The government (the political class and the bureaucrats responsible for taxation) are saying the country is going off the fiscal cliff, and the only answer is a Value Added Tax (VAT).

Yet the advice of many tax experts, is, whatever you do, taxes should be simple to pay and administer, and be kept as low as possible to prevent avoidance.

Continued growth in the size and spending of government over the past 10 – 12 years is the root cause of the country’s fiscal problems. Witness the daily revelations with things like BEC and the burdens of unfunded liabilities of government pensions and more. All these issues are related to irresponsible government policy over the years. Allowances made to help ensure votes when times are good have brought “devastation” now that things are bad.

Regretfully, few of the political class and bureaucrats connect the dots between a vibrant business class and their very survival; as governments do not create wealth. As we are currently witnessing, their bad policies destroy wealth and economic growth.

As Kamal Ahmed points out in a recent Telegraph article, our policy makers should;

“rely on one world famous economist who agreed that you can only tax people so far before you create perverse incentives.”

“Nor should the argument seem strange that taxation may be so high as to defeat its object,” the economist said.”

“And that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.”

“His name? John Maynard Keynes.”

Disciplining public sector growth and spending, and removing obstacles to business are good places to start with fiscal reform.

The false expectation that the country’s fiscal problems will be fixed over night by just increasing the tax burden is folly.

If only life was that simple. As the renowned economist Friedrich A. von Hayek noted in his Nobel Prize lecture, The Pretence of Knowledge;

“If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.

In closing, the main points to consider are:

  1. Successive governments have put us in a real fix with their borrowing and spending. So getting these under control is imperative.
  2. Taxation should be simple to pay and administer and kept as low as possible to encourage compliance, and
  3. It is impossible for the bureaucrats at the Ministry of Finance and their advisors to understand how the taxes they impose impact each business. So they might be doing more harm than good, putting the country in an even worse fiscal bind if their policies slow economic growth further.

When our politico’s can get the public policy mix right, and change their habits, things will start to improve. If they continue to unsettle the business/entrepreneurial class and potential investors with their present approach, fasten your seat belts for a bumpier ride.

Yours in Liberty,
Rick Lowe