It’s the tax, stupid!

itsthetaxstupidJames Carville, Bill Clinton’s campaign strategist in the 1992 presidential elections, coined the term “it’s the economy, stupid!” to impress on the Clinton campaign the importance of the subject of economic recovery in the elections. Nowadays, you could apply this bon mot to taxes. With the international economic depression continuing and the strain on budgets worsening, tax is a hot topic in the international news, with the U.S. “Fiscal Cliff”-hanger, as well as an ongoing European issue with the Euro crisis, which always has an important fiscal and budgetary side to it.  But taxation is increasingly also a debated political subject in small Luxembourg, where the 2013 budget discussions have lead to substantial criticism of the government for not being sufficiently courageous or decisive in cutting budget spending and/or increasing or reducing taxes (depending on which side of the political spectrum you stand).

Although paying taxes is always painful, I believe in the statement of Supreme Court Justice Oliver Wendell Holmes, Jr., which is engraved on the I.R.S. building in Washington, that “Taxes are what we pay for civilized society” 1.

At the same time, and believe me, I am no partisan of small government, it is my strong view that the other side of the equation, the spending, needs to be kept in balance as well. In particular in times of crisis, the government should have a close look at the areas where it can cut spending and reduce its costs, including on public servants. When people in the private sector are losing their jobs or suffering of wage cuts, there is no reason why employees in the public sector should not bear their part of the burden.

So, to me, part of the job in balancing the budget is to be done on cost-cutting.

On the other hand side, there are areas of taxation in Luxembourg that are clearly not well thought about. One of those areas is taxation of income derived from real estate 2. There is, to me, something shocking in people collecting millions of euros by reason of some agricultural land being reclassified into “buildable” land. Or in people being taxed substantially less in relation to added value gains on sale of property as compared to taxation of income derived from work. An architect friend remarked to me once that Luxembourg had no natural resources of any kind, and hence had to invent one in the form of real estate. I think there is a lot of truth in that. And I think that, in this complex field, Government (both communal and State) should have a much closer look at the profits being made in making land buildable, developing and  selling property.

I have not thought much about the type of tax this would be: communal tax on development, tax on wealth, direct taxation on income derived from real estate… but clearly some thought should go into that.

In pre-election year 2013, the prevailing logo may therefore well be “it’s the tax, stupid”, and the party that will come up with the best and fairest tax reform leading up to the 2014 national elections may be well positioned to win.

  1. Quoted in “Tax Time – Why we pay” by Jill Lepore in The New Yorker, 26 November 2012. []
  2. See also the interview of Gilles Roth in the Luxemburger Wort of 29 December 2012, where he also discussed taxation of real estate. []

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