Are taxation and free markets mutually exclusive?

There is a tendency among those who are ardent supporters of the unfettered free market (the “invisible hand” and all that) to think that any form of taxation, government intervention, and public spending is inherently, irrefutably, and perpetually bad for free markets and competition.

And it can also extend to much more than a tendency or a thought. It can be an iron belief that reaches the levels of zealous religious dogma. The market and society must absolutely be left to its own devices. It must never be fiddled with. Any sort of incursion from a government authority in the form of a tax or regulatory policy is sacrilege. Any sort of talk suggesting that is blasphemy.

Well, that’s not exactly true. It’s quite far from the truth, in fact. If you’re one of those types reading this now and you’re about to start foaming at the mouth, consider taking a step back. For a few minutes, at least, assume or pretend that you may just be wrong and it’s quite possible that the other side of the argument may have a semblance of a point to make. You really never know. You might even learn something new!

Alternative Policy Solutions, a Cairo-based policy think tank affiliated with AUC held its first annual conference under the auspices of “Towards an economy for all” at the Tahrir Campus on December 18. Experts and academics from around the world came to the event to share their knowledge and research of how an inclusive economy that provides equity and basic needs for all is not only desirable but necessary.

Among free marketeers, inequality and poverty can be generally accepted as necessary evils for the sake of having a completely free, competitive, efficient, and prosperous market. And only that kind of market is good for the economy, right? Well, not quite. According to a lot of recent economic research, including from the International Monetary Fund (the lord of the free market), high levels of inequality and poverty can actually be quite bad for the economy and the health of a market.

One of the conference’s attendees, Panos Tsakloglou, a professor from the department of international and European economic studies at the Athens University of Economics and Business in Greece, debunked many of the myths associated with the free market. And even claimed that many forms of government intervention can improve market efficiency.

Nobody is questioning or rejecting capitalism or its founding principles here. Tsakloglou said “the capitalistic system is a very efficient system” in the levels of production and innovation it achieves. However, “it may create inequality as well. Some inequalities may be justified. Some others, however, they may not be. And if they are not, we may need some kind of an intervention to correct these inequalities.”

The assumption is that if markets are left to work freely without any intervention, then they achieve perfect competition which produces optimal outcomes in both production and distribution. “However, markets are often anything but competitive,” Tsakloglou said, as when left alone, they tend to form monopolies and oligopolies and descend into non-competitive practices, which can also lead to market failures. “In such cases, government intervention is justified,” he continued, in the forms of taxations and regulatory policies.

Free competitive markets aren’t immune to failures. Causes of these failures are many. “There are several other reasons that can lead to market failure even if the economy is competitive. There are questions of externalities, questions of asymmetric information. Questions of missing markets and also there is the question of public goods.”

Asymmetric information is business-lingo for a failure of information when a participant in an economic transaction has more knowledge than the other participant. According to Investopedia, in such cases the seller of a good or service tends to have more knowledge than the buyer, however, this can also happen the other way round.

The most significant causes of failures which free markets cannot account for on their own are externalities, according to Tsakloglou. While externalities can have a positive effect on production and consumption, they can have a negative effect which would necessitate government intervention.

Since the world is currently in the grips of a global climate crisis due to human economic activities having an adverse effect on the environment, it has become a necessity to transition away from fossil fuels and towards a carbon-neutral economy, perhaps even a carbon-negative one. “If we leave production without any kind of a restriction, it produces quite a lot of pollution,” Tsakloglou said. “[It] is an international externality…pollution is something that crosses borders,” and hence would require local governments to intervene in their countries’ markets to correct it.

Defining pollution and environmental degradation as inefficiencies, tax policies can improve them. Tsakloglou explained a scenario of how it could work: “Tax the most polluting activities. A choice to make this production very expensive, forcing them to produce at lower levels and hence reducing pollution or giving incentives for the discovery of new technologies that will be less polluting…this [is] an example [of how] taxation can improve efficiency.”

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