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Less Is More When It Comes to Taxes

Try as we might we cannot escape the euro zone crisis and its impact worldwide. Perhaps EU governments should be happy when they observe the President of the United States visiting the Prime Minister of Australia and taking time out to comment on the euro. In true Wildean fashion, it’s always better to be talked about…

Credit Crisis
CNBC.com
Credit Crisis

Government indebtedness is the most significant factor behind the euro’s problems, but unemployment is the biggest manifestation of the crash. And the jobless stats are entering truly dreadful territory. UK youth unemployment is now above 1 million, the figure in some parts of Spain is approaching 50 percent, and elsewhere in the EU there are comparable figures.

This is truly the most pernicious effect of the recession and one whose social impact will be felt for generations. One would have thought it would command more column inches.

Not every problem in the world needs to be solved through more public expenditure. If EU governments suspended payroll taxes for small and medium size (SME) companies for one year, we’d soon see jobs being created.

Throw in an abolition of the minimum wage and the effect would be even greater. Neither of these measures “costs” the government anything, and will result in lower welfare payments and higher tax receipts. Could we not see this discussed more often in the business media?

Instead the leading debate now is whether to implement a financial transactions tax (FTT). Just as not every problem needs to have public money chucked at it, not every issue needs to be met with greater taxes. The “Eurobond” market only exists because in the 1960s banks sought to escape US taxes on bond issuance.

Unless one implemented the FTT in every financial centre in the world, all it would succeed in doing is driving banking business to areas that don’t have an FTT. This would have the consequence of reducing the tax take from banks in the affected jurisdiction. Not really what one wants to see in a recovering economy.

And could we expect that revenues raised via FTT will be segregated into a separate pool and used to alleviate poverty and unemployment? Or is it more likely that they would simply be merged into the great central pot of government revenue and used for other purposes, such as helping to maintain an expeditionary force in Afghanistan for another ten years?

Not every economic problem requires a government solution. Unemployment is easily the biggest single problem facing EU countries today, and one can deal with it by reducing bureaucracy and suspending payroll taxes, particularly for SME companies, without having to spend a penny. If we create an easier environment for the small business sector, we’ll soon see the jobless figures fall.

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The author is Professor Moorad Choudhry Head of Business Treasury, Global Banking & Markets, at The Royal Bank of Scotland, and Visiting Professor at London Metropolitan University.

The views in this article represent those of Moorad Choudhry as a private individual, and do not represent the views of Royal Bank of Scotland or London Metropolitan University.

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