What makes the difference between a developed and a developing country? For example, what is the difference between the UK and India? And what can this tell us about the nature of development?
In the UK, the government spends lots of money on schools, hospitals, infrastructure and welfare. The income comes from taxes on people buying things, like VAT. And from people earning salaries – income tax and NI. Almost everywhere that transactions occur, there is a tax. So the model is that governments earn money by skimming it off every time it changes hands. So the government, to keep the economy going, needs to keep the money going round and round. Even paying money out for welfare isn't "losing" the money, because the money gets spent very quickly on other stuff. And if people stick money in a savings bank, about 90% of that is going to be loaned out to someone who WILL spend it. So that's why austerity budgets don't make any sense. That's why Britain's growth is in the toilet. On the other hand, you don't want to overspend because the law of conservation of energy probably operates so you can't spend money you haven't got. Well you can, but you will end up with inflation. However, none of this seems to apply to the purchase of investments. There is no tax on financial transactions. If I buy £5000 of Invesco Perpetual High Growth Rhubarb Fund, I don't pay VAT. Why not? And if I buy some futures, I certainly don't have to pay any tax. So the Tobin Tax makes total sense. If you put just a tiny tax on all derivative transactions, what a windfall that would be! They had some idiot on Newsnight the other night arguing against it, but he was obviously a paid lobbyist paid to lie and couldn’t come up with anything sensible.
The corollary of all this is that probably the highest crime against society is not the odd murder, but cheating on your taxes. Because it strikes at the heart of the financial model of our society. Murders are few and far between and only affect the immediate families. Tax evasion probably occurs partially due to peer affect. Most people I know would happily cheat on their taxes, in part because it's socially acceptable.
Now why is India a developing country? Possibly because the middle class isn’t yet big enough to take enough tax money to build all the hospitals, schools and welfare schemes that a developed country needs. But also because at least half the economy is black, so is not contributing taxes. And because tax avoidance is of course done on a big scale there.
I read recently that if everyone in Greece (and Italy) paid their taxes properly, the Euro wouldn’t have a problem! By the way, in Spain, where my partner owns a house, it’s almost impossible to sell a house without having to pay money into the black economy.
So it could be argued that penalties for non-payment of taxes should be SERIOUSLY strengthened. I’d start off with having the head of HMRC flogged for letting Goldman and Vodafone off the hook for their taxes. (See Private Eye for the full story.)
To summarise: 1. Put a tax on every financial transaction, especially derivative transactions. In fact you might only need to tax derivative transactions. 2. Make stiff penalties for tax avoidance. 3. Shoot the head of HMRC.