Wednesday, February 01, 2006

Recommended Reading for Treasury Officials

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There’s a good article in the Melbourne Age discussing the argument that lower taxes don’t lead to better economic performance. It also discusses how lower taxes have higher social costs. Here’s hoping that a few people in Treasury take note of the points made.

The article also has a succinct summary of why Adam Smith was a great social thinker; but also one with limited relevance to today’s debates. Here’s the relevant extract:

Tax is at best a necessary evil. [This is]… a view with a long pedigree. Back in 1776, Adam Smith, founder of economics, famously declared: "Little else is required to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice." Many believe him, but was he right? Smith had no experience of the modern world; government to him was corrupt, incompetent officials in 18th century Britain. He could not imagine governments providing universal education, a comprehensive public hospitals system, subsidised health care, and comprehensive income support for the aged and the poor. Nor could he imagine governments managing industrial development so well that its output doubled every few years, as happened in Japan, South Korea, Taiwan, China and Ireland. Mozart's music may be eternal, but social ideas must evolve.


Hat Tip (and thanks): Tim

7 comments:

Chris said...

'He could not imagine governments providing universal education, a comprehensive public hospitals system, subsidised health care, and comprehensive income support for the aged and the poor'.

Ah, if only that were true today! It will be again, one day soon.

Terence said...

hhmmmm...chris are you sure you want to waste your on comment for Febraury on that?

Anonymous said...

Anybody read "Why the Welfare State Looks Like a Free Lunch" by Peter Lindert? Abstract: The econometric consensus on the effects of social spending confirms a puzzle we
confront in the raw data: There is no clear net GDP cost of high tax-based social
spending on GDP, despite a tradition of assuming that such costs are large. This
paper offers five keys to this free lunch puzzle. First, it shows conventional
analysis imagines costly forms of the welfare state that no welfare states have
ever practiced. Second, better tests confirm that the usual tales imagine costs that
would be felt only if policy had strayed out of sample, away from any actual
historical experience. Third, the tax strategies of high-budget welfare states are
more pro-growth and less progressive than has been realized, and more so than in
free-market OECD countries. Fourth, the work disincentives of social transfers
are so designed as to shield GDP from much reduction if any. Finally, we return
to some positive growth and well-being benefits of the high welfare budgets, and
then pose theoretical reasons why democracy may exert a crude form of cost
control

Terence said...

Thanks anon,

that looks like an intersting paper; you don't happen to know which journal it is published in do you???

Michael said...

http://www.econ.ucdavis.edu/people_faculty_info.cfm?eid=17 May help you. I found it via Brian Eastern Listener article: TAX AND THE CULTURAL CRINGE http://www.eastonbh.ac.nz/article574.html

Chris said...

Good point, Terence. On the other hand, it is a rather succinct expression of the Libertarian dream--and one that will be achieved, at least in New Zealand, with the victory of LibertariaNZ in 2008 (although one hopes they will have dropped their immature explicitly anti-Monarchist stance by then).

Terence said...

thanks michael