Every year, politicians of all countries increase government spending. As you cannot get something from anything, this means that ultimately taxes need to increase, or they will finance their spending with borrowing or inflation. There is no such thing as a free lunch. Printing money does not create wealth, but it does enrich the politically connected at the expense of everyone else because the newly created money is able to be exchanged at the old pre-inflation level. Then the money goes out into the rest of the economy, raising prices as it goes. Borrowing money just puts the problem off until another day, and ultimately the money must be paid back with interest. Kicking the can down the road may be appealing to politicians who think in terms of election cycles but it is not a solution. What is needed is fiscal and monetary discipline.
The more money that the government spends, the worse off things become. This is because wealth is created by the private sector. The more taxes that are imposed, the less money remains to be reinvested in the economy, in new businesses, creating new jobs, or new machinery, which makes labor more productive and hence more remunerative. Taxes also lead to lower standards of living for the workers who pay them. At a time when so many people are struggling to get by, the last thing we need is the government reaching into their pocket. It is true that some good comes from government spending, but there is so much waste at the same time, and much of the spending is directly counterproductive. It is time to think wisely about reducing government spending. Making cuts to government spending, in terms of personnel, budgets, and projects undertaken will bear significant fruit in the years to come. Another important source of revenue when you are looking to reduce taxes is to sell off government property and/or land. Get that land into the private sector where it can be used for productive purposes, and at the same time raise revenue to decrease taxes. It’s win/win. Now it’s true that bureaucrats may lose their jobs as a result of decreasing spending, but they’ve had many years at the trough, and besides they can find other employment where instead of simply consuming wealth they will be creating it as well.
Taxes need to be cut, and/or eliminated. But to be fiscally responsible you need to cut spending as much as you cut taxes, or even more so when you are running a deficit. A lot of people have proposals to improve the tax situation. People want a flat tax, or to tax land or whatnot. But the truth is there is no good tax. So what you need to focus on reducing spending. Across the board, cut everything. Eliminate entire departments or ministries whole cloth. Government has been growing inexorably for over a century, and we need to reverse course and start reducing government instead. In addition to giving room for the market economy to grow and produce more wealth, cutting taxes and spending will also attract foreign investment. Over the years there has been a lot of talk about factories going overseas, to take advantage of cheap labour and/or a laxer regulatory regime. Actually, this should be celebrated. You have to understand how desperately poor people in the third world are. If you can set up a factory there and offer them great jobs producing cars or whatever, that is to be celebrated. That is capitalism doing good to transform those people’s lives, to bring them out of poverty and into the middle class. At the same time, we in the first world need to careful about job losses at home. Globalization means the good and the bad. But one way to attract foreign investment and the building of more factories in first world countries is to radically reduce taxes and regulations and to provide a more hospitable environment for foreign investment and foreign companies. And at the same time, we can make it easier for domestic industries to flourish.
One thing that many politicians are doing around the world is offering massive incentives for companies to set up shop in their jurisdiction. This is patently unfair. They are taxing domestic industries for the benefit of their competition. They do this because they want to attract foreign investment, and their confiscatory tax rates and unnecessary red tape make companies want to establish their businesses elsewhere. But how can you justify taxing one company to subsidize another? That is profoundly unfair. And many companies do go bankrupt precisely because they are forced to pay such high taxes and comply with unnecessary regulations. So instead of engaging in corporate welfare, and then taxing the other companies to pay for it, to take from one to give to another, to allow politically connected firms to benefit at the expense of those who cannot afford lobbyists, we should simply offer a fair playing field to all companies. And simply by offering a low tax, business-friendly environment, this will do much more to attract foreign investment than sweetheart deals ever will. And it is fair. But politicians don’t want fair, they want special treatment for favoured groups, so those favoured groups contribute to their election campaigns.
But tax reform is absolutely crucial. The first reform is to make the income tax a flat tax. Exempt anyone who makes less than $40,000 a year, and then charge a simple 15% from there. It’s easy to calculate, and substantially less of a burden than the graduated income tax. Instead of penalizing hard work, we will reward the most productive members of society by allowing them to keep most of the wealth they create. It would be even better to eliminate the income tax altogether, but let’s do this one step at a time. People might ask “how can you afford such a tax cut”? But the answer is simple. It’s their money that we would be allowing people to keep. The real question is how can we afford to have such high rates of government spending and taxes? Just cut spending across the board to compensate. No doubt there are countless government officials enjoying extremely high salaries who could be let go. Entire buildings of bureaucrats who could be sacked without anyone even realizing. Fire those bureaucrats, auction off that building, and use the money to cut taxes. It’s extremely simple. The problem is political, not economic.