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Will Europe Run the 21st Century? – Not With High Taxes!

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Will Europe Run the 21st Century? – Not With High Taxes!

Recently I went to a shop in Brussels that specializes in English-language books — seeking recommendations for new works on Europe’s political outlook. Someone suggested a book, “Why Europe Will Run the 21st Century“, by Mark Leonard. Unfortunately, the book looks to me like pro-EU propaganda, without much substance or insight.

There is something very naive in the European intellectual milieu: a vain hope that somehow a central EU government will solve all the problems of Europe — and, to judge from this book’s title — apparently those of the entire world. Somehow this reminds me of the absurd idealistic mentality that tried to cast World War I in a positive light: the “war to end all wars.” What I mean is that Europeans have suffered from centuries of internecine warfare and this has deeply colored their outlook. Their vision of the future seems tied to the the premise of a united Europe. Unite Europe, as this opinion goes, and all the problems will fix themselves.

This differs starkly from the view in the US, where there has never been such internal division. The exception of the Civil War notwithstanding, Americans see themselves as one country and one people, with a common history and destiny. Political salvation for Americans is not seen as coming from becoming united. Rather, they see problems as coming more from what one might call an excessive unity — a federal government that is too strong and insufficiently responsive to citizens.

I won’t belabor the point, because to me, it is simply an observable fact: Europeans place far too much hope in a centralized EU government. Given Europe’s history, this is understandable; but, unfortunately, Europeans seem unwilling to make the connection that they are headed towards the same kind of lopsided federal model that has gotten the US into trouble. Federalism doesn’t work.

And in the case of Europe, the looming federalism is even more aversive, because the central government has no clear accountability to the citizens of Europe. Let’s state this plainly:  the EU is a democracy in name only. A democracy is a political system in whichthe people control the government. It is not the presence of elections, nominally designated elected officials, or a ‘constitution’ that make a democracy. It is whether the citizens actually have a significant voice and role in determining government policy. This does not exist in Europe. Most European citizens don’t even understand the government. Many do not even speak the official languages of French, German, or English!

As I’ve already written on this subject, I won’t repeat myself here.

Rather, to return to Leonard’s book, I’d would offer that Europe will not likely “run the 21st century”, or, or that matter, accomplish much of anything until it wakes up to the grim reality that high taxes are ruining the lives of its citizens.

Taxes are too high in western Europe. It’s that simple. The marginal income tax rates are excessively high — much higher, as is well known, than in the US. When you factor in the VAT tax (21% in Belgium!), people pay more than half of their earnings to the government as direct taxes.

There’s more.  High taxes inflate the prices of goods and services. The price of food in Brussels is unbelievable. I can barely afford it — and have a good professional salary. It must be hurting the poor people considerably. The high prices are partly a result of excessive taxes. When you buy something, you are, in a sense, paying the taxes of the seller, who naturally passes his or her taxes onto you, the consumer. There’s nothing ethically wrong with that; it’s just the way things work.

This fine point is something that those who advocate high-tax socialism as a means of redistributing income should consider more carefully. Even if we assume that producers are ‘greedy capitalists’, they will inevitably pass their taxes onto consumers. There is no price control; prices, rather, are up to the discretion of the seller, determined by the laws of supply, demand, and competition.  Since all sellers pay high taxes, all will raise prices sufficient to assure a certain net income.

In fact, the best way to reduce prices is to permit competition.  But in a high-tax environment it is more difficult for people to start businesses.  Hence, higher taxes mean less competition, and higher prices.

Since rich and poor consumers pay the same prices, this disproportionately burdens the poor.

In any case, under the present western European model, you, the consumer, (1) not only have to struggle with high income taxes, but every time you buy something (2) you pay an unreasonably high VAT tax, and (3) have to contend with the incremental price, added onto the natural value of the commodity, required so that the seller and manufacturer can pay his or her high taxes and stay in business.

Where is the Outrage?

Mostly what I see throughout Europe is a moribund economy, lassitude, and, in a psychological sense,  cultural depression. Europeans are, by nature, intelligent and hard working. But now they are unmotivated and lacking a sense of direction or purpose. High taxes as a central causal factor.

