Politicians are, in a hurry to decrease swelling budget deficits, seeking new and new taxes and clamping down on tax heavens. The issue of taxation went that far that every citizen of Slovenia is taxed at least twice on the same money. First, at the source when he earns money and pays income tax, and then, at the point of consumption, when he pays VAT on whatever he spent (and the money he spent had already been taxed via income taxes). But, since during the credit crunch, budget shortfall keeps increasing dramatically, we can see new taxes, excise duties, environmental compensations and “voluntary contributions” whose sole intent is to close or at least decrease the yawning budget gap.
But still, compared to the UK, we have been quite lucky. On top of all the other taxes, they have the Council Tax, a tax for the right to live in a property, which costs between 1000 and 2000 Euros each year, depending on the property value, and goes straight to the council budget.
While, on the other hand, most of the politicians keep on forgetting that budget deficit can be decreased not only with increased taxes, but also with decreased public expenditure. There is a way to decrease the expenditure, while at the same time increasing the amount of money available for given service.
With the tax relief on voluntary donations to particular non-profit NGO’s the state can efficiently and on the basis of market mechanism transfer most of social and health services to such non-profit NGO’s, while at the same time decreasing its own expenditure on the services and increasing the total pool of money available for those same services. It only takes a few short steps. First, the state needs to prepare a public tender for the provision of service, limited to non-profit NGO’s. The state then transfers to them their obligation to fulfil government goals and guarantees them the minimal resources to fulfil them (those minimal resources shall be no bigger than the current expenditure). At the same time, the state shall publish the tax relief for voluntary contributions to organisations that won the tender (has to be more than 1 to ensure competition). This would encourage citizens to donate money to such organisations. Since the income from the donations is higher that the lost income from lower taxes (since we luckily do not have 100% taxation yet), the state saves money, as it does not have to pay for the services if NGO’s raise more than minimum in donations, while there is more money to improve the quantity and quality of the service. If we enable more non-profit NGO’s to compete in the same field, this introduces the efficiency of market mechanism into the equation, by automatically channelling donations towards the highest quality provider. We can add that later on the state recoups most of the money that it lost as a consequence of tax relief, in the form of VAT receipts on the total amount of donations, higher wage taxes and higher taxes on profits from suppliers of those NGO’s. This mechanism thus enables the state to lower expenditure, increase the quality of services and increase tax collection. We can quickly see that this is a WIN-WIN situation.
This does not mean that taxes should be eliminated altogether, as we need the state to ensure law and order, enforcement of legislation, protection of competition and protection of external borders. On top of it, we need different government department that are responsible for setting the strategy in education, health and social policy, while the tactical implementation is better of being done in private sector, supported by donations.
This is an English translation of an article by Mitja Sadar that was published, in Slovenian, in the leading Slovenian Investment Magazine KAPITAL, on 27.04.2009. Original article is available at the following URL:http://www.revijakapital.com/kapital/poslovnefinance.php?idclanka=6696
