Rip Up the Tax System
Mark Braund
[Originally appeared in The Guardian.
Reprinted from Progress, January-February 2006]
Despite the prime minister's resolve, the year in which Britain was
to "lead the world in making poverty history" has achieved
little. This month there is one last opportunity as the World Trade
Organisation gathers in Hong Kong. But even if this meeting throws up
some surprises, we will end the year little closer to ending poverty.
Increased aid, debt cancellation and fairer trade would certainly have
some impact, but they would not address the underlying causes of
poverty.
To their credit, Tony Blair and Gordon Brown seem genuinely committed
to reducing poverty in the developing world. But commitment is not
enough. Their ambitious plans were doomed from the start for political
and economic reasons.
Any strategy to reduce poverty in poor countries based on aid, debt
relief and trade justice has to be paid for by rich countries, and
this has consequences for their economies. Britain may be able to
absorb the costs, but other countries cannot. Try telling France's
disaffected youth that more taxpayers' money must go to Africa, or
their struggling farmers that more food must be imported from the
developing world. But even without this considerable political
constraint, the strategy is unlikely to succeed because it does not
take proper account of the economics of poverty. All the governments
of rich countries remain committed to current global economic
arrangements and believe a solution to poverty is available within
that framework. They see poverty as a side-effect of economic advance,
a problem to be addressed through policy adjustments, and refuse to
accept it is part of the system.
One can see that the neo-classical economics that currently dictates
policy, and that has driven globalisation, has little to offer when it
comes to tackling poverty. It is reasonably effective at promoting
economic growth. But growth does not assure the equitable distribution
of wealth, and often appears to have the opposite effect, especially
in the developing world.
If the objective is reducing poverty, then economic progress should
be judged by measuring not growth, but poverty and economic exclusion.
This reveals that after several decades of steady improvement, the
situation in sub-Saharan Africa has deteriorated every year since
1984. Despite this, it seems never to cross the minds of the world's
finance ministers that the theoretical basis for the global economic
revolution of the past three decades might be fatally flawed.
The forces that cause deepening poverty in poor countries are also at
work in the rich. This is why Labour's commendable targets for
reducing child poverty have been so difficult to achieve. Poverty in
the developing world can be successfully tackled only by removing its
root causes. This requires us to return to economic first principles
and to look to the founding fathers of worldly philosophy. It was
clear to Adam Smith that any philosophy for a fan-society needed to
acknowledge the economic forces that determine the distribution of
economic opportunities and therefore wealth. It was Smith's near
contemporary David Ricardo who made explicit what was becoming
obvious: if the ownership of land and natural resources is grossly
unequal, then wealth and wellbeing will be the privilege of the
minority. And as the economy develops and more wealth is created, the
gap between rich and poor will widen. This is an inescapable
conclusion of classical economic theory, and although the world has
moved on since Ricardo's day, the fundamentals remain the same.
Consider Mozambique, an African success story where the economy is
growing at 10% annually. The capital, Maputo, boasts one of the finest
colonial hotels on the continent. But as the new indigenous elite
enjoys London-priced cocktails in its sumptuous bar, only a few miles
away then- fellow citizens are still living in the iron age. Fairer
trade would increase the wealth-generating capacity of countries such
as Mozambique, but without measures to address the root cause of
poverty, the poor majority would feel little of the benefit.
Neo-classical economics is considered to be a minor updating of its
Enlightenment predecessor. But in the process of that updating, key
aspects of the earlier version have been discarded. Only those
elements likely to serve the interests of minority privilege have been
preserved. If a small group of wealthy citizens set out to devise an
economic system that would enable it to expand its wealth and entrench
its advantage, it is hard to imagine a better system than the one we
have today.
It is reasonably easy to make a moral case against the obscene wealth
of the super-rich, and for a more inclusive and just global economic
order. But that moral argument must be presented alongside a sound
economic strategy. If our present minority-favouring economy is based
on a false understanding of economics, then a revised understanding is
needed in order to create an economy which serves the interests of the
majority.
The early economists set out to find a means by which individual
freedom and social justice could be reconciled. The evidence of the
intervening two centuries suggests that not only were they ahead of
their time, but also ahead of ours. Far from trying to emulate their
attempts to reconcile freedom and justice, we as-sume them to be
irreconcilable. As a result, politicians and activists divide into two
camps: those who prioritise individual freedom, but fail to
acknowledge that freedom is worth little without economic security;
and those who prioritise social justice, but struggle to come up with
a sound economic strategy for promoting a more equitable distribution
of wealth.
Arguments about freedom and justice often centre on taxation. Those
on the right argue that taxing personal income is a disincentive to
individual enterprise, while taxing corporate profit undermines the
ability of firms to invest for the future. The left counters that as
private enterprise and free markets are unable to provide economic
security for all, the redistribution of wealth through taxation is
imperative if a sizeable part of the population is to avoid
destitution.
