Monday, 14 May 2012

TAXES, HERE COMES THE GREAT REAPER, PART 2

PART 2: TAXES, THEY ARE SO UNFAIR!

Apologies to anyone actually reading this blog for the long delay - it's been a difficult month and I haven't found the courage to put my thoughts in order. But here is my attempt.

Introduction

In the previous post, I examined the shape I would like taxation to take. Basically, it ought, in my opinion, to follow income distribution i.e. be flat/near flat for the first 99.9% of the population and then increase exponentially for the remaining 0.1%.

This tends to lead my more conservative friends to 4 types of objections which I would like to address today.



1- WHY WOULD IT BE FAIR TO TAX THE VERY RICH?

Hey, they've earned their money, haven't they? Why so jealous? Why don't you go and create your own company? Why do you hate success? And variations thereof.

The main answer to that question is that, actually, they have not 'earned' their money in any way, shape or form we would recognise in our everyday life. If you're salaried, you're "earning" your income. If you're a small business owner, you're "earning" your income. We will get into the nitty gritty of what is behind that 'earning' in another post on macro-economics. But, if you're truly rich (i.e. part of the 0.1% and, actually, the 0.01% would probably be closer to what I am interested in), it's unlikely you're actually 'earning' anything. At that point, your wealth depends either on your ability to extract/re-direct 'surplus'/money away from the other stakeholders and towards yourself (that's the upper management technique for getting rich) or on your ownership of a company which somehow managed to find itself in a position to avoid or destroy competition and extract what is, in effect, rent.

Going back to the origins, Adam Smith clearly stated that, although it is every 'capitalist' wet-dream to become a rent-exploiter, competition/the Invisible Hand made sure this did not actually happen in practice and thus the capitalist's pursuit of his own self-interest (rent-seeking) led to the betterment of every economic actor.

Said differently, rent-extracting happens only when competition, for one reason or another, does not work. It was Nassim Taleb who said it best - "Hard work will get you a professorship or a BMW. You need both work and luck for a Booker, a Nobel or a private jet". The luck of being in the right place at the right time, with the right product.

So, going back to our original point, if you are becoming extremely rich because the mechanism that is meant to keep capitalism "efficient" and in everyone's best interest is not working, why would it be unfair to use taxes as a corrective measure? What is society interest in rewarding luck? Hard work and risk-taking? Sure, those ought to be rewarded. But I haven't seen a compelling argument, especially one based on fairness, for rewarding luck.

The simple answer is that, failing our ability to eliminate real world imperfections and create perfectly competitive markets, taxes are a corrective measure and thus not intrinsically unfair.


2- THE RICH DON'T CONSUME MORE PUBLIC SERVICES

They don't use more public services than the rest of us! If anything, they use less of it. Leave the poor darlings alone!


I think it was UK Uncut that proposed to stop garbage collection around the shops of Philip Green's retail empire ( http://www.ukuncut.org.uk/targets/3 ). But, leaving asides a notorious tax dodger (albeit nothing I read has led me to believe he broke any law), can someone point out any big company that does not depend on modern structures and modern society to survive and thrive?


Where would Microsoft (and Bill Gates) be if it could not ship its products via safe highways and sea lanes? If Internet/broadband didn't exist? If most of the western consumers it is targeting were not computer literate thanks to public education? If we did not recognise and enforce somewhat debatable IP laws?


My rule-of-thumb test is dumb but I think it captures the essence of my counter-claim to the idea that rich don't benefit more than anyone else from public services. What would happen if the whole world was like Somalia? How would Bill Gates (take your pick among the super-rich) fare in such a world? My bet is that he would not have been able to create Microsoft. Thus he wouldn't do so well and thus he is massively benefiting from our modern society. As such, he does have a massive vested interest in keeping it going. And so does Philip Green.




3- INCREASING TAXES ON THE WEALTH CREATORS IS COUNTER-PRODUCTIVE


Also called the job creators. With unemployment so high, that re-branding has a more powerful appeal than "wealth" most of us see very little of.


My answer to that objection is short: It's true [most studies as well as logic show some substitution effect between work and leisure time as taxes increase on the highest tranche]... for most small business owners, self-employed people and professionals such as doctors, lawyers, independent consultants or artisans, for that matter. Hence, I would definitely agree with my conservative friends to leave those people mostly alone.


But Bill Gates or Sir Philip Green or Liliane Bettencourt or whoever else you care to mention in that category will not work less if they are taxed more. By definition, as seen above, they do not actually 'work' for their income in any sense that is recognisable.  They extract it. The acceptable level of extraction is partly a matter of relative strength between the actors/stakeholders and partly a matter of what is socially acceptable. And, on a psychological level, I doubt 'money' is a reward for them in the same way it is for people of more modest means - beyond the raw power money actually confers and the fact that it is easy to rank oneself against his or her peers via the size of one's fortune. Either way, their income is un-correlated to work, effort, energy, time spent etc.


Thus, I would fully expect that, if we were to meaningfully increase taxes on the very rich, these people would scream to high heavens, threaten Armageddon, cry that socialism is back and Stalinism can't be too far behind... but that, eventually, as long as their respective pecking order hasn't been altered, they would just go back to leading their business empires totally unaffected.




4- RAISING TAXES ON THESE PEOPLE IS IMPOSSIBLE: THEY'D MOVE ELSEWHERE.


Switzerland, Monaco, the Bahamas or any number of tax heavens would welcome them with open arms.


That's true, of course. But that's not the end of the story.


As long as most nation-states with significant military power cooperate (and, technically, it's an iterative prisoner dilemma for the non-tax heaven western states i.e. cooperation is best and cheating just lead to a race to the bottom where no one get $1 of taxes on the very rich), we can bully the tax heavens into cooperating. If you think this is entirely preposterous, I would remind you that De Gaulle actually surrounded Monaco with tanks and cut off their water supply in the 60s ( http://cdlm.revues.org/index3023.html ). More recently, the USA has managed to wriggle quite a few concessions from Switzerland if not at gunpoint at least by carrying a very big stick.


If you find such advocacy for the use of naked force in international negotiations unpalatable, what about the fact that all those very rich people depend for their fortunes on free access to the western consumer (as stated above). Vodafone could transfer its HQ to Zug, Switzerland and yet it would still depend on accessing its customers to survive. Simply setting up punishing trade barriers would bring Vodafone's managers to adopt a more reasonable position when it comes to paying taxes.




Conclusion


Most 'theoretical' opposition to taxing the very rich is unconvincing and rely for their emotional appeal on mixing the small corner shop owner or self-employed doctor and plumber with the most powerful and richest business executives as well as the heirs or owners of business giants .


The practical objections are more of a concern, especially as such taxation would indeed require cooperation across western states and some, such as the UK or even the USA, have already proven their willingness to "cheat" i.e. trying to attract revenues from international corporations at the expense of everyone else.


But practical organisation is not impossible and would anyhow require a clear idea of what we are trying to achieve - that's the limited purpose of this series. As I said elsewhere, I do not really expect my writing to truly influence the state of the world. Thus, while I am willing to debate practicalities, I ought not to be limited by it. Not yet, at the very least...