Wednesday, January 16, 2013

Ideas on taxation

Most people do not like taxes as they think that a part of what they earn from their hard work is being taken away from them. 

There is another way to look at this matter. The state collect taxes to provide for public services for the people, e.g. health care, education, housing, safety, environment and settlement of disputes. 

These are essential services needed by the community. If these are not provided by the state, the individuals have to pay a higher price by purchasing the same services from the market.

The debate should be on the types and level of services to be provided by the state, and those to be provided by the market.

The majority of people at the lower income brackets (say comprising up to 70% of the population) would prefer probably that the basic services should be provided by the state. The top 30% can opt to pay more for these services, e.g. private health care and overseas education.

Another question is how to pay for these services. Ideally, every one should pay an equal amount, as they are likely to use the same amount of services during their lifetime. This argues for a flat rate tax or a per capita tax.

This type of tax system may place an unfair burden on the lower income, who do not earn enough to pay the tax. The solution is to give everybody a higher wage level, through a minimum wage, so that they can afford to pay their fare share of tax. This is the approach adopted in countries like Australia. I like this system.

It is a big challenge to move to such a system. I am not suggesting that it can be done easily. But it is good to understand the principles on why there should be taxation, what is the level of tax and who should pay for the tax.

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