Today's Editorial

24 January 2017

The secret of a good life



Source: By Ashok V Desai: The Telegraph



Socialism had its golden age after World War II. Taxes in the belligerent countries had gone sky high during the War; people had got used to paying high income taxes. Governments had no use for the revenue once the enemies were defeated; what better use for it but to improve the conditions of the poor? No country rewarded the poor for just being poor; they had to be young, or old, or unemployed — unfortunate in an additional dimension — to qualify for subsidies. India, for instance, invented a scheme and named it after its saint, Mahatma Gandhi: a poor man had to be prepared to do hard physical work in the open, however hot or cold it was, to get a paltry wage. No wonder middlemen found it easier to invent poor men and pocket the wage in their name.


But bad solutions do not get rid of the problem; the poor continue to suffer, and however incompetent or dishonest governments may be; the need for a solution remains. One of its lifelong pursuers was Sir Anthony Atkinson, an academic with a social conscience. His last book was about rising inequality in most of the capitalist world which is so widespread that people think it is global fate. He argued against this pessimism and suggested innovative policies to reduce inequality.


They include a proposal that every government should create a sovereign wealth fund. At present, it is normal for governments to run deficits and finance them by borrowing or printing money; Atkinson thought that governments should also run surpluses in good times, save and invest in companies and property. The profits from ownership, trade and industry should not go to capitalists alone; the government itself should buy into capitalist enterprises, and use the income for social purposes.


This is a shift from the beliefs of traditional socialists, who wanted to nationalize enterprises, thus converting private profits, the major source of economic inequality, into government revenue, which could then be used for progressive income redistribution. The postwar experience was that governments were not much good at managing enterprises.


Atkinson's solution was to let private entrepreneurs manage enterprises, but to buy into their rewards. And there is no reason for governments to confine themselves to investing in domestic enterprises; they might invest in the best enterprises internationally. Governments levy estate duties, which tax people after they are dead and cease to care.


In Atkinson's view, the government should also keep a record of inheritance and gifts inter vivo that rich kids receive, and levy a lifetime capital receipts tax on them; and it should collect a proportional or progressive property tax based on up- to- date property assessments. It should introduce an annual wealth tax, and a minimum tax on companies irrespective of deductions. Personal wealth tax was levied in some European countries, but did not work too well; rich people could easily shift their wealth to countries with lower taxes.


This is a general problem with redistributive policies; it is difficult to make them work beyond a point at the national level. Major countries have fixed the peak rate of personal tax between 30 and 45 per cent, and corporate income tax at a level close to the maximum rate of personal tax; they have given up on higher tax rates because of the risk of losing revenue to tax havens. The members of the Group of 20 fulminate at this and discuss action against tax havens from time to time. But apart from some instances of success against Panama and Switzerland, they have achieved little.


Many governments subsidize poor grown- ups. In Atkinson's view, poverty is no less of a curse for the young. They should get a generous child benefit. It should be included in the income of their parents and taxed as income, so that children of poor parents would get more generous subsidies. There is merit in this idea. Grown- ups, especially old people, are likely to consume any subsidies they get; the young may use them for education, travel, or just having fun. There are, of course, counterproductive ways of having fun, such as drinking and drugs; but they can be equally resorted to by the old as by the young. Nevertheless, it is difficult for governments that raise money by taxing people to give away money unconditionally; after all, they have to justify it to the taxpayers.


Hence, they are prone to give it to the deserving, such as the poor or incapable, or for laudable purposes such as education and health. The more conditions are attached, the greater the chance of misuse — just try and count the number of government schools in India in which incompetent or unwilling teachers waste their and children's time. Much innovation is directed towards raising productivity and reducing labour requirements; Atkinson wanted the government to encourage innovation that uses more workers, and to take account of income distribution in competition policy. Workers cost money, so economizing on workers — raising productivity — come naturally to enterprises.


There is no money in using more labour; so it is difficult to see why any enterprise would innovate to use more workers. The obvious thing to do is to subsidize workers; instead of giving dole to unemployed workers, the government should subsidize workers whether they are working or not. Atkinson wanted an annual tax on personal wealth; there is already an annual tax on personal income, and it would be easy to extend it into a subsidy to the poor. Pensions are normally paid irrespective of how well off the receiver is; Atkinson wanted pensions and pension contributions as well as saving schemes to be covered by progressive income taxation.


Governments have sometimes made a distinction between earned and unearned income, and taxed the latter more heavily. This is really a subsidy to paid work; there is no reason why it should be favoured against unpaid work or living without work. But progressive taxation should not distinguish between sources of income; in this sense, Atkinson was right.


Progressive income redistribution has gone out of fashion; mobility of wealth and income has made it risky at the national level. Progressivism requires international cooperation, which is unlikely to happen. One only needs a handful of rogue nations to defeat it. What is worth thinking about is progressivism as part of good living. Many rich countries have all kinds of schemes for the poor, unemployed, old, young and so on.

But only some have used them to create a desirable life for the young and the old. Scandinavian countries are amongst them; Germany also probably qualifies. These are the countries whose people are happy where they are and do not want to leave. It is this secret of a good life that a government should try to crack. It will involve a fair dose of redistribution, for it is only the rich that have the surplus to finance a good life. But a government should aim to create a good life for the rich as well as the poor. There are countries that the rich want to run out of, and countries where the rich flock. There is something the former are getting wrong and the latter right.