In this chapter I will deal with a very important matter: the financial dealings of the state. The bottom line of the financial affairs of any state revolve around income and expenditure. There is no way around it. If you don’t have the money, you can’t spend it. According to some (I’d say rather foolish) people, this view of dealing with the organisation of the state is cold and doesn’t include the human perspective. I’d say that this all boils down to the implementation of the policy by the people who need to carry out the work implementing it, but there’s no way around the fact that you need money to keep things running and that you can’t keep things running if you don’t balance the books.

In the end it is very cute that you want to cure cancer for everyone, but it is not economical. Some people will be unlucky. Deal with it. Success is a choice. The fate of the individual citizen is not the subject matter of the politics. The subject matter of politics is to make sure the nation as a whole is provided the services and environment to prosper and make individual success more likely. In the end, this does boil down to what you spend your tax income on and how you spend it.

In this chapter I will discuss:

• Determining the proper tax base

• Proposal for fair taxation

• The division of tax revenues

• Government expenditures

Determining the proper tax base

Taxation, by its definition (and also its history!), is akin to a legalized form of robbery by an entity more powerful than the entity being taxed. However, the state need money to keep things running. I therefore reluctantly accept that it is necessary to impose taxes as a way to enable the functioning of the state.

How then, would one impose taxes and make sure that they fair for everyone? The answer for this question starts with determining the proper base for taxation.

So, what to tax?

You can tax income, but this is liable to schemes which manipulate income so it looks as if income is lower than it is in reality. This means that solely taxing income isn’t the be-all, end-all way of taxation.

How about property then? (including assets such as cash and stocks, etc) Well, this too is amenable to manipulation. Besides this, there’s also the fact that an over-taxation of property will lead to a loss of wealth, which hampers economic stability by eroding capital.

So neither situation is ideal. The best way then, is to strike a balance between the two.

Proposal for fair taxation

To me a taxation scheme should be fair to everyone involved. It is clear that a fixed amount of taxes due per person is untenable, as it would impact the majority of the population beyond their means. On the other hand, It has always been painful to me to see socialists pretending that once you earn enough, the rest should go to the people. This is just plain untrue. It’s a form of robbery by the poor and it encourages tax evasion schemes and tax refugees. However, the opposite should also not happen. Tax evasion in the manner rich which people can get away with in countries like the US by lowering their income on paper should not be made easy. To combat this, one should calculate a fair virtual income: the income gained by the use of property without paying for its use and the exercise of one’s capacity for labour. The solution to this is rather simple though: All income, either real or virtual should be taxed at the same rate. No exceptions for anyone under any circumstances. In other words, a true flat tax. Virtual income for the use of a good or service should be determined by the 5 year average for said good or service in the whole of NE.

When you tax all income equally, there can’t be a misunderstanding about how much tax one owes. Similarly, a flat tax should be imposed on property. This should be a sustainable amount, so the economy is not harmed. The taxation should be equal for natural persons and legal entities like corporations and foundations alike. I’d like to call this ‘Universal Taxation’.

With universal taxation it becomes harder to evade taxes and this should make it less attractive. Likewise, foreign entities should pay taxes for any income they earn inside NE before their assets are allowed to leave the country. I would like to propose that property transfer taxes are abolished. In my mind they truly are a form of robbery, and they destroy family capital like nothing else can. Similarly, gains gotten through smart investment should not be punished through taxation.

There’s one exception to the universal taxation: punitive taxation. Punitive taxation can be a good way to shape behavioural outcomes, and I think it is a tool which can be used to positively influence things. To me punitive taxation should generally only apply to goods and services which are scientifically proven to be harmful to society. This can be very broad, but I think that taxing pollutants is a very clear example of what I mean by this. I do think that any kid of special tax should be validated by referendum and it can only have a fixed term before it has to be renewed by referendum. This is to ensure that there is support for such schemes and that there’s no sneaky way for the state to increase taxes beyond the universal taxation for an indefinite period of time.

The tax should be collected by the national tax income. Since taxation is mostly an IT challenge these days, centralisation can help efficiency and combat fraud.

The division of tax income between national and provincial government

After collection by the tax office, the money should be split between the national government and the provinces. I it is best to have a fixed percentage of the individual tax payers money allotted to the national government and the rest to the province of the tax payer, as it allows for a shared burden of responsibility in making sure that tax revenue is maximised without changing the tax rates. This scheme should provide a strong incentive for the senate to keep local interests in mind while the assembly will make sure that that an overly strong emphasis on the local interests will harm the nation as a whole, therefore hurting everyone. Naturally, anyone with a two bit brain can see that cooperation between provinces can have a synergetic effect, so I don’t expect a total stale mate between the two houses of congress when it comes to taxation and government expenditure either.

The ratio should be based on the distribution of the needs of the services provided by the respective governments, so I can’t propose a concrete number. For the sake of simplicity and to create an image of how this should work, I do need to set an example. For this purpose a 40/60 split between the national government and provincial government, just as a tool to explain the core of the policy. It largely depends on how you split the expenditures between the levels of government.

