Sunday, 27 May 2007

Essay on Taxes

The following is my entry into the ACT on Campus Essay Competition 2007. I'm not betraying the far better Libertarianz, but instead this is an opportunity to get known in politics, and better my skills in writing.

Why a Low, Flat Tax Rate is Ideal for New Zealand
By Callum McPetrie

In this day and age, the government has a firm grip on many parts of our lives. We see government in healthcare, education, welfare, and a whole lot of other activities, which means that the government has been taking an increasing interest in our wallets, too. But what happens when the government digs its hand-or its foot, according to some Capitalist economists-into our money? Is the money used for better, or worse? And how is this government intervention affecting our economy?

First, lets look at some countries with very different tax systems, and what the outcome has been.

Case Study: Estonia

Estonia is a nation of 1.4 million people located on the Baltic coast south of Finland and east of Sweden. Like its neighbours Latvia and Lithuania, the nation was a part of the USSR until 1991, when it gained independence after the “Singing Revolution”.

After the Soviet break-up, the outlook for Estonia was very grim. Inflation was at 1000%, the economy was downsizing at 30% every year and 92% of trade was with Russia. The conditions Estonia was facing were worse than those during the Great Depression!

During these fateful years, a young man called Mart Laar became the Estonian Prime Minister. He was very inexperienced and had only read one book on economics-“Free to Choose”, by Milton Friedman. Despite some forecasts of 30% unemployment if the flat-tax reforms Laar proposed became a reality, Estonia soon had new, flat-tax system. The economy boomed. Growth at higher percentages than those of the Asian tigers was realised. Businesses flooded into Estonia, and the country benefited immensely under its new system.

Only 16 years on, and Estonia is now the ideal model for post-Soviet countries. It is a very high-tech country that has been dubbed “the Silicon Valley of the Baltics”. Over 80% of taxes are now done online, and within 5-20 minutes. The tax rate is currently at 22%, but will be lowered to 20% by 2009 and to 18% by 2011. All around the Internet and in publications over the world, people are raving about the success that Estonia has been enjoying. Several other Eastern European nations, inspired by Estonia’s success, have now adopted their own flat-tax systems.

Case Study: France

In contrast to booming Estonia, France is one of the most Socialist countries in Europe. Government spending and revenue accounts for over 60% of GDP. The top tax rate is 49% (although this will be lowered thanks to President Sarkozy), and that is for people who earn just 48,000 Euros a year! If you earn over 8,383 Euros you get taxed at 19%. Over 14,754 Euros per year, and the rate is 28%. 23,889 and 38,869 Euros will land you a 37% and 43% tax rate, respectively.

It is because of these crushing tax rates, along with all the other Socialist intrusions into the French economy, that men and women from all over France are now crossing the border to work. Every day, thousands of Parisians commute to London, in the more Capitalist UK, for jobs there. The French economy has been stagnating for years and there is much to be shown for it. Over half of French households live on less than 2,000 US dollars a month. Many French businesses have been outsourcing jobs away for years; the unemployment rate has not been below 8% since 1984. In the Pas-de-Calais, the region with the most beneficiaries per capita in France, the unemployment rate is 13%.

What of the Nordic States?

The Nordic States have high tax rates, just as high, in most cases, as France (although it should be noted that Sweden elected a Conservative Prime Minister last year). The Nordic States also have large welfare states. So why are they remaining competitive?

Sweden, the country I’ll look at here, was in 1850 poorer than the Congo is today. Yet during the period between 1850-1900, Sweden became one of the richest countries in the world thanks to trade with Britain. Sweden’s economy was unremarkable until the 1970s, when the country started introducing higher tax rates and more labour market protections, and the country dropped from 4th to 14th richest country in the world. Because of this, Sweden had a sluggish economy not dissimilar to the French economy today. In the 1980s and 90s Sweden cut a good deals of taxes (there is no current inheritance tax and gift tax) and regulations. Another reason why Sweden and other Nordic States aren’t suffering is because of the fact that many people who invest in the country live outside of it. Despite the fact that Sweden does not have a government instituted minimum wage, unions keep it at about 65% of the median wage, which is barring many immigrants from poorer countries from entering the workforce. If this continues, combined with less Swedish innovation in future times, it could pose a serious problem. Many skilled immigrants that come to Sweden in search of jobs leave soon after, which is also an issue facing Sweden in the future.

How a Flat, Low Tax Rate would Work in New Zealand

New Zealanders are well known across the world for their entrepreneurial spirit and hard-working attitude (which the current Labour government has all but destroyed). New Zealand is an isolated country, which means that because overseas products cost more to import, our industries could stay more competitive under a low, flat tax rate and provide more jobs. NZers would be free to produce more, meaning the country’s quality of life would rise.

A flattened, lowered tax rate would mean less money spent on government services. However, this is more than made up for by the extra productivity caused by lower taxes. People would be free to invest, meaning more wealth is created and more money is poured into businesses, and jobs are created. Because of the decreased government burden in people’s wallets, more citizens could afford to use more efficient private services.

Many opponents of flat, low taxes say that they unfairly benefit the rich. Under the type of tax system I am discussing, the rich would have a lot more money in their pockets. But the opponents of flat, low taxes fail to realise that the majority of the rich man’s money goes is invested in his business-to make more money. More jobs would be created this way. Because of the decreased government intervention, more people could afford to run their own businesses, and as thus there would be more competition in the labour market, so workers could have a decent say about their working conditions without resorting to unions.

That is why I support a flattened, lowered tax rate for all New Zealanders.


The Free Radical No.74, Page 09, “Why Does Sweden Work?” by Johan Norberg


Sus said...

Well said, Callum. Michael Cullen should be sitting at your feet.

(Easier for you to kick him, too!)


Anonymous said...

Cullum for PM, that is awsome writing Cullum!!!!

Callum said...

Thanks guys. :-)