6.7.1.5 Funding by Taxation or Government Borrowing

The hardest aspect of government spending is raising the money to pay for it.  As quoted in an Economist article, Plucking the geese:

LOUIS XIV’S FINANCE minister, Jean-Baptiste Colbert, famously declared that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” When it comes to taxing companies, a modern finance minister might rephrase this as “the largest possible amount of revenue with the smallest possible amount of economic and political damage.”

The article focuses on multinational companies, which can choose where to report their profits, but Colbert’s observation applies to all taxation.

Wealthy individuals and companies can practise aggressive tax avoidance, as described previously (3.2.4.4), unless they are exposed and politically pressurised to pay more.

In addition to the economic constraints on how much tax can practically be levied on an economy (3.2.4.6), governments are constrained by their need for political consent.  They may try to choose taxes that are less visible or less unpopular (3.2.4.2), or they may try to evade hard decisions by borrowing – which delays the impact of increased levels of spending, although the debts have to be repaid with higher tax later (3.3.8.1).

There is a temptation, in democracies, to defer political pain for electoral reasons – despite the obvious unfairness of passing the pain to later generations who have not benefited and who did not participate in the decision-taking.  Some governments have even resorted to concealing the truth about deficits, as was the case with the Greek government’s decisions that ultimately precipitated the 2011 Eurozone crisis; this was described, for example, in a New American article EU Trouble: US Banks Helped Hide Government Debt.

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