Friday, August 05, 2005

Minor parties - direct democracy / transaction taxes

Minor parties are a particularly humorous part of the election. It is pretty uncommon for a small group of politicians can get together and propose sensible policy on a wide range of issues.

Anyway we will look at direct democracy this time.

Here is a classic quote from their site
"Alp said if you looked "beyond the spin", the [National] Front and Direct Democracy had several policies in common, which was why Chapman had joined the party."

Something to consider before voting I guess...

They propose binding referendum rather like Switzerland (this seems to be their main policy) and they support a transaction tax on all withdrawals of money - common leftwing sort of aims which often go unchallenged - so lets have a closer look.

Now what is the problem with this?
well the referendum idea sounds ok - although Switzerland is basically the worst performing economy in the civilized world by gdp per capita but maybe there are some other reasons for that.

but the transaction tax seems a bit more dangerous. Why? well here is the seldom made explination...

All goods and services have to have some sort of tax attached but to reach current tax levels each god would need to be taxed dozens of times to get the current share of GDP. But not all goods, services or activities involve the same number of transactions. This means that the tax burden would vary not on anything particularly rational but on whether its production involved many or few financial transactions. Petrol might bear a low tax, while groceries would be taxed heavily this seems counter to man governmental aims as well as just plain stupid.

The introduction of the tax would also cause negative fiscal effects. Note how there is more theoretical money in the economy than real cash and that you can effectively have more money if lets say a man gets you to repair his car you buy a stereo from him and he buys a fridge from you. I.e. the money circulates faster. Transaction taxes will slow hits circulation - reducing efficiency, being deflationary and shrinking its own tax base.

It will also hinder development of a nation’s financial system push investment offshore, and lead to disintermediation from the banking system encouraging people to use primitive financial methods. Furthermore it will be a regressive tax in that wealthy people and big businesses can avoid transactions taxes. Also governments will undermine the ability to raise money with government bonds and will raise interest rates.

Comparing this to other taxes (and others have downsides also) - the best taxes are the ones that cause the least distortion this doesn’t mean the taxes have to be EVEN, because there is a second factor this is the degree towards which the tax can change behaviour.

A consumer (or even a worker) is much less options and is less likely to change behaviour based on a tax difference than a trader is so consumer taxes are likely to cause less distortion of behaviour. Even if one supports distorting behaviour - If you are going to distort behaviour it is much better to do it intentionally than as an unintended side effects like those discussed above.


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