Both sides have a case. Taxation does limit wealth creation. But,
without some redistribution, millions more would fall into extreme
poverty. Taxation of personal income is an infringement of people's
right to keep what they earn. But that infringement is as nothing
compared to the experience of those denied viable economic
opportunities.
Instead of arguing over how much we should tax, we should be asking
why an economy based on free markets and private enterprise is so
incapable of delivering opportunities and security for all. This
brings us back to classical economics. If access to the land and
natural resources upon which economic activity depends is concentrated
in the hands of the few, the many will struggle to find adequate
life-sustaining opportunities. This conclusion drove Ricardo to
despair. Two centuries ago there was no possibility of persuading the
aristocracy that wholesale changes in land ownership were needed to
reduce poverty. After staggering economic and technological advance
but still no end to poverty, we may be more receptive. But we still
need a mechanism to widen access to economic resources without
threatening individual freedom.
A neat solution was proposed more than a century ago by an American
economist named Henry George. Today, his followers are subjected to
unfair accusations of intellectual naivete by the economics
mainstream. But his ideas deserve a hearing because they adhere to the
essential truths of classical economics, and because they promise an
economy in which individual freedom and social justice become
co-dependent rather than mutually exclusive. For George, the key to
transforming the economy lay in the tax system. He argued that instead
of taxing effort and enterprise through taxes on incomes and profit,
we should tax ownership and the exploitation of natural resources.
Currently, people who own land are entitled to keep the full amount
of any increase in its value. As land generally rises in value, their
wealth increases regardless of how much work they do. If this income
were taxed, there would be no incentive for anyone to amass large
landholdings, and land ownership would be spread more widely.
Supporters of such land-value taxation suggest it could ultimately
replace traditional taxes as the source of public revenue, thus
increasing the capacity of the economy to generate wealth, as well as
ensuring its more equitable distribution.
By reforming the tax system to reward effort rather than ownership,
many more people would gain access to economic opportunities.
Admittedly, the super-rich would have less freedom to amass huge
personal fortunes, but if our democracy is working as it should, they
would eventually have to accept that their privilege comes at too
great a cost to wider society.
Look at the argument for such change: the promise of an economy that
encourages private enterprise; that is dependent on the free play of
market forces: that reduces the role of government to that of provider
only of those services not suited to private provision: and that
provides opportunities for everyone prepared to take responsibility
for their economic welfare. It is a no-brainer.
Such revisions to the tax system would have to be accompanied by
other similarly motivated policies if the economy were to be
transformed from a servant of minority privilege into a provider of
majority justice. These would have to include reform of the global
monetary system which allows banks to create unlimited credit for
large corporations while denying small loans to those who need them to
help themselves out of poverty. It would also require an end to the
kind of casino capitalism that allows the rich to speculate on
financial markets, sometimes causing whole economies to collapse,
forcing millions into poverty. What these reforms (of the tax system,
the monetary system and Financial markets) have in common is they all
target unearned income.
In poorer countries the pace of economic liberalisation makes matters
worse. Russia is a perfect example of how rapid deregulation causes
land and natural resources to fall into the laps of a fortunate few.
It now rivals Mexico as the country with the largest gap between the
rich elite and the poor majority. And it does not require corrupt
government for assets to be scooped up by the likes of Roman
Abramovich. It happens anyway, as those who are wealthy borrow money
to acquire more land and the rights to exploit mineral resources.
In the developing world the situation is more serious. In these
mainly agricultural economies, the only way for most people to make a
living is by growing their own food. If, as in Africa, the most
productive land is taken over by cash crops for sale to rich
countries, then the life-blood of ordinary people dries up. This may
be happening because of the need to repay crippling international
debt, but even if that debt were written off these businesses would
continue to flourish. As they became more successful they would use
more technology and employ fewer people. No jobs, no land to farm and
no social security system. More than anyone, the people of the poorest
countries need a mechanism to ensure they have access to land.
The long-term redistribution of economic resources through a reformed
tax system that targets unearned income promises an end to poverty in
rich and poor countries alike, because it strikes at the root cause.
We have a choice. We can arrange the global economy so that only a
minority have access to it. and then tax their earnings to mitigate
the poverty of the rest. Or. we can arrange it so all have access to
economic opportunities. The first will relieve the worst of today's
poverty but do nothing for tomorrow: the second could eradicate
poverty once and for all.
For too long we have accepted the argument that there is no
alternative to current arrangements. If growing numbers can be
persuaded that there is an alternative, one that is morally desirable,
likely to promote individual freedom and social justice, and that is
backed by sound economics, then we might succeed in making poverty
history.
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