Government Provision of Goods and Services as redistribution

The diagram in my previous post omits another prominent way of redistributing, popular in the UK until recently. This is redistribution through the provision of goods and services by government. Providing can be a means of redistribution, and in many cases this is to be applauded. However, there are degrees to which this can occur.

I will assume that the provision of certain basic goods and services (democracy, law and order, defence) in a redistributive manner is uncontroversial. (Murphy and Nagel, in their excellent book 'The Myth of Ownership' make this point).

However, some would propose that government should provide a lot more services, and that this should be the primary way of creating a more equal capitalist society. This was common in the UK in the middle of the 20th century, for example.

If the government provides services on a universal or limited basis then this is a means to redistribute resources. This could be done by providing some service or good to all people (and not just because it is a public good that cannot be provided by the market), or on a targeted basis to those deemed to be most deserving or suitable.

A good example is the state provision of housing (I will ignore the universal provision of education and health, since there are further specific reasons to provide these on a universal basis).

The problem I have with state provision is that it will favour those who are selected for the benefit—people who get state-provided housing for less than those who purchase or rent privately. Those who are not chosen will not benefit (except in rare cases where the provision corrects for a market failure). In order to avoid this favouritism the good could be provided to all people, but this is likely to reduce the choice available to people.

The latter example shows a further problem; that the provision of goods and services that can be provided by the market will often be inefficient. Simply giving people the money would be a more cost-effective way of achieving the desired redistributive effect. This is certainly the case in the extreme example where everyone has their housing provided by the state, but this point no doubt also applies to many other cases as well.

The economic argument against providing goods and services directly to people is very strong. However, there may be some further justifications that supporters could draw upon:
1. People can't be trusted with money - if you give them money they might waste it but if you give them something clearly good then it will benefit them.
2. Universality and solidarity - that providing these goods represents the value of society.
I'm not convinced by these lines of arguments, but I'd be interested if anyone wants to try to defend them below...

Ways of Taming Capitalism

Free market capitalism is a system that works very well for a small number but not always very well for regular working people. I propose a tax system that would radically redistribute income from the most economically fortunate to those who work for low wages.

There are various responses to this which have been tried at various times and to various degrees, and it is worth mapping out the differences. We can distinguish between redistributive and predistributive ways to make capitalist societies fairer. (It is arguable that all the approaches are really redistributive in the traditional sense of the term, though I will follow the recent trend in distinguishing Predistribution as a separate approach).

In the redistributive camp are proposals that would take tax revenues and spend them to improve the position of the worst off in society. There are many ways of doing this, and I will briefly outline these in the diagram below.

The proposals above are not all mutually exclusive. However, since all - if they are to make a real difference - are going to have high costs and/or economic effects it is unlikely to be practical to have more than one at a time.

My proposal (in italics above) is a form of hourly earning subsidy. The only other hourly income subsidy proposal I know of is that proposed by Nobel-Prize winning Economist Edmund Phelps in his book Rewarding Work. Phelps' proposal would provide money to employers in exchange for the employment of full-time, low-paid workers. This money would then be passed on to the workers in higher wages. My proposal would instead take account of the number of hours that people work (up to a maximum), and provide a subsidy to them if their lifetime average is below a certain level. My argument is that there is no reason to limit the subsidy to those in full time work.

I have discussed Universal Basic Income/Negative Income Tax proposals in previous blogs, and plan to discuss the others in future blogs.

How radical is the CLIPH-rate tax?

My tax system proposals are in many ways very radical. However, they may not be radical in the way that everyone would think of the term.

The proposal to calculate tax (or for some a subsidy) taking account of the number of hours that people have worked (or been excused from work) in their lifetime is a significant break from previous ways of calculating taxation. In this sense, hourly averaging is a radically new proposal.

The CLIPH-rate tax is also radical in the way it would change the economy and the distribution of resources therein. Everyone would effectively become working class, since all would need hour credits from working in one form or another. The difference in income between the highest and lowest earners would be radically reduced.

Of course differences in wealth would remain, since some would spend all their income while others would save. Nevertheless, the differences would be much less marked than they are in any other capital-based economic system.

However, radicalism can also means something further which does not apply to the CLIPH-rate tax. This is the idea that society should be altered and reimagined through the process of revolution or class warfare.

My tax proposals pursue equality through a continual redistribution of income from the fortunate to the less fortunate rather than any kind of revolution or change in social or human nature. People would still pursue their interests in a society with a market and almost all of life would work as it does not.

The CLIPH-rate tax proposal is not radical in this latter sense of the term, and some may see this as a bad thing. Some may simply want society to be totally different than it is and blame capitalism and free markets for the problems they perceive with current societies. The CLIPH-rate tax offers nothing to such radicals.

However, the CLIPH-rate tax does offer a challenge to those who defend the status quo; while the other radical plans may appear utopian the CLIPH-rate tax does not require the leap into the dark that revolutionary radicals propose. To those who believe in capitalism and markets, the challenge is to say why can’t there be radically more redistribution, given that it is possible within a capitalist economy?

(Photo Credit: Flickr Creative Commons/Ed Gaillard. Occupy Wall Street marched into Lower Manhattan on September 17)