Some thoughts from Tradewinds.

In Part I it was stated that the Theory of Excess Burden evokes difference of opinion in analysis and conclusions. One of the underlying assumptions in the theory is that the market is usually perfect even when reflecting monopolistic tendencies. It was evident that when taxes are too high, consumers will stop buying non-essential goods and services resulting in a deadweight loss for the economy as a whole.

One school of economic thought, the Neo-Keynesians, have a different point of view. From their perspective markets in the real world are anything but perfect. Their answer is to use tax policies as a way to correct adverse market distortions. In other words, government intervention becomes necessary to correct these real world market imperfections. Many economists in this school of thought argue that taxes are a necessary tool because they can redistribute income from the wealthy classes to the poor classes. They say this is necessary as a fairer distribution of income is more conductive to stimulating economic growth. This is classical Keynesian textbook thinking as Keynes always favored the redistribution of income to the poorer classes because of the multiplier effect. Money distributed to the wealthy usually goes into savings while money distributed to the poor is immediately spent creating a greater stimulus to the overall economy. Higher rates of money turnover has a Keynesian multiplier effect on the aggregate economy.

Hope I was fair and unbiased to neo-Keynesian with this analogy as I tend to support a different perspective. Opponents to Keynesianism will argue that calculations of the Keynesian multiplier effect are misleading according to the theory of Ricardian Equivalence proposition, for it is impossible to quantify and calculate the effect of deficit-financed government spending on demand without determining how people expect the deficit to be paid in the future. In other words, it really does not matter whether a government finances spending with increased taxes or debt, because the effect on aggregate demand is the same throughout the economy.

It is interesting to note that since Independence successive governments have pursued Keynesian deficit spending policies as a matter of routine course. Such policies have created the appearance of a growing and prosperous economy. But now we have reached the ends of our borrowing capacity and our excessive spending now exceeds our ability to tax and borrowing to pay these costs and other unfunded commitments.

We have been told that VAT will be the answer to raising more revenues, but when considered from the perspective of Excess Burden it becomes highly questionable whether VAT will be a meaningful answer and an effective policy to cure our nation's acute financial ills. It certainly will not pay down our huge deficit and resulting interest cost burden.