Feudalism and capitalism

Anyone who seriously declared themselves a supporter of feudalism would rightly be laughed out of whatever room they were in. The idea that people should obtain a higher or lower position in society solely because of their parents is horrendous. It does not treat people properly, let alone equally. Furthermore, it does not give foster equal opportunity and is an inefficient way to use talent and resources.

However, while capitalism is contrasted with feudalism as an economic model it seems that some of the problematic aspects of feudalism lived on. A recent journal article, summarised in a guardian article, has shown that most wealth gets passed on, along with other types of privilege that go with it.

Perhaps (ignorant historical conjecture klaxon) as part of the bargain in the slow transition from one type of economy to the next the fact that capitalism allowed the transfer of wealth and resources through generations. This meant that those who were wealthy could continue to pass on their wealth.

So there is a certain similarity be`tween free-market capitalism and feudalism where people are free to pass on privilege. The libertarian ideal of even less regulation and taxation does not seem likely to interfere with the passing on of wealth – it actively allows it even more than current societies. So what are the alternatives?

Anti-capitalist egalitarians might want to make it impossible for some to have more than others, and support the removal of the market economy in order to achieve this.

Supporters of meritocracy might want to remove the opportunity for people to obtain anything unless they have earned in (what they consider to be) the appropriate manner. Markets would be highly important for the purpose of determining what people should obtain, but they should not be able to pass on that wealth.

What the two views above often share is a distaste for the passing on of wealth. Those who wish to pass on their wealth are violating the ideals of either social equality or just deserts.

These views are far too extreme, however. Wanting to live in a fair society should not mean you should not desire to help those you love and care about. Whatever the source of this motivation, it does not seem to be a bad thing to want to help another person, even though it is often a very partial and economically inefficient position to take.

The liberal egalitarian approach that I take steers the right course through all these waters. As well as allowing people to act on their legitimate desire to give to others

Nevertheless it is right to tax resource transfers which are gifts between private individuals at highly progressive rates. Those who benefit the most from such transfers should pay a lot of tax on such transfers. The main reason is that this is a very good form of tax revenue—it does not stop people from working and investing if they are taxed on unearned wealth. Indeed, you would expect people to work and invest more if they are less confident of getting hold of significant familial support. Plus the people who benefit from large unearned transfers are (by definition) very fortunate people who can and should pay a lot more in tax than those less fortunate than them.

As a further advantage, taxing all such gifts would make the positions in society open more on the basis of talent and effort rather than family support.

The main point I wish to make in this blog is that while I argue for my CLIPH-rate tax proposal from a liberal egalitarian basis it actually mimics a lot of the features of the meritocratic one. By taxing all income including gifts and inheritances, and taxing unearned income at a higher rate than earned income, it should generate a highly meritocratic society.

I also believe it would generate an egalitarian society where everyone interacts as equals, though again this desire is not my own primary motivation for supporting the proposal.

The CLIPH-rate tax is therefore a form of capitalism that would truly break away from the vestiges of the old order and its hierarchies. 

Cumulative Advantages of the CLIPH-rate tax

My CLIPH-rate tax proposals represent a major change in the administration of taxation and benefits. It requires the authorities to obtain information about the number of hours people are working, or to assign hours to those who have a valid claim for additional credits. I admit this is no mean feat.

So why is it worth investigating the advantages of such a difficult undertaking? One point to make is that there are multiple advantages to the scheme and if you add these together then cumulatively, the proposal becomes attractive.

In previous blogs I have highlighted why hourly averaging should be good at taxing the rich, helping the poor (by which I mean low-earners), and do so in a way that would encourage economic activity and growth. However, will these advantages really outweigh the costs of administering the system?

I would like to suggest one reason why they might, under the heading of cumulative advantages.

This is just a way of saying that hourly averaging achieves many things using one system. This system would replace many other taxes and benefit payments and roll them into one single system. The CLIPH-rate tax would subsume all forms of income tax and if revenues allowed it could enable the removal of VAT/Sales and corporation tax. It also counts capital gains and gifts and inheritances and so these would fall under its remit.

More importantly hourly averaging would replace a lot of benefits that currently exist. It would replace disability benefits, unemployment benefits (jobseekers allowance), child benefit and tax credits/earning subsidies. Assistance for carers and students are included in the single system as well. Furthermore, if people’s incomes are closer together there is much less justification for other benefits (such as housing benefit in the UK).

Rolling together many taxes and benefits into one system should make the overall system a) easier to administer for governments and civil service, and b) easier for people to understand and engage with. Furthermore, one major system is much less liable to tinkering and political point-scoring when compared to the possibilities opened up by many systems that the public do not necessarily understand very well.

