Monday, July 19, 2010

What to tax and how to spend the public funds

Since the crisis is still here (now with the sovereign debt flavor) and nobody declared it unconstitutional yet, Romanians discovered a new domain where everybody has an opinion after football and politics: the tax system and budget deficit. So here are my two cents on this issue.

The budget deficit can be reduced in two ways: by increasing the income, or by decreasing the spending. In order to have more income the state can either improve the collection rate of the existing taxes by simplifying the forms and cracking down on tax evasion (that could be hard given the corruption levels of the tax authorities)
or by increasing some taxes. Regarding taxes my preference is for a system that tax rather consumption then work. Since the whole human race's consumption levels is unsustainable on the long term, any measure that discourages this consumption is welcomed from my point of view. From taxation point of view this would be higher VAT, excises on energy products and other goods, property taxes (which are very low in Romania), road taxes, CO2 tax. It's true that I don't feel very affected by these types of taxes since I always enjoy starring at the ceiling and thinking of a math problem :) On the other hand, the taxes on work should be lowered so that people are encouraged to work (legally). Note that in Romania currently there are 4-4.5 millions of employees out of a working age (18-62) population of 10 millions people. Even if you take out maybe 2 millions migrant workers there are still 3.5 millions who are not formally working in this country!

Now, there are some opinions that whatever mix of taxes the government will choose the state will not be able to get more than 32% of GDP as budget income. In this case the only real option for getting a balanced budget is to cut the spending to 32% of GDP (currently they are at around 40%). That should lead to lay-offs in the public sector. Another source of economy would a more efficient public spending and procurement, but this is hard to do quickly given the level of corruption in this area.

As you can see the fight against corruption should always be a high priority because it affects both tax collection and public money spending. That is what is corruption all about in the end.

P.S. Enough economics, I'll end this post with a good Spanish restaurant where I ate a couple of nights ago: Alioli: paella, creme catalane and sangria were all good.
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