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The Case for a Homeopathic Fiscal Policy

The Case for a Homeopathic Fiscal Policy Economy Near Us (XXI)

Very recently, a certain initiative of the Minister of Public Finance – namely regarding the possibility that tax evasion be punished by prison time – has generated much rumour and pros vs. cons debates (especially among the TV talking heads). Since the political (or even electoral) reasons of such a proposal are alien to my mind, I will focus this intervention on the general character the fiscal policy should exhibit, according to its nature as well as its purposes and, consequently, on the legitimacy of introducing such sanctions. Another issue of interest will be that regarding the efficacy of the proposed measure. 

The nature of fiscal policy 

The fiscal policy is a macroeconomic public policy of adjustment, with an imperative status and targeting the real economy, which is the economic activity which provides goods and services which may immediately enter the consumption (final or intermediate). Consequently, fiscal policy has its room to manoeuvre in the fiscal (and budgetary) space. By fiscal and budgetary space, we understand the set of rates for taxes, contributions and other mandatory levies for the consolidated general budget, on the former side, and the directions of public expenditures financed by public revenues and/or public debts, on the latter one. So, the nature of fiscal policy is framed by the two categories of tools dealing with public money. 

The purpose of fiscal policy 

The fiscal policy has two purposes:

  1. a) to provide the public goods;
  2. b) to ensure the macroeconomic stability (or, better, sustainability) of the real economy.

For the nominal economic stability or sustainability, we task the central bank.

Regarding the supply of public goods, fiscal policy must establish the adequate rates of collecting the public revenues based on which we will make the public expenditures for producing those public goods. Regarding the provision of stability or sustainability for the real economy, public policy must implement, using its own tools and mechanisms, stimuluses and inhibitors on the economic behaviour of actors within the real economy. 

Some preliminary conclusions 

Based on the above considerations, the fiscal policy seems to be framed at the intersection between real economic adjustment and social justice. Social justice, in this case, addresses the distributive phase of the economic product, not its re-distribution – the last belongs to the social rightness. In addition, it seems clear that fiscal policy (and, generally, any economic public policy of adjustment) has no links with justice understood as the administrator of the criminal law. On the other hand, the economic behaviour violates many such rules – in fact, such a violation comes packaged with the infringement of rules concerning public funds[1] (i.e. with pure economic rule violation). Obviously, this interference has led the Minister of Public Finance to make his provocative statement. 

Homeopathic vs. allopathic public policy 

In medicine, there are two ways of curing a disease:

  1. a) homoeopathically, that is, the remedy is of the same nature of the disease – set a thief to catch a thief;
  2. b) allopathically, that is, the remedy has an opposite nature to that of the disease.

Regarding the public policy, we can also think in the same terms: a public policy is homeopathic if its measures regarding a given behaviour in the society are of the same nature as the behaviour, and it is allopathic if its measures regarding a given behaviour are of a different nature. Prior to applying these considerations to fiscal policy, we must accept that, just as in the medical field, neither approach has a perfect track record on its own. 

Fiscal policy should be homeopathic 

My pleading is definitely in the favour of a homeopathic fiscal policy. I will provide the following arguments:

  • probably, most of the infringement of rules pertaining to public funds is performed without the intention to violate the criminal law (although, of course, nobody can defend himself by invoking the ignorance of criminal law);
  • the fiscal policy should be primarily interested in recovering the monetary damage, instead of punishing in terms of criminal law the actor violating rules regarding public funds;
  • it is not at all established fact that criminal punishment will lead economic actors towards avoiding, in the future, the re-infringement of the rules;
  • mixing public funds rules infringement with criminal law infringement will lead economic actors with a disposition to steal the public money to proceed simply by cost-benefit calculation, that is, could transform the economic actors into optimization machines for usurping public money;
  • based on the previous statement, economic actors could accept the criminal punishment as a cost for public money theft, so the fiscal policy will fail in its purposes;
  • on the contrary, if the fiscal policy would remain in its “territory”, without flirting with the penal law, that is, if it will act inside the “money territory”, the economic actors targeted will feel the cost directly expressed in their private money, not exchanged in some days or months of prison (which, as has been said, could be more acceptable than to pay the financial cost of rule breaking);

Based on the arguments above, I strongly recommend that the fiscal policy be homeopathic regarding the procedures and tools used to prevent or to repair the public funding rules infringements. Indeed, the order of things should be this: prevent and repair rather than punish. In such a vision, in a cynical statement, it could be said that any infringement, if discovered, has as a result the increase of public revenues – because of the economic penalty applied for the infringement of rules concerning the public funding. I once advanced a proposal to calculate a multiplier of the fiscal revenues based on the fiscal evasion. Discovery of infringement is another issue which deserves attention in a future essay regarding the capabilities of the fiscal administration to discover that rule breaking has occurred.

Taking into consideration that the infringements are performed not based on principles (e.g. protesting against the social or political order), but based on pecuniary interests, then the reaction of the state must focus exactly on these pecuniary interests. It is obvious that the impact (so, the result) would be much important, relevant, and significant than the criminal punishment which was required by the Minister of Public Finance. 

Some concluding remarks 

Probably any public policy of adjustment should preserve the homeopathic character of the tools or procedures applied in its field of competence. Regarding the fiscal policy, I think such a desire is much more stringent and productive, because the fiscal policy has to do with the public money which must be preserved and used in the common interest of the nation. 

Photo credit: pxhere.com.

[1] By public money I understand: a) money which is held by the state, no matter in which way; b) money that the state claims under the law, no matter from whom.

 
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OEconomica No. 1, 2016