An approach to taxes and public expenditure

by Johny

By Juan David Huertas Ramo

When some one allude to taxes it is because it is talking about State finance or public finance. That implies to mention taxes’ social importance. Indeed, everyone of us is connected with taxes. Benjamin Franklin commented that death and taxes are facts in human life. He was not wrong because taxes work in social context as a link between population and States. It is not possible to understand social life without consider taxes or State roles.

On the one hand, The Oxford English Concise Dictionary defines tax such as “a compulsory contribution to state revenue, levied by the government on personal income and business profits or added to the cost of some goods, services and transactions”. According to this definition, taxes have an obligatory nature because they originate from law. Taxes constitute an important part of States’ revenue. Taxes are levied by governments but that money is not governments’ property, taxes belong to States.And population is the most important element which shape States. Natural and juridical persons have to pay taxes on their income or profits. It is relevant to stand out from this definition that taxes increase goods’ prices, services and every transaction of the formal economic sector. According to the last point, if one player works in the informal economic sector, that person (human or fictitious) is not contributing to public finance. In other words, informality does not contribute financially to development.

On the other hand, Adam Smith claimed in his most prominent work “An inquiry into the nature and causes of the wealth of nations” that taxes should support the majority of government expenditure (public-sector expenditure). Indeed the Scottish author held the idea that taxes affect income, independently if it is coming from salaries, profits or any remuneration which people get. Personally, I do not agree totally with Adam Smith because States have to be exceptional managers of public goods. States have the responsibility to provide people with the needed means for dignify humanity. If we accept that taxes have to support the majority of public expenditure we are recognizing implicitly that State has not manage public entities properly. State should be a superb manager of its properties and interests. It is not acceptable that State’s firms and/or institutions get poor performances financially because State has a preference stage in Economy, and plays usually like a referee. Indeed, some States’ companies play in economy like monopolies and/or monopsonies, Is it not enough for getting profitability?.  

If public administration choose good managers with higher technical expertise instead of politics to lead its entities, States can be profitable. Politicians have to be in the arena, but managers have to be on the top of institutions that contribute financially to development. Development is not a political or demagogical process, it is an economic issue. Because development is a stage where population can elevate their nature throughout material conditions of wellness. Everyone have to contribute to development. It is not fair that some natural and juridical persons pretend to work in the informal economy and receive the State support when they did not contribute with public finance. It is necessary to pay taxes for receiving the balance in social services but it is necessary that State manages  every entity smartly in order to maximize profitability and translate that return socially.

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