BEE Partner, South Africa Economy Watch

This stagnation tendency, the growing savings gap, has often been viewedas a problem. But why should one look at it that way? Isn’t the gap really a big resource? Should it not be encouraged? For the bigger the gap, the greater the scope for deficit financing of public spending. Indeed, the graver the stagnationist tendencies of the private sector, the lower the taxes can go, and the greater the scope for public borrowing and a growing debt. Instead of encouraging private spending as a remedy for stagnation, should we not promote private saving to widen the savings gap? For by so doing, we could deficit finance all the more, and enjoy the supply-side benefits of reduced taxation.

A progressive personal consumption tax might be calibrated in such a way as to encourage an average level of personal consumption that is consistent with the desired aggregate volume of consumption. The per-person target level could be calculated by taking an estimate of the economy’s overall capacity to supply consumption services and divide by the number of taxpayers. The sharper the progressiveness of the tax penalty for exceeding the target per-head level of spending, the stronger the individual incentives to hold consumption levels near the target. In order to bring the overall level of taxation down to the zero level (in accordance with Turgeon’s idea of a ‘tax-free’ economy), tax revenues collected from spendthrift, over-the-target consumers could be transferred to low-consuming households. This could be accomplished by means of an automatic transfer mechanism along the lines of a ‘negative income tax.’

This is not the place to expound a detailed tax reform proposal. Our primary concern is to show the main principles on which such a reform might be based. The purpose of such a tax reform would be twofold: It would discourage private spending and encourage saving in order to make room for big, permanent public deficits. It would maximize aggregate supply by bringing down the overall rate of net taxation – taxes less subsidies – to zero.

Functional Finance and the new Historical Compromise

Egalitarian ethics versus the right to contribute – those are the elements of the perennial conflict between Equality and Enterprise. It is generally believed that there exists an inescapable trade-off between the two. The more the Equality, the fewer the pennies, and the higher the taxes, the less the Enterprise. Too much Equality will render a fair but slack society riddled with `Eurosclerosis;’ Enterprise can only be bought at the cost of a staggeringly unequal society plagued by an alarming rate of poverty in the midst of plenty.

The political left embraces Equality, while the political right preaches Enterprise. The polarity of political life rests heavily on perceptions of economic necessity. The compromise that Functional Finance can offer involves a mitigation of the polarity. By substituting debt growth for taxation, and by invoking progressive personal consumption taxation, we may indeed combine the best of both worlds. We can have more Enterprise and more Equality atthe same time!

True, a tax reform along the suggested lines is likely to involve a considerable degree of income inequality. That seems to be the inevitable price for having tax-free Enterprise. In the absence of taxation there will be no economic disincentives that discourage work and productive efforts in general. Progressive taxation of consumption will however provide strong incentives for the leveling out of differences in standards of living. Lifestyles, after all, are based on levels and patterns of consumption, not income. It seems, therefore, that the requirements of remunerative justice (that is, getting paid in proportion to inputs), and of distributive justice (moderate differences in consumption levels), could both be better satisfied by such a reform than the existing case today.

Since remunerative and distributive justice may be considered the bees in the ideologists’ bonnets, this tax-reform approach also suggests a new historical compromise to replace the social compact of the high-taxation welfare state. Functional Finance could pave the way for the peaceful cohabitation of the killer-bees of right-wing Enterprise and the bumble-bees of left-wing Equality. There would at any rate be less grumbling in the hive. It would be rash, of course, to propose anything concrete at this premature stage, but the logic of this overall vision of a virtually tax-free economy, still retaining a fair measure of public spending, should be interesting enough to warrant attention and further discussion. It may well prove to be an erroneous and impossible strategy in the end, but even if it does, there are important insights to be had from taking it all the way to that end.

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