The primary debate since the crash of 2008 has been that of government spending. To enforce cuts or not to enforce cuts? Of course if you are a government that finds itself in danger of being shut out of capital markets because investors are wary of your existing debt levels, the debate becomes academic.
One has to cut when one can’t borrow any more. But that still hasn’t stopped the various interested parties and think-tanks on both sides of the Atlantic from arguing on whether this is the optimum approach or not.
In its own way the very fact that this debate is still raging suggests that the neo-Keynesians maintain the upper hand. The “supply-siders” have evidently still not made a convincing enough case. This column has long argued for proactive measures to unlock labour market bottlenecks – a 12-month freeze on payroll taxes for example – which are necessary to tackle the West’s chronic unemployment problem. This week we consider another supply-side issue, that of taxation policy.
By that we don’t mean the absolute level of tax, or whether a “flat tax” is an idea worth implementing. Nothing quite so controversial. We really do mean tax structure. Anything that simplifies taxation and red tape is a “good thing” for commerce. Reducing the number of tax bands, simplifying the calculations that corporations have to make, measures like these all free up time to pursue genuine value-added activity rather than form filling.
On the personal taxation side, Western governments are adept at taking away with one hand and handing out with the other. For a definition of bureaucracy it’s hard to think of a better picture then that! Take the concept of social welfare transfers from the central government to private individuals. In the vast majority of cases, these same people also pay income tax.
Stoics among us may think such an arrangement is all for the best in a Panglossian world, but others are more inclined to think of Kafka rather than Voltaire for the closest analogy! Simplifying tax regimes (by raising income tax thresholds, for example) so that people who receive social welfare transfers don’t also pay income tax, or pay less income tax, doesn’t only reduce bureaucracy - which in itself lowers public sectors costs - it also incentivises unemployed people to re-enter the labor market.
It isn’t beyond the wit of policymakers to make the taxation structure simpler, and there is a clear benefit to be obtained at both corporate and personal levels. There may not be any media capital to be had out of it, but allied to other labour market reforms it would result in a positive impact on unemployment. It’s a pity there isn’t more written about this in the mainstream media.
The author is Professor Moorad Choudhry,Treasurer, Corporate Banking Division, Royal Bank of Scotland. The views expressed in this article are an expression of the author’s personal views only and do not necessarily reflect the views or policies of The Royal Bank of Scotland Group plc, its subsidiaries or affiliated companies, or its Board of Directors. RBS does not guarantee the accuracy of the data included in this article and accepts no responsibility for any consequence of their use. This article does not constitute an offer or a solicitation of an offer with respect to any particular investment.