Reducing Costs of the State: From Compulsory to Voluntary Purchases

1
Reducing Costs of the State From Compulsory to
Voluntary Purchases

• By Ruta Vainiene, Vice-president, Lithuanian Free
  Market Institute,
• 2003-06-23, Montenegro

2
Costs of the state consist of

• Taxes (direct burden)
• Non-tax taxes (indirect tax burden)
• Tax compliance (tax administration burden)
• Tax consumption (budget expenditure - hidden
  burden)
• Government-induced inflation
• Public debt
• Regulations

3
How to measure costs of the state?

• Only direct tax burden is measured as a rule
• absolute amount, a share of GDP or Tax Freedom
  Day
• Still - tricky (tax cuts make tax burden to
  increase or tax burden may shrink due to rapid
  economic growth, not tax cuts)
• Others are invisible. This allows the state to
  increase them.

4
What do we get for that price?

• State functions and public goods including
• - sick health care (patients are encouraged to be
  sick), poor social security (SS provides
  incentives to be poor, discourage labour, erodes
  personal responsibility), unsafe safety (no
  possibility of protecting ones life and
  property).
• - Bureaucracy (waste of time, injured dignity)
• - Regulations (complex rules)
• - Other limitations on personal freedom (hampered
  creativity).

5
Mutually beneficial exchange?

• By definition ineffective because compulsory
• - tax payer has no choice
• tax consumer has no motivations to improve the
  quality
• there is no market price for state functions.

6
What can be done?

• Limits on increasing effectiveness of the state
• A shift from compulsory to voluntary purchases
  by
• sizeable tax cuts on the one hand
• privatization of state property and functions on
  the other

7
The more the better?

• De-mystifying negative effects of reducing state
  finances
• What is the difference between justice and social
  justice?
• Money will remain in private pockets and will
  certainly be used in a more effective way

8
Micro state? Micro government!

• Easier to implement due to simpler decision
  making
• Inefficient public sector is giving way to
  private sector which, if ineffective, will be
  punished by the market
• Increases the nations competitive advantage
• Makes the State, not the government, viable and
  sustainable

9
Micro state is a merit

• Fewer incentives to pursue ambitious goals, and
  so - cheaper
• No need to have local/central states in addition
  to central/local, and so - more concentrated
• Possibilities to be open, flexible and innovative