Summer reading prompts thought of whether to scrap taxes
Last week I managed to get in trouble around the Tax Watch household for having my nose stuck too deeply into P.J. O'Rourke's latest, which goes by the strange name of "Eat The Rich" (English edition published by Picador). For those of you not familiar with this gentleman, O'Rourke is an American journalist who specializes in humor writing about man-made disasters, politics, politicians and any other subject he can send up in his inimitable style. He incidentally also wrote a travel book called "Holidays In Hell," which included an account of a visit to Warsaw in 1986 entitled, "What Do They Do For Fun In Warsaw?" We won't hold that against him, because that was a long time ago, and by his account it could have been a different country.
The idea of Mr. O'Rourke's latest book is that he travels around the world on expenses (suggestion here to the editor) looking at various economic systems to see which ones work well, and which ones work less well, and he draws various conclusions about what this means about economics.
I have no intention here of making the column a book review, but he raises several interesting ideas about what governments are supposed to be for, and what they are supposed to do. These ideas have a direct impact on what their tax policies should be, and what their tax plans are trying to achieve, which was inspiring enough for a column.
O'Rourke's idea is to compare Good Capitalism, Bad Capitalism, Good Socialism and Bad Socialism, which he does by visiting Wall Street, Albania, Sweden and Cuba. I think I've got the order right there. He also took in Tanzania, Russia, Hong Kong and Shanghai for good measure.
In one conclusion, he categorizes government spending into four types, which he defines as: spending my money on me; spending my money on other people; spending other people's money on me; and spending other people's money on other people.
Going back to the principle that there is no such thing as government money, only taxpayers' money, the same ideas can be used to ask governments why they raise money from taxes, and if they look at how the money is spent compared to these four categories, whether it is necessary or efficient to levy taxes or not.
The general idea is that I would be more efficient at spending my money on what I need better than the government can (although Kasia would argue that she is even better at it than I am), in which case the government does not need to spend it for me. In such a case, the government is only necessary to spend other people's money on me, and to spend other people's money on other people.
The spending of other people's money on me is very nice, but results in whoever spends it buying many things that I may not need - think of the socks that you get from grandma at Christmas - or me choosing to spend more than I would have done if I was bearing the cost myself, which I always thought was the main reason for having company cars. Spending other people's money on other people also results in people getting things that they don't want, don't need, or shouldn't have, without much regard to whether it's wanted, needed, or value for money. Unfortunately, most government spending of taxpayers' money seems to fall into this latter category.
We could digress into a discussion about the economic benefits of public goods such as roads, but that would be a bit too high brow and take up too much column space. So what is the implication for taxes? And how does this affect Poland?
Well, Polish taxes are generally perceived as being on the high side. The top rate may be low by European standards, but it cuts in at a very low rate, and the average rate is higher on lower levels of income, even if the average levels out at higher levels. In addition, the penalties for non-compliance are high, and often the same penalty is applied for an innocent mistake as is applied for outright cheating.
Some recent reforms, such as to the pension system, have clearly linked the contribution to the government with the benefit received back by the taxpayer, in particular his pension, sickness, accident and disability payments. This helps establish the idea that for every benefit received from the government a more than equal amount has to be given up by other taxpayers, to finance the benefit, and the cost of administering it, and is a welcome addition to the understanding of the system.
But has the reform gone far enough? The original intention of the Polish tax laws at the beginning of the 1990s was to have a relatively simple system with few deductions, to reduce the distortive effect on the economy. In many ways it is a phenomenal achievement that the mere idea of having to pay taxes has gained such widespread acceptance, even though everyone hates paying.
Despite my regular sniping every two weeks, the Polish tax system has been comparatively successful in achieving its objectives of getting businesses to pay some taxes, and to raise money for the government to spend. It also creates lots of works for tax advisers, which is a tremendous employment opportunity in the economy, as all of these people in turn charge VAT on their services, and pay income tax and ZUS to the state from their revenues.
But all talk of reform of the system now focuses on detailed changes to the rates, and for how many more years the corporate income tax rate will fall by 2%, and until what point. The fundamental framework seems to be fixed.
Even though he did not deal with the subject of taxation other than in passing, Mr O'Rourke's book made me question the fundamental question of whether taxes should exist at all, and to what extent there remains scope for another radical restructuring of the Polish economy to take yet more out of the state sector, and leave more money to be spent in the category of spending your money on you, rather than my money on you or your money on me, or our money on someone else.
The radical flat tax idea seems to have died a quiet death, although some of its good points live on in the proposed simplification to two rates that may or may not come in next year or the year after or maybe the year after that.