I have emphasised that is good at taxing the most economically fortunate and assisting the least economically fortunate, but one concern is that it will also require the assessment of many people who seem to be in the middle. This leads to the worry that a lot of time and effort will be expended on people who are neither highly fortunate nor unfortunate.

In response to this worry, I would argue that the information that hourly averaging provides might show us that many of those who are considered to be ‘in the middle’ are actually either quite fortunate and should be taxed more (or encouraged to work more) or that they are not as fortunate as they appear and should really receive extra assistance.

With the full information about the amount of earned income people have received in their lifetime compared to their unearned income and to the amount of hours they have worked in order to obtain this earned income, we can make much better judgments about economic fortune.  We can then tax and redistribute in a much more appropriate manner.

A lot of time, resources and effort are expended on the current system. This contains lots of components which are administered separately and do not always work very well together. I see no problem in expending a little bit more of these if it would achieve much better results. 

Hourly averaging and taxing the most fortunate

In my recent blogs I have explained why hourly averaging is a very useful method to assist the least fortunate: it provides an earning subsidy that contains a strong incentive for people to work more hours.

Perhaps I have assumed that it is obvious why hourly averaging offers an excellent method to tax the most fortunate at appropriately high rates. Put simply, a lifetime hourly average is the best feasible and measurable gauge of each person’s economic fortune. To show why I will describe eight people, who fit into some fairly simplified but important categories.

Some of the imaginary persons find it easy to do well in the job market. They might earn more because of their natural talents, their connections, or simple good luck. Others, however, are unable to earn high wages because they have not benefited from such good luck. Another dimension of luck is that of family background, people can either come from a rich family which offers them support or a poor family which is unable to assist them in ways that will generate more income and wealth.

All of these people freely choose (with no mitigating factors) to work full or part-time. If we look at some index of their income and wealth against which to tax them we would classify people as follows:

Person	Low or High wage?	Part-time worker or full-time	Rich/Poor family	Income/wealth
Adrianne	L	PT	Poor	Very Low
Brenda	L	FT	Poor	Low
Celine	H	PT	Poor	Low
Daphne	H	FT	Poor	Fairly High
Edith	L	PT	Rich	Middling
Fran	L	FT	Rich	Fairly High
Gina	H	PT	Rich	Fairly High
Hannah	H	FT	Rich	Very high

Table 1 : Fortune and work choice of 8 people

People’s income/wealth generally goes up as we move down the table and those at the bottom of the table are also more fortunate. A progressive tax system (which could capture returns to fortune from family transfers, investment income and earned income) would therefore tax Hannah more than Adrianne, which is the right sort of outcome.

However, taxing income and wealth does not capture the difference between all of the individuals. If we place people on a numeric scale for both their income/wealth rating and the areas in which they have good fortune we can see that in most cases there is a difference (see table 2). This difference tracks their decision to work full or part-time. There is nothing wrong with people making this choice of course. However, the choice does not indicate how economically fortunate they are – they just want to work fewer hours (for example because they want to spend more time on their hobbies).

One way to put the problem is that income and wealth can vary due to numerous factors including the choices that people make. Some of these factors will be examples of fortune, but income and wealth are influenced by other factors as well. The important factor here is the amount of time they work, though another factor could be their tendency to spend or save. This would also influence their level of wealth and investment income, and is reason to be cautious about taxing wealth, as I discussed in a previous blog.

Person	Income/wealth	Fortune in family or job	Difference between the two?
Adrianne	Very Low	Low	Y
Brenda	Low	Low	N
Celine	Low	Middling	Y
Daphne	Fairly High	Middling	Y
Edith	Middling	Middling	N
Fran	Fairly High	Middling	Y
Gina	Fairly High	High	Y
Hannah	Very high	High	N

Table 2 : Problem with tracking fortune on the basis of income and wealth

For progressive taxation on income that tracks fortune, there is a problem. Some full-time workers are taxed at higher rates than their fortune-level would appear to warrant (Fran, Brenda and Daphne) while the part-time workers are taxed at lower rates than their relative fortune level (Celine and Gina). If taxes were made less progressive then less tax revenue would be generated overall, leaving less revenue to assist people like Adrianne and Brenda.

The dilemma continues as well because while higher tax-rates might generate more revenues, they might encourage quite a lot of people to reduce their hours. It might encourage the Daphnes of this world to become like Celines, Frans to be like Ediths and Hannahs to be like Ginas. If people reduce their hours then everyone suffers as a) there are less goods and services available and those that remain will probably be more expensive (prices will rise) and b) there will be smaller tax revenues available to assist the less economically fortunate (particularly when we remember that tax revenues are required for important issues such as administering law, policing, democratic institutions, development, and for providing education, healthcare, support for the disabled and national defence).

