Death
and Taxes
Different countries, or even regions, have tax regimes
that differ. A common mistake is to compare them, trying to find out which is
the best tax system. Scandinavian countries for example, have probably the
highest tax burden in the world. In a progressive scale, a worker pays from 25%
to 60% of their gross salary in taxes. Of course, they do get something in
return: the welfare system. This is what differentiates them the most. People
in Scandinavia brag about public healthcare and education, but all developed
countries have that. Welfare though means that if you lose your job you will
get a large percentage of your salary the first two years (in which you count
as unemployed), and after that you will go through another route in the system
in which you will still get less welfare but enough to live (the socially excluded,
a concept I will explain in last chapters).
The Welfare system has disadvantages as well though:
the high tax burden equalizes salaries. Everyone gets relatively the same, from
the waiter to a company director. This burns the incentive to climb up the
ladder, since there is not so much to climb. The people at the bottom of the
ladder though have it much better than in other countries, that is true, but
the higher you get the worse you have it, compared to other countries (a
Director in Scandinavia earns the same after taxes than a Director in Argentina
or Chile, but Scandinavia is more expensive, so the top of the pyramid has
actually a better life in Argentina or Chile than in Scandinavia). The tax
system varies in different Scandinavian countries as well. Reforms where taken
in Sweden and Denmark to lower the tax burden and make the public sector more efficient.
These reforms have not reached Norway yet, but will surely begin as soon as
lower commodity prices forces government efficiency.
Another advantage of the Welfare system is the
pension. Norway has secured it’s citizens pension with the Oil Fund, so the
older generations have everything covered. Other countries have pension systems
as well, however, it might not be enough to get by and older people might have
to get help from their children.
But the most important to consider here is that the
tax system must match the country’s culture. In Argentina, in the last Cristina Kirchner Administration the tax burden was increased for the top of the pyramid in an effort to
distribute wealth in a better way (maybe in a Scandinavian way?). This did not
have appeal to the general population, who did not want to give away so much of
their salary in tax. The everyday citizen then started to cheat on their taxes.
A good example is people who are working for themselves: when they reach the
top limit of the tax pyramid and the taxation level starts being abusive, they
usually get a “friend” to invoice the rest of the amount and skip paying the
whole amount they should. They always pay something though, to avoid suspicion,
but it appears as it is allowed to “choose” how much you are going to pay.
Now, in Scandinavian countries the tax system has been
informatized. Automatic tax deduction from your salary is the best way to
control. However, from a cultural perspective people would generally speaking
pay anyway even if they are not controlled. Consider that it is countries with
small populations though, so it is much easier to implement a unified tax
system.
Other countries like the “Asian tigers”[1]
(Hong Kong, Singapur, South Korea and Taiwan) have actually succeeded with very
low taxation levels. They are countries that turned to New Liberalism in the
1990s and are always used by the British as an example of success of a sort of
“British model”, if you want to define it somehow. With minimal welfare states,
free trade and less government spending were the driving force.
Again, consider cultural implicancies and people’s
behaviors and expectations when applying economic models. Ever noticed how in
countries like Thailand you will never get an invoice? In some countries,
people don’t like to pay their taxes and are not used to it. Many times they
blame it on the government: the politicians steal, so we steal first.
Implementing a controlled, informatized tax system would be a solution for
transparency; however, consider for example, that Thailand has 68 million
inhabitants. And what about China’s 1.4 billion people? Can the government
control them all, individually? I believe low taxation is a good solution for
emerging economies that present high levels or corruption and mismanagement.
The case of Argentina is more complex though. Even if
people would not tolerate Scandinavian taxation levels, they are willing to pay
levels similar to Southern Europe. They expect something in return: public
healthcare and education has been a given for the last 100 years, people expect
that to remain so. Attempts to privatize the public education system failed in
the 1990s when the people rebelled against it, which shows you that there is a
line, or a degree of tolerance from part of the population, based on history
and culture. Nobody wants to lose their hard-earned benefits. Moving towards a
unified, simplified and informatized taxation system seems the right way to go.
Conclusion: regardless of scandinavian’s effort to convince the
World that their system is the best (as the British and Americans have always
tried), countries must find solutions according to their own history and
culture. I have here presented three very different taxation systems, which
match very different cultures. A heavy taxation system for Scandinavian
countries, a middle taxation system for Southern Europe (and Argentina), and a
low taxation system for South East Asia. They also imply what you get in
return: heavy welfare in Scandinavia, middle welfare in Southern Europe, no
Welfare in South East Asia. And they also have pros and cons: liberalization
favors businesses against the interests of employees (but also ends up favoring
employees by boosting job creation in the private sector), heavy government
intervention favors employees against the interests of businesses (but in the
end plays against the employees by making it more difficult to establish
businesses and destroys jobs in the private sector). Matching taxation system
to the countries culture is key to long term success, as well as assuring
government spending transparency once the taxes are collected.
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