The Moorish Wanderer

Wandering Thoughts Vol.2

Posted in Dismal Economics, Flash News, Read & Heard by Zouhair ABH on October 7, 2010

I was going through some old documents on the computer, and I found a piece I wrote in relation to the 2009 OECD annual conference in Paris. Quite light on theoretical background, but the main ideas are there.

“Could taxes stimulate an open economy ? The question on itself is a bit provocative : how could a drain –or let us say a puncture- on a theoretically optimal production market bring benefits to an economy ? A government takes money for two basic things : pay its regular expenses (as in paying its expenses and its civil servants) and its investments. There is a way in turning theses taxes into powerful means in boosting an economy : how so ?

– A common wisdom among tax experts is that an optimal taxation (in the sense of Laffer’s maximum level tax) is such that the government takes a little something from everyone creating value. The little something is a mathematical solution such that the captured part of the social surplus is so low that the expected projects of the taxed agents would not be altered.

 

Laffer Curve. Surprisingly the US, home of "Free-capitalist" market is on the wrong side of the curve

 

This might even go to a social consensus, where agents voluntarily give away a part of their present surplus for a bigger future one. This is not wholly irrational, it is just an example of the cooperative Nash paradigm. The main question is how agents behave so ? when they have positive expectations on the government project : a highway project, nuclear plants for cheap electricity, universities for a larger knowledge capital, etc… How does one calculate the ‘optimal’ taxation rate for the government’s projects ? For businesses, the problem is more or less easily solved: many firms have to spend a lot of money in some projects they have to undertake due to lack of say, infrastructure, skilled labour force, an so on. Theses firms would be relieved to give a lot less to the government for it to provide these collective goods. To sum up, taxes are just an aggregate of opportunity costs for investments a firm cannot undertake but is in dire need of it in order to do business.

– How does the government spend the taxes right ? Apart from rigorous spending checks, it is the social consensus that the agents are putting their faith in what is now the very visible hand of ‘benevolent government’. It goes back to the very structure of market economy : there is no such thing as ‘natural markets’. It is how roles are distributed among agents : the firms, the public authorities, the labour force representatives, the households, and so on and so forth. Taxes are just the equilibrium price for what the government is providing as services: education, legislative framework, infrastructures, security. Finally, there is only little to be feared from the impact of taxation within an open economy. One might even dream of international taxes form common international services: sea and airports might be free to use in exchange of a ‘package’ tax that would pay for their expenses thus rendering them autonomous and effectively international.”

Ok, that does not sound very classic left-wing-ism on tax-and-spend policy, but when you think about it, neither does the conservative wing’s policy make sense. A heavy tax toll is no productive and could hinder an economy, but too much tax cuts -especially to the top tier income households-  is no good policy either because when the going gets tough, governments are left twisting in the wind and compelled to borrow money they could have already gotten, or because it just adulterates government policy to provide basic services for the many and skews the policy towards the better-off.

What about government then? Contrary to the media myth, it is not a core policy for the left to advocate for “big state”. It is not. I’ll try to elaborate on that on some future post

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