It is time to leap to the defence of effective taxation. One of the lessons of the GFC, which is becoming increasingly apparent in the European crisis, is that government debt is far more vulnerable than private debt, because government debt cannot fail without massive repercussions. This is fairly obvious looking at Greece, which has government debt that is 132% of GDP. Italy’s is is 111% of GDP. The rest of the European countries have government debt about the same level as America’s, and not especially alarming, at least in terms of the quantum.
And then of course there is the outlier Japan, whose debt is a staggering 512% of GDP, and whose government debt is 226% of GDP. But of course it is almost all owed internally, so notionally less of a “problem” (until it is a problem, that is). The UK and Ireland have relatively low government debt (about 80%), but huge financial institutional debt (219% and 259% respectively). Australia has very low government debt (22%), but high household debt (105%).
They are the quantums, the relationship between income and total debt (although GDP is not strictly income, it is a lower figure only useful to make comparisons between countries or different periods in the same country). We get another picture when we look at tax revenue as a percentage of GDP. These are huge differences that to some extent explain why some countries work better than others. But only to some extent.
The comparison that most interested me in this list was that between India and China, which supposedly have a similar tax take: 17.7% for India, and 17.0% in China. But it is very clear that where China has an effective tax system, largely the achievement of Zhu Rhong Ji in the 1990s, India does not. In India, the middle class tends to see tax payment as optional; in China the government has a very different view and punishes tax cheats harshly. That is why there are highways and first class infrastructure everywhere in China and precious few genuine highways and poor quality infrastructure in India.
What I suspect is that the effectiveness of a tax system, the extent to which the middle class is given no option but to pay, may be a crucial element in how large the economy gets. For the simple reason that a broke government can never be as effective catalyst of economic growth as a solvent government. If one looks at countries that strongly enforce taxation, these are the countries that work well. For instance, Wesley Snipes was jailed for tax avoidance recently (although it may also have had something to do with his bad acting), because that is what America does. In Australia Paul Hogan was ruthlessly pursued by the Australian Tax Office for unpaid taxes. It is serious business.
But in places like India and Greece, it isn’t serious business. John Markakis, writing in the London Review of Books starts off by quoting an editorial saying “the state is bankrupt”. Then he explains why:
This was a time when tax dodging became a popular sport in every part of Greek society. Those who didn’t play themselves tolerated it. Traders, shopkeepers, craftsmen and professionals avoided issuing receipts for goods and services; until recently they were allowed to assess their own tax liability in the knowledge that their declarations were unlikely to be scrutinised. To this day Greeks press a fakelaki (a small envelope stuffed with cash) into the hands of state-employed doctors in order to ensure good treatment. VAT, which currently stands at 23 per cent, is widely avoided, and so are worker benefits that add as much as 80 per cent to labour costs. Tax dodging at the popular level has deep roots in the culture and is not easily overcome.
Some things are changing. Cash registers and numbered receipts have been introduced in the past couple of years, obliging people to collect and produce receipts to meet tax regulations. Hundreds of thousands of bags filled with receipts have arrived at tax offices, where no further notice is taken of them. The plan now is to introduce smart cards to record all transactions digitally. Meanwhile the real beneficiaries, as so often, are in the upper income brackets, but the ossified state of the judiciary means that tax evasion at this level effectively enjoys legal protection. Despite repeated government promises, there is no expectation that even a fraction of the tax owed will be recovered.