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An Alternative To "Negative Tax"
The employees' income tax is, from an accounting perspective, and only from an accounting perspective, an integral part of their wages. But for all practical purposes, financially, economically and even for accounting itself, the tax is a significant part of the product's cost, and being so, of its price. Therefore, the real payer of the tax is the consumer. Nothing would change financially, i.e. in the distribution of the money paid by the consumer between the employees, the capitalists and the government, if the accounting definition of the tax would change into an employers' tax or value added tax (VAT). The employees would still receive the same net wages, which are their real earnings, the government would get the same tax, and the business owners would still struggle with their competitors to achieve the highest profit, which is the margin between their products' cost and revenues. This accounting change will not have any economic effect. It will not change the distribution of the goods and services available to the different socio-economic sectors, nor in their share in the production process.
The bad effect of defining it as an "employees' income tax", is that it hides the fact that since the tax is a component of the price of goods and services, the real tax payers are all sectors of society, and not only the employees who earn above a certain level. Because of the fictitious definition, only this group of employees can enjoy the tax reductions by raising their net wages. Changing the accounting definition into employers' tax or VAT, can bring the positive effect of gradual tax reductions to all parts of society, since the government's partial decrease of its portion in the cost of goods and services would:
1) Lower the prices, through free market competition and via a justified government control over the monopolies. This would raise the real value of the earnings of all social groups.
2) Serve as an anti-inflationary factor that can lower more rapidly the interest rates. Interest is also a part of the cost of goods and services and it directly hurts people of all social groups, as well as the business firms.
3) Lower manufacturing costs of local products, encouraging exports to global markets, as well as local sales. This can speed economic growth, enhance investments, create more jobs, etc.
The only explanation for the tax's misleading name, which hides the real taxpayer, should be found in the realm of psychological demagoguery. It gives the public and its "social" representatives, who often understand little about economics, an impression of a just and progressive tax, where those who earn more pay more and the poor pay nothing. But like all lies, in time it takes its toll from those whom it wants to please. This time has just arrived, when the government intends to reduce taxes, including the "employees' income tax". It is only natural for the employees, who were made to believe for generations that they were paying the tax from their wages, to feel that they are entitled to tax reductions that would increase their net income. It is not easy to explain to them why this is not the case. This difficulty should not drive the government to abandon the benefits to the public and the economy that the tax reduction would have brought under a different accounting definition. It should consider compensating those groups that are supposed to be exempted from it through the "negative tax". This bad idea cancels most of the benefits that could be achieved by reducing the tax from its real payers, if only the government had the courage to tell the truth to the public, and reduce the tax while preserving the employees' net income.
Moreover, the proposed negative tax would:
a) Require fiscal resources to make the payments and slow down the rate of tax reductions and budget cuts.
b) Increase government involvement in the economy through paying parts of many citizens' salaries, expand the bureaucracy and its roles, and increase dependency of many citizens and firms on the government. This would mean a progress toward the Marxist dream of a government that pays all its citizens fair wages.
c) Hurt the dignity of the lower classes. Instead of living on fair wages that would be increased in real terms through lowering the tax on their purchases, they would be receiving handouts from the government.
Indeed, after decades under a regime that made us all dependent on the government, we have become accustomed to this state of affairs and forgot the meaning of free humans' sense of dignity.
Read more in: http://classicalliberalism.virtualave.net/liberal2.htm
Dr. Noah Nissani, 9/September/2004