BEE Partner, South Africa Economy Watch

A necessary practical condition is that the government share of GDP be limited, that is — in the case of European welfare states — be cut back. This need not involve any reductions of the volume and quality of services provided by the government sector. If aggregate supply is relatively elastic with respect to the level of taxation, then tax cuts may provide for a great expansion of the private sector. A vigorously growing private sector will tend to reduce the share of the public sector in the economy, a reduction that might render unnecessary any actual cutbacks of the real size of government.

Provided that government demand is kept within the ’small government‘ percentage limit, the stability of the system depends crucially on the ability to bring down the private-sector wealth-to-spending turnover rate u to the required level of roughly 0.13. Since the present-day turnover rate is in the neighborhood of 0.20, spending habits will need some restriction in order for the 0.13 level to obtain. How, then, can we conceive a means with which toaccomplish this?

The answer, we believe, lies in tax reform. We must invent a system of taxation that discourages the private sector from spending to the necessary extent. The natural solution to this problem, is to invoke a system of progressive spending «taxation, meaning that private-sector spending, at least on consumption, should be progressively taxed. ¹² Such a tax may be established within the framework of the ordinary income tax. All that is needed is to allow deductions for saving. The progressiveness of the income tax itself will then provide disincentives to spending.

If allowances were made for saving, then the level of income taxation would be subject, to some extent, to individual discretion. Frugality and tax- avoidance would go hand in hand, while the spendthrift would suffer from high taxation. The personal rate of income taxation would depend on the level of personal-consumption spending as well as the size of personal income. From the point of view of egalitarian ethics, such a taxation system may seemquite unfair. For high-income earners usually spend a much smaller proportion of their income on personal consumption and may therefore avoid a great deal of taxation. Invoking fairly sharply progressive tax rates may however mitigate this injustice.

It is however questionable whether taxation of income really is an expression of equity. The mere earning of income does not involve any claim on the nation’s real production resources. Personal saving means an excess of that person’s contribution to the nation’s output over her absorption of currently produced goods and services. That excess will enable other people to incur a corresponding deficit, that is, to absorb more than they productively contribute. The very intention of the tax reform suggested here is to make the whole of the private sector a net contributor, or net saver, in order to make room for the public sector’s deficits.

Any taxation of the contributions — of factor incomes that is — is likely to reduce the willingness to contribute. This is just another way of expressing the elasticity of supply. One may question what society gains by preventing people from working as much and as well as they desire. Indeed, preventing people from contributing and doing their best may well involve a measure of paternalism and injustice in itself.

From a Functionalist perspective, the earnings and wealth of individualsshould be a subordinate problem. What really counts is the extent to which people contribute and how much of their contributions they use up. The ‘ stagnationist’ tendencies of modern economies, as emphasized by William Vickrey, essentially means that there is a general willingness on the part of the private sector to contribute more in terms of output than it uses up in terms of spending. There is a `savings gap’ that calls for an ever-growing public debt inorder to balance overall supply and demand.

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