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Banbury Cross

a pillow for lost thoughts...

Archives for: May 2014

Case for Higher Taxes

The yields on the Spanish 10 year note dropped below 3%. We live in a strange dream.

It seems that the never ending money printing exercise of central banks is dragging the real world into a financial twilight zone, where no one really knows what the risk associated with debt is worth, where the responsibilities for repayment have been blurred and the prices of assets are whatever the central bankers want them to be. Monetary smoke and mirrors is the only thing that keeps sustaining the runaway government spending. Should the interest rates go back to historically normal levels at which the market risks would be fully priced in, most governments in the developed world would go belly up.

What seems clear, however, is that the primary benefactors of the frivolous monetary spigots are people with assets - which mostly means the top 1%. Whether your capital is stored in real estate, stocks or bonds, the rising financial tide has most likely lifted your boats into the stratosphere. But for people who live hand-to-mouth, the conditions on the ground have slowly been deteriorating. The fact that inflation hasn't exploded yet is only due to strong deflationary pressures from the general improvement of productivity and utilization of cheap labor overseas.

In such circumstances I think we should return to simpler basics, starting with a balanced budget. Every state spends whatever the taxpayers are willing to directly support through taxes. That means both higher taxes and lower spending. Where the balance of this process lies should be the subject of a fair political fight. And to make sure that such drastic measures won't drag the economy back into the quagmire of prolonged recession, any future monetary easing should be done on behalf of all taxpayers. Sending checks to all people should kick start the consumption and equalize the beneficial effects of financial engineering.

The thing is that when the public entities can borrow beyond their means, it is very easy to smuggle unnecessary items into the budget. Only when each and every expense comes from someone's taxes will there be a true political debate about what is necessary and what isn't.

Taxes should also be gradated to accommodate the revenue needs. Why? Because the higher up in the food chain you are, the more you benefit from the functioning society. Not to mention that it is really hard to evaluate many factors that are contributing to the bottom line, such as environment, public education, safe trading routes or essentially free contributions of past authors. Even free market cannot fully appreciate those costs and put a price tag on them. No one can really come up with a great idea on his own these days. All the low hanging fruit has been picked long ago.

Most technological advances are made on the back of numerous collaborators, scientists, researchers, whether through freeware or by making use of old scientific results. Say you make a great discovery in semiconductors and are ready to monetize it. You pay your workers and staff, you pay for your input materials and then whatever you get for your outputs is your profit. Right? But imagine the countless hours of public research that went into your discovery? How are those accounted for? Who pays mathematicians and physicists whose theories enabled the engineering discovery. Who pays the teachers who taught them? Who pays authors of free software that enabled better programs. Simply put, not all social benefits can be expressed in terms of immediate pay structure. By making contributions to society today, we enable similar discoveries in the future.

We will have to rethink the idea of taxes. We will have to find mechanisms that will counteract the increasing income inequality. Or we will wake up one day and realize that the Earth belongs to a thousand or so richest families.

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