Far, far away in the South China sea is an island where a small kingdom is situated.
This kingdom has been very successful for the past three decades at least, enjoying unprecedented economic growth, leaps in standard of living, and living a mark on the global community.
People go "wow" when they hear the name of the kingdom. A perfect mix of technology, success and greenery, blending seamlessly into the most classic picture depicting the kingdom: the night sky in the background, with the forefront dominated by skyscrapers of finance giants and a free-flowing river sitting at the porch of the entire setting.
In the kingdom today, as a council was held in the magnificent halls lined with velvet seats, portraying the image of luxury. No surprise - in the council sits members of importance, representatives of the citizens and high-flying civil servants loyal to the monarchy. Only one stands out, not belonging to the majority but exists because of Constituitional laws and for the king(s) [uh... why kings?] to say: "Look, we have the Opposition."
Late in the evening, as citizens turned on their television sets, tuned in to the news, the very first report that came up was an increase - again - in a variable tax called Government Suck and Take (GST) that will see it increase by 2 percentage points, at a time to be announced later.
As an astute student, my brain shifted into gear 1 as my cognitive resources were activated to facilitate the recalling on an interesting set of economic principles that very much prompted the birth of this entry.
In economics, albeit only the basic principles, a Government finances its spending (commonly known as Government expenditure, G) through the collection of taxes (T). There are 3 results that are plausible:
Budget Surplus: When the amount of taxes collected (be they personal income taxes or corporate taxes; used collectively here) exceeds G, the Government will have surpluses that can be used to build its reserves, such as the purchasing of gold;
Budget Deficit: The reverse of the previous result, the Government operates at a loss (at least for the current budget year) presumably in a effort to boost the economy through investments in infrastructure or promoting programs such as R&D or setting up state-owned industries to keep people employed. Direct benefits, such as welfare programs and handouts, are also part of G and may cause the deficit;
Balanced Budget: When G = T (theoretically possible only), the Government operates at a break-even.
Consider the following "hypothetical" situation:
In a rapidly expanding economy, a persistent problem that surfaces as a by-product is the widening in income inequality. Governments around the world face intense pressure to close the gap, or at least make efforts to reduce it.
As this kingdom is not in favor of cash handouts that its citizens do not work for (some countries allowed unemployed citizens to receive benefits at the expense of other taxpayers and there is not legal obligation for them to return to work or stay employed in order to receive these benefits) it has proposed a few years ago that only citizens who work are eligible for a higher share of handout; those who do not (including those who cannot due to reasons such as being retired and disabled) receive much less.
Thus, under the pretext of better-than-expected returns on investments, which yield high net profits, the kingdom decides to shed its authoritarian image and show its compassionate side by giving out these surpluses. This is done in hope that the income gap will be reduced.
Today, in order to finance social safety nets, more money is required. The most direct way to raise taxes is through the said tax, for the following reasons:
1) With a bustling economy, unemployment falls and income rises. With more disposable income consumers are encouraged to spend on durables and perishables, and variable tax, as the name suggests, varies with the level of consumption. Since people are expected to spend more, the collected tax revenues will also rise.
2) The strong economy is a good time for the raise in taxes, as the supposed burden is lighter with higher incomes. This is to reflect the adage "saving for a rainy day" and is used to finance the said nets.
3) A politically-neutral economist will say that as the economy grows and tends towards full employment, inflation may occur. Therefore, taxes, being a withdrawal from the economy, can help to stabilize growth and curb excessive spending, which is a major contributor to inflation.
However, the keen-eyed, like me, will see a logical fallacy in this proposal from the council:
Granted the income gap is widening. You raise taxes but say you will give me money to offset it. Upper-class should pay more (as mentioned, "being part of society"), middle-class should be doing ok. It does not make sense. A store does not ask the customer if he/she belongs to either class and charge the increased GST rate if the person is the "atas" one. It does so for everyone who visits the shop.
What compassion can one derive from the money that will be offsetting the increase? This is a spiral. You raise taxes, you give me money to offset it, the next time you raise, you cite the same reasons and you give me money again to offset it. And so on, and so forth. The smartest thing the founder has ever done is to shape the citizens into pragmatic, money seekers that can be pacified by dollar notes. Any problems? If have, give money.
Taxes are up, service quality remains unchanged, monopolies push consumers and citizens alike into corners. Not having a choice in many things, no avenue to say it - indeed, a homogenous breed of citizens thinking only about nothing but money and more money.
Furthermore, you try to package the whole thing, try to sound credible, build rapport, establish goodwill, use logical arguments... not very effective. Someone once said that it does not matter what others say, but "What is the best thing for S--------?"
What a disappointment. First class economy, first in many things, last in human touch.
