| Thursday, September 2, 2010

Stephen Covey has a phrase in his book that keeps springing to mind when I think of what Zapatero is trying to do with the Spanish economy: “you can’t talk your way out of a problem you’ve behaved your way into.”

For as badly as Zapatero has done over the past two years—and he has done very badly indeed—we must also admit that he has to work with what he has to work with. Many of the deeper structural problems in the Spanish economy are a question of joint historical responsibility which means Spain will have to learn to behave its way out of the hole it’s in.

But the government can help by steering the ship in the right direction, setting up the infrastructure and laws to motivate and punish people so that it all moves towards the right place.

There is a problem, of course, if the government doesn’t know where it wants to go.

Now, certain taxes have a certain motivational effect at a certain level. It seems to me that basically, the more you raise taxes, the less people want to pay them.

People can either just not pay them (Spain’s underground economy is said to represent around 25% of GDP) or change their activity so that they do something which incurs a lower tax rate.

Look at what happened in the Basque country when they raised Capital Gains Tax for special investment vehicles from 1% to 28%. Three-quarters of the special investment vehicles suddenly decided Bilbao wasn’t actually the right place to be operating from after all.

Look at what has just happened to car sales in Spain: in July, between the removal of government car purchasing subsidies in place since last year, and the rise in VAT from 16% to 18% on July 1, car sales have plummeted 30% in a month.

Wouldn’t we want to encourage people to become business monsters, as it were, thoroughly motivated to do as much private sector business activity as is humanly possible?

Whoever is pressing Zapatero to do more is still going, though: Infrastructure Minister Jose Blanco has just reappeared to throw around the idea of increasing even more taxes. The Spanish government is supposedly looking at increasing tax rates on income, alcohol, tobacco, corporate earnings, private estates and inheritance.

As before, the government will be saying that “in the name of solidarity and a time of recession, we want to ask for more from those who have most‘”— the middle classes, those who still have a job and the ‘rich’ — but the correct phrase would read more like: “’we have no plan and no money, so we’re going to take money off everyone who still has a little left over, and now that the initial tax raid on the civil servants has gone down so well, we’re going to take some more from those who still have something.”

What’s all this nonsense about fair taxes? Since when have taxes been fair? Taxes are economic motivators. Thoughtful people generally don’t like to be taxed too much and will behave in ways which avoid as much tax as possible.

And how is it fair that hard-working people who contribute the most—and perhaps use the least services—have to subsidise the lives of those who willingly do less (or in some cases nothing at all).

Shouldn’t those who generate most economic activity and tax residue for the economy actually pay less proportionally? Shouldn’t those who are doing nothing or leeching off everyone else pay the most to society for the privilege?

Why not leave the 1% special investment vehicle in place and raise income tax to 50% for the unemployed or those who don’t declare all their earnings, as a commenter on the Times website suggested a couple of months ago?

Do we want a ‘fair’ tax system or do we want a tax system that sets up the infrastructure for a strong, powerful economy—some of which can then be used to pay for the welfare state?