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Benjamin Franklin was wrong - By Kitty Miv, Editor

Kitty Miv, Editor
05 January, 2012

It's been holiday time across much of the world, giving people a chance to enjoy their favourite amusements, most of which do actively help the national exchequer, allowing you to feel a measure of civic virtue as you puff on that Havana Romeo and Juliet or down a glass of Bollinger.

In many countries, however, the stereotype payer of 'sin' taxes would be a man  leaving the betting parlor, coat turned up against the wintry shower, a cigarette dangling from his lips, on the way to the bar around the corner, where he can play a fruit machine as well as imbibe an unholy quantity of the local hooch while watching the game on a wide-screen TV.

All these activities contribute towards a river of gold flowing into the national treasury. And not to forget that these may be the only taxes our hero pays, because he, er, doesn't work, which means that he has a nice little cash earner cleaning windows, fixing friends' grass-cutters, doing their tax returns (especially shocking, that one!), giving massages, distributing substances. It's a long list, and if you happen to live in a country where the taxes are high, you will be familiar with it. You do withhold tax from your cleaning lady's wages, don't you? Of course you do; how could I be so crass as to suggest otherwise!

Finance Ministers are prone to donning a virtuous cloak of their own when announcing increases in 'sin' taxes, which they say will cut back on the horrible habits of smoking, drinking and gambling. Of course they don't mean it; they hope that people will go on with their bad habits, but will just pay more for the privilege. And usually they are right.

There are limits, however, to the possible extent of sin-tax-farming: the gaming industry, which can service its customers remotely, has largely decamped from high-tax countries to low-tax islands with good connectivity, where Finance Ministers can't get at it; and the tobacco and alcohol trades are vulnerable to smuggling, which is now a major industry in Europe at least.

What is a poor Finance Minister to do? Sin taxes are yielding diminishing returns; high income tax rates simply drive people to cheat or to leave the country; corporation tax rates are on their way down to zero by fits and starts; VAT, which is at least fairly difficult to evade, is inflationary; stamp duty is expensive to collect and easily evaded; inheritance tax is extremely unpopular and widely thought by economists to be anti-enterprise.

Most thinking Finance Ministers would like to cut taxes; but there is little chance of that during the next decade in the highly-indebted Western democracies. Only those countries which choose to renege on their sovereign debt will get the chance to hack back their taxes, and if there are too many of those it will be a zero-sum game. A few there will be, starting presumably with Greece. For the rest, they can only grit their teeth and wait until times are better.

They do need to plan for it, however. In all directions, the ability of countries to apply high taxes is becoming constrained, and the ability of people to avoid high taxes is growing. A country that doesn't realize this is condemning itself and its people to penury.

Why? Because of competition. For the last 200 years or so, national boundaries have allowed the suspension of the laws of competition (governments, bureaucrats, tyrants, tax collectors and trade unionists all hate competition). The globalization that is following the liberalization of capital markets, the spread of telecommunications, cheap travel, the demolition of language barriers, and above all the domination of the Internet is rapidly destroying these boundaries, and will destroy the ability to tax along with the rest.

So that is my joyful message for Epiphany (the Christian festival of revelation): Benjamin Franklin was wrong, and tax is no longer inevitable. Death is a bit more difficult to deal with, though.

Ciao, Kitty


About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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