For anyone trying to understand what is happening in the economy, it is crucial to follow the rule that Frédéric Bastiat formulated in the mid-19th century. The rule states that any decision has obvious and non-obvious consequences, or, in Bastiat’s own terms, that which is “seen” and that which is “not seen”. Understanding that which is not seen will, in most cases, reveal the error in that which is seen.
The classic example here is the “broken window fallacy”. The story goes that a baker’s window gets broken, and from this fact follows the idea that a broken window is “good for the economy”, since the baker will now have to pay the glazier for a new window, thereby “stimulating” industry and so forth. The error is that had the window not been broken, the baker would have bought a new suit with that money, thereby “stimulating” the tailor. That is, in the final analysis we are comparing the situation “baker with window” against the situation “baker with window and in a new suit”. It is clear that public wealth in the second case is demonstrably greater.
The simplicity of this example is deceptive. It is, at any rate, beyond the grasp of economists like Paul Krugman and the overwhelming majority of politicians who argue, say, about the “stimulating” role of wars and taxes. When it comes to government expenditures, “government investments”, “stimulus”, you will almost always find the broken window fallacy lurking within them.
I want to offer another kind of example—an example of that which is not seen, hidden within hypotheses and assumptions. Let’s take the idea of a head tax. This is a tax paid “per head”, that is, a direct tax—a fixed sum that everyone must pay to the state. Consider a situation where this is generally the only tax and other revenues to the state are prohibited. Also factor in that the tax amount is revised during elections—meaning that before elections there is a kind of competition between budgets and the tax amounts they imply, and after the elections the budget of the winning party is implemented.
The first thing I will be told is that this system benefits the rich, since all citizens—poor and rich—pay the same amount. Let’s set aside the question of why the rich should pay more. Let’s assume they are all scoundrels and prison awaits them. But taxes in no way “punish” the rich. Having paid either 20% or 40%, the “rich” person will still be left with a larger sum than the “poor”. I am not even mentioning that if the “rich” person calculates that taxes cost too much, unlike the “poor”, he will find a way to avoid them. “Fairness” in such an approach can exist only in the form of property confiscation.
If, however, we are against total confiscation, then we must choose the better system, and I assert that the head tax system in the proposed version is better than any other. And it is better from the angle that is not “seen” at first glance.
First, the head tax is paid by “individuals”. All taxes on legal entities are abolished. This means that your enterprise will finally breathe freely. Currently it exists in a state of constant struggle with the state—every transaction, every payment carries risk. Enormous resources go into this; the “planning horizons” of Ukrainian business extend to a maximum of one year. Enterprises will finally be able to engage in business, that is, to benefit people, and economic growth will begin.
Second, since the tools of pressure on business disappear, the system of cronyism and privileges collapses. “Pressing” competitors using tax and countless other inspectors becomes impossible. The market begins to work—that is, the seller’s income begins to be determined by buyers, not connections in the bureaucratic apparatus. Accordingly, society grows richer.
Third, the head tax is not tied to salary, or profit, or income, or property, or economic activity. That is, you have no incentive to hide anything, and this means that you can freely plan your activities for long periods, buying off the state with a sum known to you in advance. The state will not come to you with its extortion, because it no longer has reasons for this—its “work front” has radically shrunk.
Fourth, the tax amount depends on the persuasiveness of the proposed budget to the voter. Therefore, a huge army of bureaucrats is liquidated. These people and their hangers-on now begin to work and be useful. You control the state; it does only what it is paid for.
Fifth, the reduction of the state means that new markets are freed up, ones previously monopolized or controlled by it (education, medicine, transport, and so on). Sixth, along with indirect taxes, excise duties, tariffs, off-budget funds, and the like disappear. Life becomes cheaper.
Seventh—and for me this is the main point—in such a system citizens become accustomed to the idea that life is, in principle, possible without the state and taxes.
As I see it, such a system is much better than the current one, even taking into account that after paying the head tax the “rich” will have more money left than the “poor”. Especially if we understand that this will happen under any other possible system as well.