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.