We have already commented on and criticized before the disproportionate growth of public sector expenses that the corresponding need to increase revenue via taxes implies. Now I am not going to deal with the convenience or not of this trend. I simply want to emphasise that this fact implies that government tax policies have some repercussions, relatively important, on the increase or decrease of the economic wealth of a society. If the total amount of tax collection were relatively small, the tax system would have less influence on global economic activity. However, the reality in the last few years has been the contrary.

At this point, it is logical to wonder, and those responsible for tax policies should do so thoroughly, about the positive and negative repercussions that one or another tax system has, independently of the collected total sum, regarding the growth of the economic value of society in its entirety.

Commons raises this question in his work Institutional Economics distinguishing two approaches when establishing a good system. The first approach would highlight payment capacity as a measure for selecting different taxes. The second approach is the one that in this case interests us more: that which selects the importance of different types of taxes according to the greater or lesser capacity for motivating individuals to increase the wealth of the community, increasing in this way its own wealth.

If instead of following the approach of collecting the most possible and in the most affordable way, we are inclined to the approach of motivating the increase of wealth of the whole of society as much as possible, we can draw some conclusions. In short, I would like to draw attention to the suitability of taxing physical, real goods of economic units more, and less the income of these same units. Collecting an identical total amount we can study the advantages of taxing real goods of physical or juridical patrimony in a greater proportion than income. It is assumed that the increase of tax collection on real goods corresponds exactly to the decrease of the collection on income.

It is as well to highlight again the role that the domestic economies, as basic units in those that the different physical, financial and human resources are supplemented, have in the economic game. Important managerial decisions are made by the proprietors of those companies stimulated by the healthy objective of obtaining maximum yield from the part of their patrimony invested in them. More than a circular flow, mercantile activity is structured in a net of exchanges between patrimonies looking for an increase in value for all the actors by way of greater perfecting.

Together with this I also insist on that aspiring for the best, in the quest for maximum profit and in the effort to increase economic value understood as a greater reconciliation of material goods to human objectives, cannot be condemned but is even advisable and an obligation which nobody should avoid to the extent of their possibilities.

From these two principles, punishing instead of stimulating the positive and successful effort of achieving maximum possible profit without breaking the ethical and legal rules of the game, is derived as absurd. When we tax income, we are in fact punishing those that contribute more to economic growth because they make the most of their resources. Those that have to make outstanding economic decisions feel reserved in their desire (positive) to achieve better results. If of what one earns, a growing portion of it ends up in the hands of the treasury it cannot really be interesting to improve results.

What happens if instead of taxing income, we tax real, physical goods, of the different units of decision?

The most outstanding consequence that hits you in the eye, is that a redistribution of material resources would take place in the whole economy, in such a way that each real good would tend to be integrated in the patrimonial group where more profit, in terms of value, is produced. If I have three properties, one of which I have not exploited, and I have to pay a real tax on it, whether I exploit it or not, it is logical that I end up selling it. Only someone who considers that he can obtain a greater profit in terms of value will purchase it. Given the strength that horizontal and vertical perfection has with regard to value among the different resources, the importance that this measure, briefly expressed, could have on general economic activity can be sensed, for exchange values as well as and especially for values in use. There would be greater stimulus for making the most profit from what is possessed. The mind would be applied more to look for creative initiatives for making the maximum profit with the indispensable minimum in physical goods. With that attitude, the proliferation of unproductive investments that are the root of so many recessions would be avoided. The patrimonial, mistaken, uneconomical investments are the origin of imbalances in cycles of growth and recession.

This first stimulus argument to achieve maximum profit from material goods would already be enough, by itself, to think about the question seriously. But another deduction exists which is no less despicable. Human capital plays a more and more important role in the creation of value. If we understand this as humanization of the material, the great wealth hidden as a passive strength in the material can only be extracted by means of the performance of the work that humanizes it. When we tax real goods, we are stimulating the acceleration of that process of humanization of the material. Human capital would benefit in the relationship physical capital- human capital. When taxing income much less, the revenues perceived by labour would not suffer. It would accelerate the shift towards investments in human capital by companies and it would have repercussions on employment because the incorporation of human resources would be less burdensome, in proportion to the physical investment.

I am conscious that this tax policy, which, I admit, has tinges of socio-economic revolution, would result in an increase in consumption. But this trend is not necessarily negative in the creation of value. The consideration of consumer goods as intermediate goods could be introduced here, that is to say, as investment goods in human capital, if we make that consumption productive. If the shift towards consumption is not a shift towards hedonist, unproductive and impoverishing consumption, that destroys value, but rather it inclines towards productive consumption that looks towards improvement in future activity, it can be highly positive. The quality of human labour as well as the so-called quality of life would tend to improve.

The possible advantages of such measures can be so important that they should not be pushed aside without more ado like fantastic utopias impossible to shape in the social reality. The practical application would require moderation and pulling all the springs of the tax system, but this stimulating power that the optimisation of the tax system has with regard to economic growth should never be forgotten.

An additional nuance... These general approaches to value are also applicable to public organisms. The State cannot tax itself, but it should think about the profitability that material goods produce under its jurisdiction. Following the same logic, the State should get rid of those physical, real, patrimonial goods that the private sector makes yield with greater effectiveness. Public property is a delegated property of private individuals.

Joseph John Franch Menéu
Autonomous University of Madrid
Gaceta de los Negocios
Professor of Political Economy and Public Treasury