Friday, November 04, 2011

Tax reforms and government efficiency (II)
Do Governments have incentives to be efficient?.What is the real meaning of tax efficiency?.What is the real burden taxes imposes on welfare level?.These questions ,should come along for tax reforms.
Governments do not have incentive to be efficient, because its key role is to be effective, which means it has to do what it is demanded by citizens needs. So, the standard of evaluation about government performance, should be the fulfillment of those needs. The efficiency issue, arises when it comes to the tools used for that purposes. But, Governments follows political criteria rather than economic one, to choose those tools. The cost of efficiency for Government actions, seems to be higher than its benefits, because it limits the impact .Besides, the principle of politics decisions rely on seeking the best possible outcome , but not necessarily at the lowest cost.
On the other side, Wagner Law (1883),suggest that the main support for economic growth should be government actions, because economic growth increase revenues. But this is a long term scenario while government faces short run demands.
The real meaning of tax efficiency(simple, fair and efficient), do not consider the other side of the coin. It deals only with its effect on resource allocation based on prices, assuming there is no gap between social and private values . However, this gap exist and it turns out to be that taxes cover up this gap and government inefficiencies. Therefore, there is no efficient taxes, but fair and simple taxes.
What about the burden tax imposes on welfare levels?.Some years ago, there was a discussion concerning Arnold Harberger´s calculations to measure such a burden(roughly less than 2%-3% of USA ,gdp), because his outcome was not precise enough .Others economist, claimed to be more reliable on this calculations. But no matter how precise the methodology was, as long as it did not include government inefficiency ( which also impose a burden on welfare level), any result was not an exact valuation of the real burden. Taxes impose an higher real burden on welfare levels, because it helps to finance government inefficiency .
Laffer ´s proposal of lower taxes make sense regarding the issue of government inefficiency, (leaving aside the impact on investment and employment which by the way is complementary with government efficiency ).In fact , when taxes go up revenues might decrease not only because its impact on incentives, but also because government inefficiency to collect them. A recent report, (Citizens for fair taxes), shows that 280 of the more important firms in the USA, did not pay the tax they should have (2010-2011).
What are the implications of all of these hypothesis for tax reforms?.

a.- Fair taxes imply much more than the progressive or regressive nature of tax rates. It also deal with its share to finance government inefficiencies.
b.- Higher tax revenues , might be additional resources for financing government inefficiency and inequality. Even worse, higher taxes do not guarantee to solve inequality or better services. (The health public sector in Chile,1990-2000).
c.- The only tax reforms that matters, is the one which deal with lower taxes. It push spending to focus where it is needed the most.