Role of a Nation State

As the world is coping with the once in generation crisis of COVID-19, we see a very varied response of the nation-states around the globe to both the healthcare predicament and associated unprecedented economic fallout. While the scholars would argue the disparity in response measures is a function of national circumstances, I would argue it dawns from the fundamental difference of viewpoint of what should be the responsibility of a nation-state. And whatever be the governing philosophy of the ruling regime (pure capitalism or socialism), both the individual & corporate taxpayer must question how their taxes are ultimately being utilized to benefit them, for the basic purpose of the existence of governments’ is to be a service provider to all citizens within its jurisdiction.

So, let us begin by understanding the economics of government finances. The government at is its core is not a profit center but a balance center. What I mean by that is the fundamental operating principle of a government should be different from a for-profit corporation. A corporation aims to generate revenues above the cost and the differential is the reward for the owners (called shareholders in corporate parlance) for footing the risk capital to set up the business. This differential is borne by the consumers for adding value to their lives (this is a very simplistic explanation of basic corporate operation). However, in the case of a government, the demarcation between the ‘shareholder’ and ‘consumer’ disappears. While on one hand, we pay the tax which is the government’s risk capital to begin & sustain operations, we are also consumers of all goods & services the government provides. Hence, the fundamental economics of government finances is to run a balance between the taxes gathered & spending made. Sounds simple enough right? But then why is there such stark disparity between fiscal policies & outcomes among different countries across the globe? I would hypothesize it emerges from the disparity of what different government chooses to spend on.

Before diving into what I consider the ideal avenues of government spending, let us take a quick look at streams of government income or taxes. Fundamentally, there are three types of taxation which exist:

1. Individual income taxes
2. Consumption taxes
3. Corporate taxes

Individual income taxes: This type of taxes is borne by salaried individuals, where the individual is taxed a portion of their income & the portion grows progressively with income. Some countries like the USA also collect a payroll tax from individuals in lieu of social security over and above income tax. So individual people are providing this capital to the government.

Consumption taxes: This type of taxes is a form of indirect tax initially borne by corporations most of the time, but finally passed on to end consumers. All forms of goods & services tax, value-added tax, municipal taxes, excise & customs duty, estate tax, property tax would fall into this category. Individual people are also providing this capital to the government.

Corporate taxes: This type of taxes is borne by corporations on their bottom-line. Basic corporate tax, dividend distribution tax, capital gains tax would fall into this category (some may debate last 2 should fall under consumption tax). Business corporations are providing this capital to the government.

Now that we have looked at sources of government income, let us try to build an ideal portfolio on matters where the ruling regime should devote that income to. As we see above that there are two major classes of the contributor to government income namely individuals and corporates, I will also make an attempt to distinguish the avenues of spending directed towards these two classes.

Lives & Livelihood Services

Let us start by looking at elements directed towards individual people. I believe the government should fundamentally provide three services necessarily in lieu of the taxes collected from individuals:

1.    Healthcare

2.    Education

3.    Social Security

Healthcare: The subject of healthcare for all is much in vogue nowadays, especially with Senator Bernie Sanders popularizing the slogan “Healthcare is a human right” in his bid for the US presidential nomination. Healthcare services have two dimensions- availability & affordability. While, availability of primary, secondary & tertiary healthcare facilities with proper medical equipment and well-trained personnel is a necessity, the affordability of healthcare services is equally important from an access standpoint. While most of the developed economies include some form of healthcare services under state-provided services, most of the developing nations have little or no provisions of state-sponsored healthcare and citizens are left to fend for themselves. Healthcare is the single biggest unplanned expense that can push a low-income family below the poverty line. I am not making an argument for universal health coverage here, where the affluent can even get their extravagant cosmetic surgeries reimbursed under the state-sponsored package, but the citizen regardless of their economic position should expect the state to take care of the basic life-saving treatments & primary healthcare without dire economic consequences. This particular topic has come into prominence in the recent COVID crises especially with the health of an individual having larger societal and eventually economic impacts.

If we do an analysis of the health expenditure of various countries as a percentage of their GDP, we see a clear distinction where developed economies apportioning a significantly larger pie to healthcare compared to developing and poor economies.

The recent trend around healthcare is to link it with employment & include it as a mandatory benefit provided by employers via federal mandate. However, the coronavirus pandemic has magnified the flaws and fallacies of that system and made the case of universal basic state-sponsored healthcare stronger. The European countries like Switzerland, Finland, Germany, UK, Netherlands has long been touted as the model for universal healthcare systems and should be looked at by all developing countries to emulate.

Switzerland's health care is universal and health insurance is required for all persons living in Switzerland. Unlike other European countries, Swiss healthcare is not tax-based or financed by employers, but rather it is paid for by individuals through their contribution to Swiss healthcare schemes. There are no free state-provided health services, but basic health insurance coverage covers 80-90% of healthcare costs, including outpatient treatment, emergency treatment, prescriptions, maternal medicine, vaccinations, post-operation rehabilitation, and more. Switzerland combines private, subsidized private, and public healthcare systems to provide its citizens with a large network of qualified doctors, best-equipped medical facilities and hospitals, and no waiting lists.

Finland's healthcare system is believed to be one of the best in the world. Healthcare in Finland is a highly decentralized, three-level, publicly funded system. Municipalities are responsible for offering their residents healthcare services. Funding comes from two sources: municipal financing based on taxes that are used to provide primary healthcare services and National Health Insurance (NHI), which is financed with compulsory fees. NHI funds private healthcare, occupational healthcare, and outpatient care. In a European Commission survey, 88% of Finnish respondents stated that they were satisfied with their healthcare.

