Friday, October 21, 2011

Tax Reforms and Government efficiency (I)
Taxes are the main source but not he only one of revenues for Government to provide services. Thus, any time those services are increasingly necessary,(economic recession, inequality gap, new demands and the like), the first option which comes along is to increase taxes. It is assumed that the efficiency level of Government programs, is such that it compensate the cost of taxes .It means, the services delivered fulfill the expectations and needs of those who asked for it.
However, it is not obvious that government efficiency might be to such a standard, to be confident that the social benefit just match the social cost of taxes. It might be that the social cost turn out to be higher than the social benefit, because of different kind of inefficiency, such as corruption, bureaucratic and institutional delays, special interest groups influence, changes in politicians preferences. In the 2010-2011,WEF report on competitiveness ,wastefulness of government spending evaluation has an average of 3,4(the closer to 1, means extremely wasteful government spending),with more than 80 government spending performance, placed below average.
Given a set of standard services based upon public policies implementation, Taxes and Government are complementary. Inefficient governments require higher or more taxes, while efficient governments require lower or less taxes. The data on government performance, shows the connection between taxes and Government, based on efficiency. In the same WEF report, the variable the extent and effect (efficiency) of taxation, has an average of 3,6 (The closer to 1, the more tax level limits incentives to work and investment),with 76 countries below average which seems to be quite consistent with previous index of government efficiency evaluation.
Therefore, the real issue It might not be necessarily narrow to whether the tax burden goes to the rich or not, but following the complementary nature of both, the efficiency use of the collected revenues by Government come along to the debate . In the extreme side of the argument, the rich might pay higher taxes but whether it is not efficiently allocated , it is not useful to anyone. In such a case, the welfare of the society will be better off with lower taxes on the rich. Why?. Because this resources will alternatively go to productive investment, employment and wealth, and Government will have to work to become more efficient. This is what the WEF report evaluation 2010-2011 might suggest.
On the other side of the implication, lower taxes are strongly linked to government efficiency to get the most of its impact on both economic growth, and a better outcome in terms of equality.

Friday, October 07, 2011

Global economy risks : The time for coordinated leadershipRecent weeks have shown how vulnerable is global economy to risk perceptions. The complicated situation of debtor countries and the risk of defaulting their debts, has made market volatility something rather usual. Any positive signals(even weak), might be enough to recover the mood, but apparently for not too long.
World public opinion wonder how come that the recovery has not gained momentum to be sustainable, after fiscal and monetary expansionary policies at global scale. I do not think that the stimulus program applied at the beginning of the crisis were too weak, but the real problem to be solved, was more complex than expected. More so, when there was not a recession proof institutional framework(EU debt and the euro ), to cope with global implications. Each decision was made as specific requirement(whether it was Ireland, Greece or Portugal) came along, which exacerbate risk aversion of global economy.
Thus ,there are two problems strongly connected which might explain current risk.
a.-The sustainability of rescue packages for debtors countries to avoid default
b.- The strategy to get back on the track of economic growth, for those countries which needed it most .
The overall scenario of a global recession is still hanging on, as long as one of those, or both previous conditions, are not fully satisfied. After all, both are strongly related. Without economic growth, the higher the chance of debt default, and the more urgent the necessity, to make sure there is enough financial support to deal with it. If this financial support availability, is made up day by day, markets bets go on to the negative territory .
Banks recapitalization goes in the right direction, Euro bonds purchases helps to clarify doubts. The Tobin tax on financial flows ,do not seem to be the proper tool, as long as it confuses the factors which explain the situation . Besides, speculative forces arises not because of lacking taxes ,by because of wrong economic policies, specially the ones which creates disequilibrium(debt, deficit, inflation ), which is when speculative forces benefit the most.
What About Latin America?.Latin America is for the first time , in a crisis not of its own. Sure ,It might be affected, but it has a basic framework to deal with it. Latin American countries are working together to confront the crisis. Perhaps ,it might go further on with the future implementation of rescue fund in case it is necessary, or better policies coordination, specially to deal with local currency appreciation implications. These efforts would get better control of risk perception.