Levelling the playing field

In order to stimulate the growth of underdeveloped provinces, a percentage of the provincial taxes should be redistributed on a per capita basis, while the remaining part should be based on the province’s own revenues. I’m not sure what the ratio of per-capita tax revenue for the provinces should be exactly. I guess one can calculate how much you need to fund the fixed expenses per capita and go from there. The reason for this is that it will allow impoverished areas to fund development projects which should aim to strengthen their economies. However, the efficacy of such projects is still subject to the reporting of the government accounting office and it should not be used in ways which provide incentives for the populace of the less productive provinces to enable lazy behaviour. If this is the case, the money from the per capita portion can be earmarked by the national congress to prevent misuse if the GAO reports consistent misuse of these funds. I think that the senate will function as a self governing instrument in this regard because provinces will need to strike deals on each others’ funding. Also, making this a universal arrangement should balance things out a bit. The earmarking should be seen as a bit of a punishment for very poor performance, and I think it will help inspire the government of the province involved to increase their efforts. In the end this means that wealthier provinces will still gain a by successfully implementing economic policies, but that the discrepancy with poorer provinces will/should never get to disproportional levels, which would encourage secession or untenable levels of economically motivated internal migration.

Government expenditures

Government expenditure should be approved by congress on a yearly basis. If the operations of a government branch are impacted by unforeseen events, an amendment based on a project proposal can be submitted throughout the year by the president or by individual provinces.

Government expenditure should be based on a weighted average of the running 5 year average of tax income combined with the weighted average of the forecast by the bureau of statistics, where more recent years get a slightly heavier weight than more distant years. In this way minor variations can be mitigated and a reasonable budget can be composed.

Government expenditure should allow for a buffer for unforeseen events. Any unused funds should be accrued in a buffer fund. This buffer fund can then be used in leaner years. The build up of this fund means that in the initial decades the budget should provide enough leeway to allow this fund to grow to a sizeable amount. This buffer should prevent the creation of unnecessary debt.

In order to be able to be able to handle real emergencies such as natural disasters, wars and epidemics, a separate disaster fund should be created to be able to carry the extra costs associated for the costs associated with scaling up and deployment to full strength of the army for the next two years. The size of the fund should be determined through a mandatory threat analysis which should be the basis. This fund is untouchable for non-disaster related expenses.

As a whole, government expenses should aim to provide basic services for citizens so that society can function. Government is not there to replace private enterprise. A prime example would be healthcare. While good healthcare need some regulation, it is not necessary to also provide all the spending. Take cancer for example. While it is very, very unfortunate that many will catch this horrible disease, it is not for the state to fund the ridiculously expensive treatment. This boils down to good coverage in the health insurance. On the other hand, epidemics are a concern for society as a whole and should be part of the national healthcare policies. Certain basic healthcare can be seen as a boost to society as a whole, and as such could be part of government policy.

The bottom line should be the concern of society as a whole in the long term.

Government Debt

Debt, while it can be used to fund growth, ultimately boils down to buying an advance on future revenues. Since the great depression the debt levels of so called ‘advanced economies’ have risen to unsustainable levels through a mechanism where, through the misuse of the democratic process, the government put forward plans it didn’t have to account for themselves in the immediate future. This lack of immediate accountability makes it attractive for the incumbent government to issue debts or devise schemes which are not covered by matching income. Later governments then have to manage the shortfall caused by a lack of growth in later years. They usually try to fix this by doing the same trick over again. We have amassed several decades worth of debt in terms of our capacity to pay them off while having a functioning government and society. An aggravating factor in this is that state debt is measured in the percentage of GDP, not in the tax revenue. This skews the debt levels so that they seem much lower than they actually are in terms of the ability to pay them off.

In the end, the solvency of a government is not very different to that of a real person or a corporate entity. Governments have similar solvency problems as businesses. Therefore, just like with banks lending to businesses, there should be a maximum debt ceiling, which shouldn’t be exceeded. The debt level should be part of the constitution, so that is isn’t easy to circumvent and the electorate has a say when it needs to be changed.

National debts should be used to fund projects autonomously. Meaning that if a project requires the creation of debt, the cost of the debt should be part of the funding proposal so that the efficacy of debt creation can be evaluated properly and funding decisions can be made in a more intelligent manner. In the end the gains of a project, as measured in terms of the increase on tax returns, should cover the costs of the loan. The goal should be that the increase of tax revenue is covered by the gains in tax revenue stemming from the execution of the project.The funding proposal should also include a ‘disaster recovery scenario’ which lays out the consequences and mitigation schemes in case a plan falls through but the expenses remain.

Provinces should never be able to issue debt

Provinces should not be able to issue debt on the open market. Instead, they should apply for special funding with the national congress on a project basis. As with the national government, this should be accompanied with a plan and an independently audited revenue forecast. This is to make sure that the economic stability of the nation as a whole is not subverted by the actions of individual provinces. Such loans are then dealt with like business loans. In case of default, the province will be put under the oversight of a special governor whose responsibility it is to restore the economy to a healthy state.

The balance between national and provincial government spending

So, how should you divide the money then? If you ask me, the basis for the division of tasks is at the base for the division of money. Although I can’t get too detailed, the division should be made on the basis of the question, is this really a matter which can’t be dealt with locally? If the answer is no, then the provinces retain control over the budgeting. The answer to this question is not entirely black or white however. While most healthcare can be dealt with locally, some area’s of healthcare like epidemic control are a national matter. Also, the ground rules for all policy areas should be set nationally at all times to ensure that all provinces are creating a very similar operating environment for all citizens.

This post is part 4 of the new Europe series.
Click here for part 1
Click here for the previous chapter