Imagine a 25% sales tax

Living in Europe has exposed me more to European economics and politics. One thing that continuously comes up in the news and magazines I'm watching and reading is the financial crisis in Europe, which seems to dwarf America's. 

Greece is bankrupt, and the other European Union countries are desperately trying to bail out their member country so it doesn't drag the rest of the countries down with it. It's a real danger, when the countries have irrevocably tied their economies together and most of them are teetering on a financial precipice anyway.

Sales taxes are already quite high in most countries here. In Germany, it's 19 percent, unless you're buying food (and "food" doesn't include soda, or other "luxury foods"); then it's 7 percent. I grew up with a 5- to 7-percent sales tax, so it's hard to fathom 19 percent. Fortunately for me, I live in Switzerland and am legally able to recoup my Germany sales taxes if I do the proper paperwork after shopping.

A friend who lives in Romania blogged this week about how Romania is raising its sales tax to 24% to help offset general financial woes. It was that, or cut retirees pensions by 15%. And judging by any accounts I've read about the life of a retired person in parts of Eastern Europe, they're already barely scraping by. So the government opted for the increased sales tax, sharing the hardship equally with everyone on something that is, to some degree, voluntary. I mean, some things you HAVE to have, and you'll eat the 24%. But other things, like a new TV or extra extension cords, you might be able to do without.

That, however, serves to illustrate the point that economies are organic like the environment; for every economic action taken by a government, there is an equal and opposite reaction. As people try to avoid this higher retail tax, they will buy less. The law of unintended consequences says that sales of goods will decline; this will hurt manufacturers and importers; that will result in companies either jacking up their prices to make up the difference, shipping jobs to a country with cheaper labor, or laying off employees. Such actions will further exacerbate any kind of national malaise.

I'm not saying I think the Romanian government had another choice, and considering the alternative of harming the retired, it may have been all they can do. However, I don't think some politicians -- most of whom have not worked extensively in business -- really understand that introducing a man-made interference into an organic environment, like an economy (even a more controlled economy), unleashes new forces. It's similar to introducing a foreign species into an ecosystem, expecting it to control another out-of-control species, but then the foreign species begins to breed out of control, harming the balanced ecosystem further.

Read more about Romania's new sales tax.