Taxpayers' Money

"A government policy to rob Peter to pay Paul can be assured of the support of Paul."
- George Bernard Shaw

What is fiscal policy? One simplistic view (which I will largely adopt for the rest of this post) is that fiscal policy is the process by which money is redistributed within each country. The government takes money from taxpayers and provides essential services such as defense and security. Other public goods are often also funded by tax dollars.

At this point, the question arises as to who should bear the burden for public services. In most countries, a somewhat progressive tax structure is employed. Singapore's income tax regime places the burden largely on the higher earners as the first $30k (approx) income is taxed at 0%. (if I am mistaken, please let me know)

Thus, even if the government was purely concerned with the provision of public goods, the existence of a progressive income tax simply redistributes income from higher earners to the rest of the population. The existence of subsidies and welfare-like programs further increases the amount of income redistribution that takes place.

(Of course, I am leaving out governmental income from consumption taxes, tariffs on luxury and sin goods like alcohol, cigarattes and COEs, and investment income. It simplifies the discussion somewhat, and I don't think they fundamentally change the argument I am about to make)

Without arguing as to whether taxes should be progressive or regressive (there are economic and ideological rationale for both), I'm sure that everyone can agree that taxation, and the way that tax revenue is spent effectively form a mechansim for income redistribution within the economy.

What are some of these effects? Basically, money flows from the rich to the poor, especially to the poor who work. Money flows from those who drive cars to those who do not. Money flows from smokers and drinkers to the rest. In theory, you want money to flow from those who consume scarce resources, which have negative public and social utility. In return, the people who receive this income are those who engage in activiities which have positive public and social utiility.

Of course, there are those who want more to be done. It is a laudable goal to wish to eliminate poverty and create some sort of social safety net. People are always clamouring for more. Every few weeks I read the forum page and I see calls for state pensions for seniors, unemployment insurance and other similar programs. Unfortunately, these need to be funded, not just today, but tomorrow and the day after tomorrow. You can't unring a bell.

Having said that, I think that the margin utility of an additional dollar of welfare (or "workfare") is still positive, in terms of social effects. I just don't think that we have as much room to go as many people wish we had. As P.J. O'Rourke famously said: "You can't get rid of poverty by giving people money". It's always the second-order effects that kill.