Friday, August 24, 2012

Taxes vs. Penalties

As predicted the governments of developed world are responding with taxing legislation. The aim is to tax the rich. But the discourse has been simplified unreasonably. Here are some important points.

First, higher taxes are required. There is infrastructure to build, things to repair and government to run. This is legitimate expectation of government from the population that has capacity to bear the burden. Higher means higher than normal times. If taxes were taken below normal then increase will have to be in stages first up to normal and thereafter, if required, a little higher.

Secondly, the government has been defrauded because of the crisis, either directly (bailout going to bonus) or indirectly (economic impairment). The people who defrauded the government have gotten rich and they owe government more money than in first case. This money should come from prosecutions and penalties. Government cannot keep settling claims without clarification of guilt and facing shortfalls. The fraudsters must face penalties which are higher than cost to the government and economy. 

In the US the situation is worse. The taxes are reduced below normal, there are no prosecutions with penalties and claims are settled.

Thus, increasing taxes to the extent as described in first case above is rational, necessary and should be acceptable. Further, increasing taxes just to cover the fraud losses from second case, is irrational, unnecessary, unacceptable and can even be unconstitutional.