Decision Time in the South Pacific: Income Tax or Mitchell’s Golden Rule?

Decision Time in the South Pacific: Income Tax or Mitchell’s Golden Rule? by Dan Mitchell.

Comprised of dozens of islands, Vanuatu is one of the few places in the world that doesn’t have an income tax. …

But the absence of an income tax bothers some outsiders. Nations such as Australia and international bureaucracies such as the World Bank are pressuring politicians in Vanuatu to adopt an income tax. And they’re playing dirty, trying to bribe and extort lawmakers with promises to provide more aid or threats to withdraw existing aid.

Faced with this threat, members of the Vanuatu business community asked me if I would make a big sacrifice and come to their nation so I could explain to politicians and the public why an income tax would be a terrible mistake. …

The absence of an income tax does not necessarily mean a country a role model for free markets. If you look at the latest edition of the Index of Economic Freedom, Vanuatu is ranked #89 out of 178 nations, barely qualifying for the “Moderately Free” club of countries. … The moral of the story is that it’s good to have a low tax burden and no income tax, but that’s just one piece of the puzzle. Vanuatu gets very low scores in other areas, particularly regulatory efficiency and rule of law. This is one of the reasons why Vanuatu is still a poor country.

Vanuatu has been violating the golden rule, that the private sector should grow faster than the government.

The reason why the income tax is a threat is that Vanuatu politicians have increased the burden of government spending. … government spending since 2000 has grown by an average of about 6 percent annually. …

Bad tax policy will be inevitable unless there is an effective policy to control the growth of government. And that’s why the last half of my speech was about the merits of a spending cap. … The challenge, of course, is that politicians very rarely are willing to tie their own hands. From their perspective, a spending cap is a threat to their ability to play Santa Claus.

Income taxes in most of the western world only started early in the 1900s. They were sold as temporary, only on the rich, and at low rates (typically less than 10%).


hat-tip Matthew