Creating Wealth: Taxes and Subsidies

There are a number of economic theories  on the effects of taxes and tariffs on a nation’s wealth. All those theories can be summed up in one brief conclusion: Taxes and Tarrifs create inefficiencies in the economy, and it doesn’t matter how high or low they are, the net effect is the same. In other words, the government can either choose between the share of the pie (tax percentage) or the size of the pie (GDP). The economic debate is the optimum balance between the share or size of the pie. Modern theorists, lean more toward the maximization of GDP, and so do I.

We don’t need to look far for proof of the feasibility of such a policy. Look at Egypt, and look at the genius policies and results achieved by Mr. Youssef Boutris Ghali, the ex-minister of finance. In three years he was able to collect in taxes a multiple of the previous 10 years by lowering income taxes to 20%. The reasoning is simple: incentives work. Investors need the incentive in order to create new businesses and maximize production, and in most cases a large portion of those extra pounds of income will be re-invested in growing the business, as long as it is generating satisfying returns.

To put it simply, a growth in income will lead to a growth in production, generating more jobs, leading to higher spending, savings, investments, and the cycle begins again, growing bigger and bigger with each cycle. The value is retained within the snowball, feeding in itself and growing exponentially. The incentive of organization’s or individuals to use resources efficiently will always be much higher then the state. For that reason, the government should attempt to extract as little as possible from this rolling snowball in order to ensure the efficient use of all financial, capital, and human resources. That’s how a nation’s wealth is created, through the efficient and productive use of all available resources.

In no way am I hinting that we should eliminate taxes. However, I do believe that there should only be one form of tax or tariff, and that is the income tax, since every other form of taxation is valued-in the income tax and is considered double taxation. For example, if we eliminate sales taxes, the income of organizations will be positively impacted and this will reflect on the income tax. The current level and formula of income tax introduced by Dr. Ghali is great. However, the tax percentage should be revisited every few years to stay relatively low in order to maintain our attractiveness internationally for foreign investments. Again, the more attractive we, as a nation, can be to FDIs the larger the pie through increased job creation and faster wealth accumulation.

The same argument applies to subsidies, the greatest taboo of all. It has been proven over and over again that subsidies are the most inefficient method of welfare. They are hard to target, hard to manage, and hard to distribute fairly. And there is one simple solution; cash. First, eliminate all subsidies on goods and services (including hospitals and education) and allow the public to determine the true value of the product or service (often referred to as cash-vote). Segment the nation to socioeconomic tranches, and determine the minimum requirements of food, health, or education for each segment. Translate those requirements to a monetary value using market prices, and determine the average income of each segment. The difference between the requirements and income can be then subsidized through cash, and be left to the individual to determine how to spend it, according to their own priorities. Trust that individuals care for their own well being, and empower them to use their resources more efficiently than the centrally planned state.


About forwardegypt

Egypt: Ideas for empowering the people, creating wealth, and improving standards of living
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