Tax and Spend

First World countries are generally far wealthier than they were fifty years ago, and taxation levels are generally higher than what they were then. The amount of revenue flowing in to governments, even allowing for inflation, is therefore much greater than it was fifty years ago. And yet, governments seem to be perennially short of money. Why?

The obvious answer is that governments spend, or would like to spend, more money than they take in. The real questions are what do they spend it on, and why do they spend it?

First World governments, by and large, spend the bulk of their money on social programs. There are two reasons for this. First, governments may see a pressing social need and step in to fulfil that need. Second, governments may cynically use taxes to bribe the electorate to vote for them, disguised as a new social program. Very often the two are combined. Politicians desperate for either election or re-election will have no difficulty convincing themselves that the latest scheme they have cooked up really does fulfil a crying social need, and will conveniently forget that world would go on just as well if their scheme were stillborn.

The problem with social programs is that while they are easy to institute in the first place, they so quickly become part of the fabric of life that removing or reducing them causes howls of outrage. Let’s suppose the government sets up a program to deliver a cup of coffee to everyone in bed before they get up in the morning. A vast, nationwide network of coffee preparers and coffee deliverers would be set up, together with their associated purchasing, transport, quality assurance, training, and management teams (lots of the latter, of course), all at full union rates and civil service hours. When the program becomes financially unsupportable, as inevitably it must, and the government of the day announces its demise, the mainstream media and social media forums would join in a concerted outburst of anguish and breast-beating, and would inform us that the coffee-in-bed program is the very essence of Americanism/Canadianism/fill-in-as-appropriate-ism, and tampering with it would lead to bloodshed in the streets.

A program of this nature may win votes for the government in an election, but only on a one-time basis. Once instituted its existence is quickly taken for granted. Next time around the government or government-in-waiting  needs a new program, but of course the old ones cannot be touched. And you wonder why governments are perennially short of money?

When considering programs of this nature, we need to ask ourselves what is the proper function of government. The answer to this is that governments should do those things, and only those things, which we as individuals cannot reasonably do for ourselves, or the private sector cannot do for us. All else is mere vote-buying. Defence, foreign affairs, and policing are areas for which the government should reasonably have full responsibility. At the other end of the spectrum, getting everyone a cup of coffee in the morning is not something that governments should be doing. But in between are large grey areas. Should governments be providing daycare for young children, for example?

The argument for government-provided daycare is that mothers of young children may need or want to go out to work, and that private daycare, for which the parents will necessarily pay the full cost, may be too expensive for them. Far better for the government to provide daycare at a nominal cost, while the full cost will be paid from tax revenues. In effect, the cost of daycare will be spread over all taxpayers rather than being paid solely by those who make use of it.

The problem with this is one of efficiency. Any program run by the public sector has no need to be cost efficient, because it has no competition. Costs can be guaranteed to go up year after year as unions press for never-ending wage increases, and as more and more supernumerary staff are added: supervisors, area managers, regional managers, employment equity officers, dispute resolution staff – you name it, sooner or later they will be there. Programs like this add on nebulous functions like fungi spreading underground. And why not? Cost efficiency is a null term in the public sector. Private sector daycares, meanwhile, must keep overheads down or go out of business.

If we as a society consider that we need to provide financial support to the parents of young children – if – then a far more cost efficient method would be to give the money directly to the parents. Direct cash  ‘baby bonus’ payments to parents of young children could be used to send the children to a private daycare, or might provide enough additional funding to enable the mother to stay home with her children.

Of course, the usual objections will be raised that parents would spend their baby bonuses on beer and popcorn. Yes, this might happen in a few cases (although much less frequently than the patronising mandarins of the liberal left assume) but this would represent a minor inefficiency, compared to the gross inefficiency of a government-run daycare system.

However, this does not touch on the central question of whether governments should involve themselves in the entire area of daycare, whether as a direct provider or by some indirect means such as a baby bonus. We need a framework in which such questions can be discussed and decided, rather than relying on the whims of politicians.

If taxpayers’ money is to be spent on a new social program, then there must be a clearly stated set of objectives for that program to achieve, other than an abundance of happy voters in the next election. In the case of daycare/baby bonus, the reasons might be thus:

  1. To encourage the participation of women in the labour force;
  2. To encourage women to have more children.

The second objective arises because as societies become richer, children change from being economic assets to economic drains. In a poor country, the more children you have, the more potential wage earners there will be in your family, whereas in a rich country the more children you have, the greater your outlay on clothes, sports equipment, computers and so on. In most First World countries today the birth rate is below the replacement rate, and while this may gladden the hearts of environmentalists, it will become a major cause for concern as the number of elderly persons receiving state pensions and medical services eventually exceeds the number of wage earning tax payers who support them.

The tax and spend philosophy embraced by many politicians assumes that there is a bottomless well of taxpayers from which endless funding can be withdrawn. Demographics would suggest otherwise. Tax and spend inevitably results in governments racking up vast amounts of debt which will be left to future generations to pay down. The problem is that those future generations  will almost certainly be smaller than ours, with a correspondingly smaller capability to deal with that debt.

Be prepared to be cursed by your descendants.



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