Education: Education has long been heralded as the greatest weapon against economic inequality in society and the best enabler of social mobility. However, education will only be all those things if it is accessible to all from the son of the CEO to the daughter of Kirana shopkeeper without prejudice. And this is only possible when the state takes the responsibility of providing the same standard of education throughout the country. Moreover, another problems school face today in countries both rich and poor is the sub-par quality of teachers. The top-quality students do not want to pursue teaching in schools as a career option as the remuneration is not competitive with respect to a corporate job. States must bridge this gap and institute a competitive salary regime to attract the best talents to the school. This can be the best investment a nation can make towards its future.

Nation’s with sub-par education systems can aim to emulate Finland as the model of the universal education provider. Not only does Finland attract the best talent as school teachers through market-competitive salaries, but the Finnish schools also rank as best in the world when it comes to learning outcomes. The country has a standardized curriculum of learning across the nation and made one year of pre-school and 9-years of basic comprehensive schooling free and mandatory for all. Finland consistently ranks at the highest end of the UN published education index along with Denmark, Australia, and New Zealand.

Again, there will be questions on till what level should education be the state responsibility. I believe, every citizen in a country should have the opportunity to study in school till the age of 18. 10 years of schooling should be mandatory and free for all. College or university education should be optional and self-funded only. Nations can setup merit-based scholarship systems and/or education loans targeted towards the economically weaker section of the society.

Social security: The third element of service that citizens should expect from government in lieu of taxes paid is social security benefits. There are two components to the social security benefits:

1.    Unemployment Insurance

2.    Retirement Benefits

Unemployment insurance is a protection mechanism against unexpected job losses. Obviously, this benefit can’t be continued until eternity as it would detrimental to the industrious nature of society as a whole. Prudent limits need to be applied to protect against misuse for example ‘unemployment insurance can be only claimed for 3 months in a period of 3 calendar years’.

Retirement benefits are the protection shield against advanced age when a person is no longer productive. Currently, most nations leave it up to the individual to save or invest for retirement. However, the majority population does not have the necessary financial literacy or discipline to earmark funds for the future. Hence, I believe the government should institutionalize this benefit and make it universal.

Law & Order Services

Now, let us explore the kind of services the government is expected to provide which benefit both individuals and corporates. I will group these services as law & order facilities and infrastructure & innovation amenities and most nations around the world provide these in some shape or form. I envisage three elements of law and order services as necessary:

1.    Police administration: This service is essential to protect ordinary citizens and businesses against miscreants and maintain a peaceful order to continue economic activities.

2.    Defense/Military establishment: A nation must protect its sovereignty and existence to protect the rights of its citizens and businesses. While in an ideal world, one can argue against military expenditure and diverting the funds allocated here to better use (Eg: Healthcare, education), one must be prudent and maintain a strong military in today’s scenario.

3.    Judiciary: The third & final element of the law and order triad are the courts to provide a systematic avenue of dispute resolution among the citizens and corporates.

Infrastructure & Innovation Services

I believe the government should only undertake the basic infrastructure projects in a public-private partnership or lease model to ensure the availability of said infrastructure in economically unattractive regions. I envisage the following infrastructure elements in need of government participation:

1.    Power

2.    Connectivity- Roads/Ports/Airports

The above list may not be exhaustive and may vary based on the nation’s geographic situation and/or economic condition potentially including sectors like banking, airlines, oil, and gas, etc. However, I personally believe the government should attempt to involve private corporations in infrastructure development as much as possible and only intervene in projects where the gestation period of investment is too long for private participation and/or the infrastructure is in the national interest. I personally believe that there should be minimum use of individual taxes on said infrastructure projects as these services can be operated as going concern businesses and monetized based on usage.

I also believe the nation has a responsibility to fuel innovation and secure the country’s future and hence should allocate a portion of it’s spending in futuristic projects like space exploration. While such projects are believed to be beneficial for human (and therefore national) progress, there are no immediate economic gains visible here. Hence, keeping such projects under the responsibility of the national budget is prudent with an objective to remain competitive in the global arena.

Regulation & Redistribution Services

Finally, let us explore the services government is expected to provide to the businesses and corporations in lieu of the corporate taxes. I envisage the following elements of services in this group:

1.    Regulate

2.    Redistribute

Regulate: Government is expected to maintain a free and fair market and encourage healthy competition to ensure innovation and best service to the consumers. Hence, it must institute and maintain strong market regulators like competition commission, the central bank, sector-specific regulators with an aim to protect minority interest and ensure a low barrier to entry.

Redistribute: The natural resources of the country are the property of the citizens and the government acts as the custodian of the same. Hence, the ruling regime must fairly redistribute the natural resources to benefit the country. I believe, the revenue generated from leasing and licensing the use of natural resources of the country to the private corporations must be channeled to develop the infrastructure and fuel the innovation.

The fundamental frustration among the taxpaying denizens of many nations today is that they can’t visualize the use of taxes to improve their quality of life. And hence there is a negative connotation with taxes and an attempt towards tax aversion. I believe if the nation can revamp the tax collection structure to demonstrate the services being provided to citizens in lieu of tax collected (for example the US separates the income and payroll tax and earmarks payroll taxes for social security and healthcare), we can move towards much better tax compliance, improved government finances, and an effective nation-state.

Disclaimer: All these views are my personal views and not associated with any organization. Also, the list may not be exclusive.