Monday, May 31, 2010

Tax Eaters v. Tax Payers

Across parts of Europe, there is drama over the need to impose "austerity" plans on governments in places like Greece and Spain. Across America, states like New York and California are facing dramatic financial crises brought on by enormous deficits.

Ultimately, all of these problems involve a tension in Democracies between people who consume taxes and people who pay taxes. Between beneficiaries of social programs (ex. Retirees on Social Security) , employees and businesses who are dependant upon govt spending (contractors), and government workers, the number of people who are net tax consumers is substantial. Furthermore, they have a strong incentive to vote in blocks for people who spend more money. Even politicians who are against more spending are rarely willing or able to cut spending – unless … the Net Tax Payers are unwilling or unable to pay more in taxes.

In the case of Greece, the country does not generate enough economic activity to support the tax load the government workers insist upon. In the case of New York, higher taxes would likely reduce economic activity and ultimately reduce tax revenues. Unless they get someone with the political willpower that New Jersey got in Governor Christie, they are in for a world of pain.

No comments: