How much of the economy should flow through the government? That's actually the question being asked when we think of what the tax-to-GDP ratio is. That gross domestic product is all the monetized economic activity in the country in a year. The tax ratio is how much of that the government takes to spend as the government thinks it should. So, that ratio really is, as I say, how much of everything should the government be doing and how much should be us?
This is one of those debates currently going on in Bangladeshi politics -- what should that ratio be? There's an insistence out there that as rich countries have higher tax collections from the economy -- 30% to 50% or so, perhaps -- then, given that Bangladesh wishes to become a rich country, the tax rates must rise, so that the tax-to-GDP ratio can be like that of a rich country.
One possible answer here is that it's the politicians saying this -- and they would, wouldn't they (this phrase has special resonance in English, in an old political scandal a minister denied paying a prostitute. Her response, in court, was “well, he would, wouldn't he?”) Those who would get to be very important by spending lots of money think they should be allowed to spend even more. Hmm, tough to divine the motives there.
It is possible to be less cynical in three different ways here, even if the correct response to all politics is “Am I being cynical enough?”
The first is that perhaps it is true that the government should be doing more. That will indeed require more tax revenue, a greater portion of the economy. Now, look at the politicians we've got. I can't do that for you but I can reveal that I worked for a year in Westminster, in Parliament. I'd not flip any of those I've met or worked with an extra penny, even if they were just short of the amount for a cup of tea, but perhaps that's just me. You have to look at those who get elected and make your own decision based on that.
The second is that there's an awful lot of what the government does that can actually be considered “luxury good” -- this is something we spend more on as we get richer -- say, oh, old-age pensions. It's only when we're rich enough that we don't all starve in our 50s that this becomes an issue. It is entirely just and right that the issue is therefore delayed until we are rich enough. There's an awful lot of the government that is like this. In Europe pretty much every town has a municipal swimming pool, paid for through taxes. Lovely things to have, I've enjoyed a number of them. But I do think I'd object to the rickshaw puller being taxed to provide them at the current level of development in Dhaka.
The third is that, actually, the government doesn't cost that much. For we need to divide state spending -- and therefore also the taxes which are raised to pay for it -- into two different things. One is spending upon the actual functions of the government (the roads, the rule of law, inspectors for building sites and so on), the Navy, Army, basic protections against foreign threats and also against the problems of life. A basic welfare state such as some health care, a basic minimum if unemployed and so on. Just the basic things we expect a modern state to provide for us like, say, how Hong Kong or Singapore do. That costs maybe between 15% to 20% of the GDP.
But we can look at Northern Europe and note that the governments take 35% to 45% of the economy. In France over 50%, but then again we English have long known how crazy they can be. That extra isn't a necessary function of the government at all. It's one that some desire for, sure, but it's not necessary. Because that next 20% to 30% of the GDP is taking money from some people to give it to others. Not, at all, to provide things that are necessary, but to equalize incomes.
That's a very different thing.
We might think it's pretty crazy but there are people who want it to be done. But it's something that is wildly different from enough money for the government to do the things that must be done by the government.
It's also possible to put this another way. The things that must be done by the government increase the growth rate. The things -- like income redistribution -- that can be but don't have to be reduced. That makes income redistribution a luxury good again -- something we do after we're rich enough to afford it. To a great extent this is therefore a choice.
But those telling you that Bangladesh must have higher taxes in order to have growth, no, they're wrong. There might be a way to spend that growth but that depends upon how you view the ability of the politicians to spend the money. That's also up to you but let's say that I'm unconvinced upon general principles.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