So as we discuss where the tax law heads in the next few years, the subject cannot be separated from where the Polish economy will head in that time as well. The lessons of "Eat the Rich" are the lessons that your parents always tried to tell you: Hard work, education, responsibility, property rights, rule of law and democratic government are the drivers of economic success, and the role of the tax system here is to support those values. In general, the Polish tax system does it reasonably well, but there's always scope for improvement. Read the book and we can argue about it at the next WBJ Mixer!
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen.
The idea of Mr. O'Rourke's latest book is that he travels around the world on expenses (suggestion here to the editor) looking at various economic systems to see which ones work well, and which ones work less well, and he draws various conclusions about what this means about economics.
I have no intention here of making the column a book review, but he raises several interesting ideas about what governments are supposed to be for, and what they are supposed to do. These ideas have a direct impact on what their tax policies should be, and what their tax plans are trying to achieve, which was inspiring enough for a column.
O'Rourke's idea is to compare Good Capitalism, Bad Capitalism, Good Socialism and Bad Socialism, which he does by visiting Wall Street, Albania, Sweden and Cuba. I think I've got the order right there. He also took in Tanzania, Russia, Hong Kong and Shanghai for good measure.
In one conclusion, he categorizes government spending into four types, which he defines as: spending my money on me; spending my money on other people; spending other people's money on me; and spending other people's money on other people.
Going back to the principle that there is no such thing as government money, only taxpayers' money, the same ideas can be used to ask governments why they raise money from taxes, and if they look at how the money is spent compared to these four categories, whether it is necessary or efficient to levy taxes or not.
The general idea is that I would be more efficient at spending my money on what I need better than the government can (although Kasia would argue that she is even better at it than I am), in which case the government does not need to spend it for me. In such a case, the government is only necessary to spend other people's money on me, and to spend other people's money on other people.
The spending of other people's money on me is very nice, but results in whoever spends it buying many things that I may not need - think of the socks that you get from grandma at Christmas - or me choosing to spend more than I would have done if I was bearing the cost myself, which I always thought was the main reason for having company cars. Spending other people's money on other people also results in people getting things that they don't want, don't need, or shouldn't have, without much regard to whether it's wanted, needed, or value for money. Unfortunately, most government spending of taxpayers' money seems to fall into this latter category.
We could digress into a discussion about the economic benefits of public goods such as roads, but that would be a bit too high brow and take up too much column space. So what is the implication for taxes? And how does this affect Poland?
Well, Polish taxes are generally perceived as being on the high side. The top rate may be low by European standards, but it cuts in at a very low rate, and the average rate is higher on lower levels of income, even if the average levels out at higher levels. In addition, the penalties for non-compliance are high, and often the same penalty is applied for an innocent mistake as is applied for outright cheating.
Some recent reforms, such as to the pension system, have clearly linked the contribution to the government with the benefit received back by the taxpayer, in particular his pension, sickness, accident and disability payments. This helps establish the idea that for every benefit received from the government a more than equal amount has to be given up by other taxpayers, to finance the benefit, and the cost of administering it, and is a welcome addition to the understanding of the system.
But has the reform gone far enough? The original intention of the Polish tax laws at the beginning of the 1990s was to have a relatively simple system with few deductions, to reduce the distortive effect on the economy. In many ways it is a phenomenal achievement that the mere idea of having to pay taxes has gained such widespread acceptance, even though everyone hates paying.
Despite my regular sniping every two weeks, the Polish tax system has been comparatively successful in achieving its objectives of getting businesses to pay some taxes, and to raise money for the government to spend. It also creates lots of works for tax advisers, which is a tremendous employment opportunity in the economy, as all of these people in turn charge VAT on their services, and pay income tax and ZUS to the state from their revenues.
But all talk of reform of the system now focuses on detailed changes to the rates, and for how many more years the corporate income tax rate will fall by 2%, and until what point. The fundamental framework seems to be fixed.
Even though he did not deal with the subject of taxation other than in passing, Mr O'Rourke's book made me question the fundamental question of whether taxes should exist at all, and to what extent there remains scope for another radical restructuring of the Polish economy to take yet more out of the state sector, and leave more money to be spent in the category of spending your money on you, rather than my money on you or your money on me, or our money on someone else.
The radical flat tax idea seems to have died a quiet death, although some of its good points live on in the proposed simplification to two rates that may or may not come in next year or the year after or maybe the year after that.
So as we discuss where the tax law heads in the next few years, the subject cannot be separated from where the Polish economy will head in that time as well. The lessons of "Eat the Rich" are the lessons that your parents always tried to tell you: Hard work, education, responsibility, property rights, rule of law and democratic government are the drivers of economic success, and the role of the tax system here is to support those values. In general, the Polish tax system does it reasonably well, but there's always scope for improvement. Read the book and we can argue about it at the next WBJ Mixer!
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen.
