods and services bought by consumers. Looked at another way the taxes on persons reduce the spending power of the individual.
These taxes can be removed and replaced through increasing VAT without increasing the prices of the goods and services produced and would ensure that imports and robots share equally in the tax burden. These changes would allow such as Brexit to happen successfully.
By taking away income tax the cost of employment will be reduced as gross pay is reduced to net pay and by taking away other taxes and contributions paid by people it could further reduce the cost of employment or improve spending power. Free health and education further reduces the cost of employment.
As the cost of employment falls it is vital to maintain and even increase spending power. The economy then basically would work on the basis of increasing VAT to reduce spending power and increasing wages to improve the economy and to avoid such things as recession.
Almost all taxes with the exception of VAT add into the costs of production and the end price of goods and services. So, almost all taxes including company income taxes can be removed making investment into the country extremely attractive. How to do it is another story.
Many countries find that profits are exported to tax havens which provide the Capital investments. Now understand that in getting rid of many of the taxes countries can become tax havens and attract investment so that they do not rely upon capital investment from other countries. Foreign Investment may well encourage those businesses to export some of their profits to avoid taxation.
The two major political systems are capitalism and socialism running into communism. With the changes suggested above it would be found that the capitalist would adopt socialist labour policies to develop the business sector.
In looking at the political systems in operation it should be appreciated that the businesses should be free of government control to ensure that the business leaders will make sure that they operate efficiently and profitably.
When businesses are operated by governments, as in socialism and communism, there is a tendency for friends, relatives and supporters to be appointed to positions of control which could result in loss making operations and the possibility of corruption
Remembering always that money provides people with choice. The communist system which owned businesses did not provide freedom of choice (Look at Russia and China’s history). Freedom of choice provides a greater opportunity for business to develop new products.
Politicians should be believers in HIM — Honesty, Integrity and Morality.
These changes are vital to ensure economic success and politicians adopting these policies would be ensured of continuing success. Can you imagine a capitalist with the socialist policy of improving the standard of living of the workers.
Next week, Peters will be writing on why Zimbabwe’s economic recovery is in a mess.