At best, Europeans are, at the personal level, treading water, economically. They struggle, barely getting by day to day. This might be acceptable to a person  if there were some genuine reason that ones economic situation might improve very soon, but there is no evidence of that. Rather, it seems likely that the economy will become more strained in the years ahead — that is, *unless* until some fundamental positive changes are made.

One plausible and commonly expressed view is that the current ‘pension economy’ is now being propped up with the wave of immigrants engineered by politicians in recent decades. That certainly has the outward appearances of a short term fix. (Among other things, wWho is going to pay for pensions of these immigrants when they retire?

The bottom line is that we are living in the 21st century, and people have a right to expect a decent life! Why is it that, despite the incredible advances in technology, the quality of life is still miserable for so many people? Why must so many people struggle through each day, living, for all practical purposes, without “the blessings of life, liberty, and the pursuit of happiness”? How can things be mismanaged that badly?

Citizens ought to be outraged, but, strangely, they’re not.

Lack of Critical Thinking

There is a remarkable difference between the US and Europe in this respect. When you talk about high taxes in the US, everybody joins in the chorus of complaint. But when one broaches the subject with Europeans, one more often gets a response like: “Yes, taxes are high, but look at all the benefits.” When pressed for specifics, people frequently point to social assistance programs — especially financial support for the elderly.

This is, up a point, a legitimate concern. We all want — or should want — a social system with a good safety net, something that takes care of the old and the infirm. We should accept that as a given.

But how does one proceed from that premise automatically to the conclusion that any amount of  taxation is justifiable on that basis? This lack of critical thinking is at the basis of Europe’s social problems. Perhaps the inferential leap can be justified if one posits of a wise and altruistic government — one that levies no more taxes than are necessary. But who could be so naive as to, given all the contrary evidence, believe that?

There are two related issues here. The first is the likely hypothesis that the government is taxing too much to support the programs which justify public taxes. That is an empirical question that could be easily addressed (and perhaps it has been): some competent economists at a think tank or university should simply analyze this.

A complication, unfortunately, might be that, if one were to look rationally and objectively at the evidence, one might discover that *no* amount of taxation — even 100% — would be sufficient to prop up the pension systems of Europe in coming years. But at least enquiry into the subject would pave the way for finding workable alternatives.

Why Bother to Work?

This brings us to the second point: the impact of high taxes on economic growth. It is an obvious and easily verified fact: when the government takes most of your income, you ask yourself, “why bother to work?”

That is the question in Europe now, as it has been for years. Why bother to work? That is the question most people — aside from the few clever ones with insider connections who have discovered ways to beat the tax system — in Europe ask themselves. And this is a terrible foundation for a society. Europe is basically comprised of people who have no incentive to work! And, in a sense, inasmuch as work is hard, that means they have an incentive not to work.

Social Liberals for Low Taxes!

So I propose to turn round the historical liberalism of Europe on its head. Europeans have accepted an aversive economy because of their strong desire to help others. Good! Let’s keep that positive social ethic. But I propose this: if we truly want to help people, then we must stimulate the economy. This will do two important things.

  1. First, it will raise revenue — actively employ more people, and more money will be available for social programs. This is the economic paradox which Americans (and, it seems some Asian countries) grasp so much better than Europeans: that lower taxes stimulate economic growth, and economic growth increases overall tax revenue. Or to say it another way: lower individual taxes produce greater total tax revenue.
  2. Second, a stimulated economy will harness the greatest natural resource any country has: its human capital. The wealth of a nation is not the coal, or gold, or iron buried in its mountains, nor the crops of its fields. It is the spirit of the individual. It is the feeling that makes one wake up each morning and say, “today let me see what I can accomplish, for myself and others!” It is this feeling or spirit that motivates people to work energetically, creatively, and productively — generating goods and services for the benefit and enjoyment of others. More than anything else it is this spirit which a society must foster in order to truly be prosperous.

Written by John Uebersax

December 31, 2008 at 2:25 pm