Tough choices

As I write this, nearly every country in the world is facing budget deficits to a greater or lesser degree. And every one of them is looking for the solution in “new sources of revenue”.
 
The interesting aspect of this is that the more traditionally capitalistic countries which rely on direct taxation like the US (which already has income tax, property tax, capital gains and inheritance tax and worldwide taxation) are looking at consumer driven taxes such as VAT.  The high tax jurisdictions like the UK and Germany are also looking at further raising their many existing direct and consumer taxes, while indirect taxation regimes like Cayman are looking at direct taxation or VAT which thus far have failed to produce enough revenue to sustain the earlier two examples.
 
The arguments always seem to be that it has “worked” in other countries, which is the same argument we now hear for property tax in Cayman. That statement is just not true. It hasn’t “worked”. It has simply been a part of a tax system in other places that has been shown to be ineffective.
 
So if direct taxation doesn’t do it on its own, even with VAT, and indirect taxation can’t do it on its own, I guess the only solution must be to have all types of taxation at once. Well that certainly will accomplish one thing: it will turn any country that tries it into a debt ridden welfare state where its people are dependent on government for handouts as the major employer. Read “Atlas Shrugged” by Ayn Rand if you want to see this type of programme in action.

Direct taxation, indirect taxation, VAT, whatever; taxation is not the solution.
 
It is interesting to note that governments are uniformly looking for the answer in the wrong place. Why? Because to look for the answer where it can actually be found threatens their very existence! There has been no tax system ever devised which when maintained at a level which stimulates business (i.e. GDP growth), can also support bloated government. And it is in bloated governments all over the world wherein the solution to budgetary deficits lies.
 
We have only to look at what is happening in the US, which has been the most productive nation in the world, to see what havoc unchecked government spending can cause. And the parallels between the US and Cayman are many. Both countries must come to grips with the principle that government should not be a nation’s largest employer, because in the process of that employment governments do not create wealth, they spend it. The reason leaders with foresight look to private sector investment to solve long term financial problems is that business provides jobs and at the same time creates wealth.
 
You have heard that saying – “lead, follow or get out of the way”?  Well, the best thing a government can do for its country is get out of the way! Get out of all but the most necessary services like crime prevention, education and justice. And it is likely they could do a much better job on those if they would focus on them. Some government services are always necessary and those should be supported by whatever system of taxation is best suited for its economic and social system and most palatable to its citizens.
 
The problem with this concept of small government, and why many call it impractical, is that for it to happen the legislature would have to legislate itself out of a job! But isn’t the function of our elected members to represent us and do what is best for the country? And if getting rid of superfluous positions, sweetheart pensions and money losing businesses is in the best interests of the country, isn’t it incumbent on our leaders to do just that?
 
Put another way, if you were the CEO of your company and you were losing a lot of money, would you not close or sell off any non-productive parts of the operation? Of course! And if you had done your best to try and balance the budget but you were still in the red, would you cut your salary to ensure the company would be solvent? Of course!  Well . . .?
 
It will take a completely new way of thinking to accomplish that in Cayman. Over the past 30 years the Caymanian entrepreneurial spirit has waned and is now only evident in civil servants setting up business on the side, which they hire a foreigner to run for them while they collect a government pay check. The days of the great Caymanian commercial families are mostly behind us, further emphasised by the funerals of the elder Fosters, Boddens and Kirkconnells.
 
The average Caymanian has got to have more confidence in his/her ability to make it in the private sector. No, it probably won’t be as cushy and secure with all the perks of the one they have in government now, however, the cumulative effect of that job, those perks and security, is what will never allow our budget to balance – regardless of revenue sources. We are living an illusion –and every time the Financial Secretary does a budgetary exercise, that becomes more obvious.
 
These are tough choices yes – but these are tough times. And if we care about the country we will leave to our offspring, we had better not continue to be selfish. The choices will only get tougher as time goes by.

tough-choicesSM

Get Real by JC Calhoun

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