What matters about taxes

As Belgians, we “enjoy” a significant level of taxation. And while I, as anyone, would like to pay as little taxes as possible, it is not the level of taxation which vexes me, but the often ineffective and inefficient way in which taxes are being used. In other words, I would mind paying taxes a lot less if I was certain they were being used well and if I would be able to influence, in part, their utilisation. Sadly, no political party currently gives me this option.

What is a significant level of taxation?

Wikipedia tells us that the Belgian taxation of an annual income in excess of 38.000 EUR is 50%. Income tax is calculated by applying a progressive tax rate schedule to taxable income, with rates that go from 25% to a maximum rate 50%. Think about that: anything you make in excess of 38.000 EUR is taxed at 50%. As the wikipedia article states “The effective taxation rate in Belgium is commonly cited as among the highest in the world” And I’m a Belgian, so I’m paying that amount.

How I feel about being taxed at that level

Of course, as Belgians we enjoy a significant number of advantages. Our healthcare is quite good and affordable. We have universal coverage, which ensures that if you are ill and poor, you stand a good chance of survival.

But, and this is a big but, as Belgian citizens we currently have no objective way of knowing that taxes collected are well spent. I’ll go one step further: oversight is currently at a very low level. The reforms of the past 20 years in the Belgian administrations have led to a situation where the control on proper use is lower than it used to be. Let me explain.

The negative effects of the federal and regional reforms of the past decades

The federal and regional reforms of the last decades saw a significant reduction of the number of public servants. In itself this is not bad, because our administrations and our governments were and remain quite large. However, the reduction in civil servants was never done in a controlled manner. Rather, when people left as public servants, they were just not replaced. This has led to an imbalance within the administrations, where key “knowledge” positions are no longer filled.

Now I agree with those who say that administrations should not play a role that can be played by the private sector in a cost-effective manner. But even that is not always the case. While some activities have been transferred to the private sector in a way in which this sector is both less costly and more effective than the administration ever was, some functions, especially knowledge intensive functions without direct pay-off, are just not supported anymore.

This can result in situations in which private sector is performing certain functions in a cost-effective manner, but without a clear view by the administration on what the private sector is doing and why it is doing what it is doing. And academic partnerships between universities and administrations are not as frequent as I would like them to be. Hence, oversight without verification. Efficient control, but not necessarily effective control.

So here is my first thesis of three: as to the oversight role of administrations and governments, it can only be executed in an efficient and effective manner if a private sector partner and the administration (or academia) work closely together, with the private partner providing systems of oversight and the administration providing insights into how to direct this oversight.

What am I looking for?

The current political discourse is one about more or less taxes, and if there is no increase or decrease, the discussion is about what the taxes will be used for.

In essence, the right is for less taxes and if there are taxes, these are to be used for hard agenda points, such as security and defence. The left is often for more taxes to be used in soft areas such as income redistribution. Both sides are catering to their natural voter public. Both fail to address the essential point.

Before we are discussing how much taxes should be levied, and what they will be used for, we need to make sure that we have adequate systems that allow for cost-effective verification of efficient and effective use. As a tax payer, I don’t mind paying as long as taxes are being spent on what makes sense and taxes are effectively used for that specific purpose.

What is the challenge?

The problem is of course that in a country with a multi-levelled government with not entirely clear separation of roles and responsibilities such allocation and oversight becomes a challenge. Which goes to my second point … allowing citizens to have a say about what to do with the taxes.

One citizen, one vote; but some choice with every EUR paid

I am a strong believer in parliamentary democracy. As Churchill, quoting from an unknown source, said in the UK House of Commons: ”Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.…” It’s important that all citizens have equal rights in determining who represents them.

But there is a corollary to that: I believe that all tax-payers, to the extent of what they paid in taxes, should have a say in what those taxes should be used for. Not a detailed allocation decision, but a choice. At least some of the money tax-payers pay should be directed to what those tax payers believe to be relevant. And here the effective tax rate pays a role. The amount determining your say is not what you should have paid before your tax advisors got a hand on your declaration, but what you effectively paid.

The government gets to decide on the list of things that get proposed to the tax payers … the tax payers get to decide on where they want to allocate a certain percentage of their taxes. If that is defense and law and order, so be it. If that is development aid, I’m all for it (I used to be an advisor to the vice-prime minister responsible for development aid). If it is income redistribution, why not? But give us as tax payers some choice in how our taxes are being used.

So here is my second thesis of three: if tax payers are allowed to allocate part of their taxes depending on their effective taxes paid, the allocation will be more relevant and more effective than if allocated solely by the government. This is the introduction of direct democracy at the level of government spending.

Effective oversight on effective spending will likely decrease taxation

Combining both theses leads to the following, third thesis: if we have efficient and effective oversight – a combined private and public sector effort – of (partly) tax-payer determined spending, we create a higher degree of transparency on tax usage which will, over the longer term, lead to a lower spending need because the spend will be more effective, to a higher degree of acceptance of taxation and to a lower effective taxation.