Populist Governments / Poverty / Corruption / Comeuppance

[Pensador]

Poverty really does suck. I have seen it so well down here. But it is far more then a condition of economics. It involves mental illness, genetics and so many things we are just not able to deal with as a society yet. Nor are we really interested in dealing with it. And when I say mental illness and genetics I am not limiting that to the poor. Our politicians obviously are not by any means sane or genetically suited for the work and power they pursue.

 

[EdRooney]

Taxes and inflation hurt all, most taxes hurt the middle class a bit more than the rest. ...It can only come from taxes or printing - both things hurt the people, some more than others, but inflation hurts everyone.

This is not only a gross oversimplification, it is also mostly untrue.

1. In and of themselves taxes do not *hurt* anyone. Taxes are necessary for allocating resources for the economy to be as productive as possible for everyone. Obviously, the less democratic a society, the more these funds will be diverted through corruption (eg, JP Morgan, Citibank, Monsanto...) and misallocated. But not taxing would be the opposite extreme: an economy with terrible wealth discrepancies leaving the economy's potential untapped. There are plenty of great examples of low tax paradises: Bangladesh, Haiti, Bahrain, Zambia...

2. Inflation does not "hurt everyone". It is a macroeconomic indicator that needs to be seen in view of other indicators. Thus for example, Europe, the US and Japan are facing a huge problem with deflation: as prices decrease businesses hire less and real wages go down. The net result is workers have less disposable income and growth is sapped. The "solution" proposed by their governments has been QE: huge increases in the money supply ("printing" in laymans terms).

3. This printing has not led to the desperately needed inflation in either of the three regions.

4. Ideally taxes should be progressive. VAT, as you indirectly point out, is a regressive tax, affecting the poor more than anyone (in your example, the same poor person has to paint her house too, and it represents a greater percentage of her gross income than the middle or upper classes.

5. Lastly in regard to "government handouts", in your analysis do not forget their effect on aggregate demand. In a country like Argentina, using taxes to redistribute money from the wealthiest to the poorest is just about always a net gain, since (given the govt's incompetent capital control policies), the wealthy are far more likely to ship their riches out of the country (thus dispensing with the myth of being "job-creators"), whereas the poor tend to spend their income increases locally, creating jobs and helping the economy as a whole.

 

[Chet]

Economies are never as simple as anyone likes to try and think. Taxes do hurt everyone, some more than others. They also tend to help everyone, some more than others. The issues appear when there is little or no congruence between the groups.
Inflation discourages saving, without some savings no one is going to be able to build that paint factory and hire the workers to make the paint so the poor can go spend their income on paint +vat.

Virtually any current economic theory put forth has a counter and short of writing an entire thesis on each and every small point not really worth arguing about.

 

[citygirl]

I think "hurt" was used in the sense that everyone feels taxes/inflation but generally speaking, the middle class *is* the hardest hit. Because not only are they paying the VAT that yes, everyone pays, they are paying income tax, property taxes, etc, etc. The poor aren't affected by the latter and the super rich usually find a way out to shield themselves via tax shelters and the like.

And in re inflation hurting or not, I think it's safe to say that when dealing with 30% inflation - it does hurt everyone. Even with wage increases, the real buying power has decreased. And at some point (at least for me I'm already there), employers will start to cut back and shoppers will be more careful, etc. Off the top of my head - my taxes on my domestic employee increased from 195 a month to 500. I would have given her an additional raise but now I can't b/c that extra 300 a month is now on taxes. I don't patronize the local butcher in my neighborhood b/c his prices are too expensive. My business is going elsewhere. We are starting to let employees go b/c it quite simply is too expensive, esp when no one pays us on time. Most of our clients are 2+ months in arrears. B/C they are playing the game that with inflation, they are actually paying 5% less if they wait a few months to pay. But that has a ripple affect. Etc, etc.

In re the poor spending their money locally - that is true. I've seen a huge increase in "stores' in my neighborhood where people are selling x, y or z out of the front of their house. But how much does that really help? I can 100% they aren't paying a penny in taxes. They aren't "creating" jobs for anyone nor paying into the system. And the reason they are doing it is b/c they can't find work elsewhere.

 

[EdRooney]

Chet:

You are thinking of taxes as liabilities, without taking into account what you get back from them: roads, sewers, clean air, a well-fed, educated employee base. The more democratic the government, the more taxes are assets instead of liabilities. I gave the examples of Bangladesh et al. to show that having a country where little to no taxes are paid hurts more than those where taxes are.

Citygirl:

Those people selling things in kioskos in your neighbourhood: they are buying mostly locally produced things like Arcor cookies, dulce de leche, shampoo, candy... Each purchase of industria nacional helps create jobs in the economy as a whole. It is not necessary per se for the kiosko to have employees or pay taxes (all though that would be nice).

