Tax system economics - ebook

FOREWORD

Benjamin Franklin believed that only death and taxes are certain, but, as it turns out, he was not right. Taxes have always been more or less arbitrary, representing a compromise balancing the society’s or its leaders’ needs against the interests of individuals and social groups. At the same time, tax problems, most often resulting from a country’s budget problems and from a limited economic growth and development, are among the most often discussed topics not only in economic circles. This means that taxes are widely talked about because in one form or another everybody is subject to taxation. This does not mean, however, that we are all well versed in taxes—quite the contrary. Meanwhile, even the most honest individuals in a society may have a natural penchant for own utility maximisation (taken in a good sense), which may result in lower-than-expected budget receipts, and even economic difficulties if most of the society, or, more precisely, most taxpayers do the same. The state’s power of taxation is each day confronted with attempts at tax contest, tax avoidance or tax evasion by enterprises and households alike. At the same time, states, depending on their economic power or key competitive advantages, support national enterprises in all economic activities, whether in an increasingly formal or less official manner. Together with the enterprise itself, they, too, become an actual beneficiary of the support if it results in higher budget receipts of central or local government entities in the state providing support.

We believe that tax policy, together with monetary policy, is the main tool for driving the state’s overall policy and economic processes. Its particular role was demonstrated after the financial crisis of 2008+. It turned out that it is impossible to stimulate the economy to the desired extent and effectively increase performance by using unconventional monetary measures such as quantitative easing, that is printing money, even if doing so for ca. 10 years. Negative interest rates, which, in the long run, may do more harm than good, did not help, either. Thus the metrics of monetary policy intervention, known and widely used for decades, were modified and the market did not respond as expected by the neoclassical models. In parallel, many countries of the world, noting the signs of economic stagnation and even forecasting a recession in the coming years, implemented major tax changes that, on the one hand, were useful in tightening the tax system, and, on the other hand, contained mechanisms to stimulate and develop the economy, and, on top of that, imposed the state’s unwanted power of taxation, mainly on top earners. The United States as the world’s largest economy indirectly used the tax system—especially custom tariffs—for a trade war, not only the one with China of 2018+, reminding other countries that the market’s rules of play are subject to change. China, balancing the costs of the trade war with the United States, has increased the consumption demand by reducing income taxes for low and middle income earners in 2019, which has resulted in an economic growth exceeding the expectations thanks to this GDP component. South Africa increased its tax base and from 2020 onwards is introducing a de facto taxation of top-earning non-residents as residents. India lowered the corporate income tax rate in 2019, which, if applied irrespective of the systemic approach, may not be an effective decision from an economic perspective. In turn, Poland, by introducing a social transfer policy, eliminated poverty among children, but this did not contribute, in parallel, to the initially expected increase in the total fertility rate.

From a theoretical and practical point of view, we are taking you in this book on an intellectual journey where we will present taxes and the tax system in economic terms. We understand tax system economics as the overall governance of a country’s or integration grouping’s revenues and public expenditure aimed to create a smart economic policy that stimulates economic growth and development, and safeguards against the functional risk to the current and next generations. We present a theoretical tax system model and its reflection in the global economy, or a division of the tax system into productive and non-productive fiscal and redistributive functions.

We discuss respective types of tax which are of greatest importance to the economy, offering an extensive methodological and systematising study on the economic analysis of the tax system, including an economic analysis of law. Next, we present behavioural economics and its application in the tax system, showing a model of mental accounting relating to the decision to pay tax according to Richard Thaler. Then, we demonstrate the tax system’s efficiency taking account of social welfare, trust in authorities and the power of the authorities. Last but not least, we try to present, based on research into innovation and tax system of the future, the clash of developed economies with the new reality of developing economies as well as changes facing tax systems in the accelerating process of digitalisation and robotisation.

We hope that this book will enable a different perspective on tax system economics, challenging the perception of the tax system as merely a collection of taxes, and the created and interpreted regulations. We believe that the current economic and tax reality may not be understood without drawing historical conclusions but, at the same time, also without rejecting, in some respects, the continuous nature of changes and mentalities known from the 20th century.

Finally, we must note that at the time the book was being sent to the press, it turned out that the 2020 coronavirus pandemic would lead to a recession in the global economy. The coronavirus has brought a simultaneous supply and demand shock and exposed the total dependence of respective countries’ budgets on borrowing. It has revealed the structural problem of maintaining debt of companies that have long lost real liquidity but roll over their debt with cheap money from monetary policies. Under those circumstances, we hope that a wise application of tax system economics in the overall economic policy will reduce the risk of global financial deprivation, preventing the creation of further bubbles and safeguarding against the functional risk to the current and next generations.

Konrad Raczkowski, Friedrich Schneider, Joanna Węgrzyn