Holding all else constant, I do not like tax. I do not think, too many people actually like paying tax.

I only rationalize the need for paying tax by holding on to classical rationale for the need of the state: that there is externality. The state is there to protect individual liberty which, generally, cannot be guaranteed in anarchic environment. I say generally because I am still reading Nozick’s Anarchy, State and Utopia and he has some idea how that maybe false. Yes, I am still reading it. But I am digressing.

Like I have mentioned earlier, I do not like tax. And some taxes are worse than others. One of the worst that can exist is tax on savings in one form or another. In Australia, much to my dismay, savings is taxed. More precisely, they tax interest gained on savings.

Tax on savings has its purposes. For one, it encourages spending to promote economic activities. Or allegedly. Islamic economics for one has this goal imbued in it due to its objection to the concept of time value of money, a concept which necessarily brings in the concept of interest. Without interest, there are less reasons to save for tomorrow and more reasons to spend it all today. Tax on interest earned on savings does that albeit to a lesser degree.

Whether that purpose is good or bad is a normative question that cannot be answered with the end set. And I know my end and I frown at the end of taxation savings. In promoting the economy, it penalizes prudent spenders and it penalizes effort to smooth out consumption by savers.

I say allegedly because savings can be turned into loans and that encourage economic activities. There are ways to promote economic activities without penalizing savers. Indeed, that is how the banking sector helps grease the economy. Fractional banking is a magnificent social technology that takes care of that.

In Australia now, there is a big discussion regarding tax reform. Called the Henry tax review, the report was released just days ago. It aims to reform the Australian tax system. One way it seeks to support those reforms is by proposing a large tax on miners. That is dominating the headlines. There appears to be a war between the big miners and the Rudd government right now.

Meanwhile, many other details slip away from public attention. One of the details is the proposed cut on interest earned on savings.[1]

I like that particular proposed tax cut. Hell, I always like tax cut. I hate giving away money that I earned just like that.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — The review proposes a 40 per cent discount on all income from savings, as well as on all residential rental income and losses, and capital gains.

These recommendations were widely flagged prior to yesterday’s announcement, with critics saying the current system doesn’t give enough incentives for workers to put money in savings accounts. [The Henry tax review – what it means for you. Chelsea Mes. News. April 15 2010]

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