Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

Why Progressive Taxation and Cash Transfers make sense

Posted by butalidnl on 5 September 2011

If Tea Party activists are to be believed, the US government is busy taking away money from hardworking citizens, and spending it on bureaucratic government or on the parasitic poor.  In response, they call for lower taxes, smaller government and less social spending. While there may be some things valid in the criticism of how the government works and its social spending priorities are, there is a case to be made to keep such things in place, in principle.

If we were truly to minimize government, keep taxes as low as possible and have no social spending, we will get something like Somalia – a failed state in chaos, with terrorists and criminals running loose, and not much of an economy. There is a need for the state and its bureaucracy, in order to keep an economy running well.

But Somalia is not the US – it was undeveloped even while it had a functioning state. True. But when it had a functioning state, it at least had a working economy, and not as much crime, terrorism etc. as it has today.

For an example of a much more developed country with low taxes , minimum state and low social spending, lets take the case of Russia during the years immediately after the fall of the Soviet Union. The lack of effective government controls on the economy resulted in a handful of people getting control of huge chunks of the country’s wealth. They didn’t pay much taxes, corruption was rampant, crime syndicates ran amok and there were shortages of coal and other resources.

A developed economy needs to have a developed system of government. And this means that people need to pay the necessary taxes to pay for that government. As an economy is more developed, it needs more government officials, not less, in order to run things correctly.

Progressive Taxation
Progressive taxation makes sense from both an economic and a moral point of view. If a country needs to raise a certain amount of money, it makes economic sense to get a bigger proportion of this from the rich, rather than from the poor. The rich have more money than the poor; and their capacity  to spend is less affected by taxes than that of the poor. Also, since the poor tend to spend most of their income (while the rich save part of it), the multiplier effect of having poor people retain their money means that the market demand for goods is higher.

Now for the moral point. It is a myth that rich people had worked harder to become rich. A lot of rich people started off as rich children – being born of rich parents. And every successful businessman became so partly because of contacts, privileged information, or just plain luck; combined, of course with some measure of hard work.  Hard work is responsible for only a part (the smaller part, actually) of the wealth of rich people. Following this logic, rich people ought to give back more to society, because they have benefited more from society than others.

Conditional Cash Transfers
Cash transfers for poor families is a way of ensuring a minimum standard of health and education for citizens. On the short term, it may look like charity or dole-outs, but it is really a smart investment into the future. An educated and healthy labor force is worth a lot more than what the Cash Transfer Program eventually costs, in the longer term. Conditional Cash Transfers (CCTs) do not make people lazy; on the contrary, people will work harder if a better future and standard of living is achievable, than when their situation is hopeless.

It would be even better if the government is able to provide Universal Health Care and quality Free Education for all. But, when this is not yet possible, a Conditional Cash Transfer program that improves the health and education prospects for the poorest families is a good thing to do. An added, though secondary, advantage of a Conditional Cash Transfer program is that it stimulates the local economy in the poorest communities. The CCT effectively raises the level of demand, leading to more business for merchants, more goods get transported, and there is more demand for services (e.g. laundry, transportation, retailing). And all this indirectly raises the welfare of all the poor families in the area (e.g. through cheaper goods, more job opportunities).

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