Furthermore about inflation: I agree 30% inflation is never healthy unless the economy is growing at 30% (no country is). I just wanted to show that we cannot say "all inflation is always bad" because it's not. It's just one indicator of many, not the only or even most important one. For some reason inflation gets a lot more press than other related indicators such as employment or GINI, which would be affected by a lot of measures to bring down.

 

[Chet]

Chet:

You are thinking of taxes as liabilities, without taking into account what you get back from them: roads, sewers, clean air, a well-fed, educated employee base. The more democratic the government, the more taxes are assets instead of liabilities. I gave the examples of Bangladesh et al. to show that having a country where little to no taxes are paid hurts more than those where taxes are.

I am by no means saying there should be no tax, the problem arises when those taxes are spent in foolish and corrupt ways, which is pretty much what can be expected to happen when people are spending 'other peoples money'.
Money that can be taken whenever the government feels the need. Why any one would even use a bank and risk having all their money taken whenever someone feels the need (Cyprus?) is beyond me (and of course I still use a bank, pretty impossible to get away from).
Or like citygirl mentioned taxes on X just suddenly being a lot more .. or taxes on things that were not taxed last week...surely they will run out of new things to tax eventually.

 

[EdRooney]

I totally agree: the less democratic the government the more taxes become despotic, because then it is not about "let's all get together and use our resources to fund the programmes we want." Instead it becomes, like you said, "other peoples' money": a foreign entity swoops in and takes away something from you with you receiving no benefit in return.

For example, I lived in the US for over 20 years and I saw a indirect correlation with civic participation and rage against taxes. As the country became less democratic, the anti-tax rage increased. More and more people there now understand it is a very undemocratic country, so they hate paying taxes. By contrast, I have been going to Bolivia regularly for the last decade, and I've seen the opposite: as the population becomes more involved in their own governance, the anger against taxes has lessened.

The solution then is not to get rid of taxes: it is to make government more democratic.

And one note about Cyprus (since it's close to home): the bank bail-in was utterly opposed by the vast majority of the population. It was imposed by EU leaders who wanted to help out their financier constituents, thus proving how un-democratic the EU structure is.

 

[Pensador]

I totally agree: the less democratic the government the more taxes become despotic, because then it is not about "let's all get together and use our resources to fund the programmes we want." Instead it becomes, like you said, "other peoples' money": a foreign entity swoops in and takes away something from you with you receiving no benefit in return.

For example, I lived in the US for over 20 years and I saw a indirect correlation with civic participation and rage against taxes. As the country became less democratic, the anti-tax rage increased. More and more people there now understand it is a very undemocratic country, so they hate paying taxes. By contrast, I have been going to Bolivia regularly for the last decade, and I've seen the opposite: as the population becomes more involved in their own governance, the anger against taxes has lessened.

The solution then is not to get rid of taxes: it is to make government more democratic.

And one note about Cyprus (since it's close to home): the bank bail-in was utterly opposed by the vast majority of the population. It was imposed by EU leaders who wanted to help out their financier constituents, thus proving how un-democratic the EU structure is.

I would argue that the need for austerity is to some degree the result of democracy and the fault of voters. Due to the fact the politicians where doling out all sorts of social benefits, projects and high paying government jobs based on acquiring votes and staying popular. These programs simply could not be sustained financially. But trying to move democratic voters from a life style they came to believe they were entitled to back to reality has proven to be nightmare. Even more so because now things are even worse than they would have been if the entitlement mentality debt had not been piled up so high. If the voters where doing their home work and watching out for the interests of their countries instead of getting drunk with entitlements many of the problems in the EU would not exist today. Many of these problems are also compounded by the fact that many of the voters like to receive entitlements but they also like to dodge paying taxes at the same time. Here again the voter digging the hole not the banks.

Therefore it is my belief that democracy can be utterly dysfunctional and is perhaps in some of its current forms of practice, it is actually very impractical.

 

[Chet]

Democracy has this annoying way of devolving into mob rule.
I wish I had a better suggestion but democracy and or republics are so far the best forms of governance humans have come up with. The biggest way we could improve various currently broken forms would be to reduce the size of the 'states'. Both the voters and the leaders tend to act more responsibly when the results can be seen close to home.
Sadly the trend seems to be going in the other direction, ever larger 'states' with people distanced from the results of their actions (EU being a prime example).

 

[Pensador]

I agree and sadly I think it has now hit an all time new low and has devolved into Mob Entitlement rules. And the few that do produce can by no means foot the bill for the massive entitlement mob.