Calculating taxation using a lifetime hourly average income enables us to much better tax people in accordance with their economic fortune. As table 3 shows, lifetime hourly average will coincide much better with good fortune.

Person	Income/wealth	Fortune in family or job	Difference between the two?	Lifetime Hourly Average Income
Adrianne	Very Low	Low	Y	Very Low
Brenda	Low	Low	N	Very Low
Celine	Low	Middling	Y	Middling
Daphne	Fairly High	Middling	Y	Low
Edith	Middling	Middling	N	High
Fran	Fairly High	Middling	Y	Middling
Gina	Fairly High	High	Y	Extremely High
Hannah	Very high	High	N	Very High

Table 3 : Lifetime Hourly Average for the eight people

Indeed, lifetime hourly averaging is potentially quite nuanced, and this points to the other major advantage of the system. Taxing people on an hourly basis means that the tax system gives people a strong incentive to work full-time rather than part-time. Adrianne will have a strong tax incentive to work longer like Brenda, Celine like Daphne, Edith like Fran and Gina to do like Hannah. It therefore has the opposite effect to all other tax proposals—instead of reducing the incentive to work this tax system would decrease it. This means that the economy will provide more goods and services (and therefore cheaper prices for these) than we would expect for any other highly progressive tax system.

We want to tax the most economically fortunate without discouraging economically productive activity and lifetime hourly averaging offers the best available means to do so.

Summary: Hourly Averaging to assist the less economically fortunate

In some of my recent blogs I have compared hourly averaging to other policies designed to assist the less economically fortunate.

My conclusion was that hourly averaging promises a much more effective means of helping the least well-off than a universal/guaranteed/basic income, a high ‘living’ minimum wage, or alternative earning subsidy proposals.

One reason for this is that lifetime hourly average income is a much better indicator of economic fortune than a snapshot at a particular moment of time or year. This is good for the worst off as it means fewer resources are spent on those who are less needy.

The second reason is that hourly averaging is calculated using the amount of time people have worked. By providing people with an incentive to work more hours, hourly averaging encourages economic activity despite its highly redistributive nature.

Encouraging economic activity is good for the worst off for two reasons. The first is that economic growth is generally good for all workers as it creates opportunities. Some alternative proposals, such as a very high minimum wage, are instead likely to reduce opportunities by taking opportunities away.

The exception to the rule that economic growth benefits the worst off is the case where some are excluded from these benefits. Fortunately for hourly averaging this will not be a problem as the systems provides the largest sustainable subsidy available to low earners. The worst off will have more money to spend and/or often more time in which to spend it.

The second reason that the worst off benefit from a strong economy is that they will it will provide more goods and services and at cheaper prices. Other proposals to improve the situation for the worst off will be more likely to cause price rises than would hourly averaging.

These summarise the points I have made in my previous blogposts in favour of hourly averaging; these are the basic reasons to prefer hourly averaging to alternative redistributive policy proposals. My arguments are entirely theoretical, and would need to be tested. However, I have explained the theoretical reasons which suggest that such tests are necessary.

Hourly averaging offers the best prospects for those who do not benefit very much from the capitalist economy, who are treated unjustly as long as greater steps are not taken to make that system fairer.

On Earning Subsidies (Part 3) Why is hourly averaging a better than alternative forms of earning subsidy?

There are several types of earning subsidy and I will explain why using my hourly averaging tax proposal as an earning subsidy scheme is much more effective than rival approaches. I will start out by expressing some concerns with existing subsidy schemes, and then highlight why hourly subsidies are more effective. Then I will explain why hourly averaging would be more effective than Edmund Phelps’ alternative hour-based proposal.

Earning subsidy schemes that are based solely on earned income, such as the US system, may encourage people to work fewer hours than they might otherwise. To counteract this, the policy tends to be focused on those with children, and with limited generosity to discourage people from reducing their paid employment. The policy therefore offers little assistance to people without children who work very long hours for low wages.

If it were more generous, in a way that would make a really significant difference to the lives of low-paid people, then it might induce people to work fewer hours as a result. Some people with higher earnings but a desire for more leisure could switch to part-time employment where the subsidy would make up for some of their lost income. These people would consider the remaining reduction their income to be worthwhile given the additional leisure they would obtain, though they would not have done without the subsidy. This would mean that some of the resources in the scheme will be assisting relatively fortunate people in order to enable them to work less. This reduces the resources available to assist others (or increases the expense of the scheme).

One way to increase the generosity of earning subsidies without encouraging people to take more leisure is to add a requirement for the adults in a family to work a certain number of hours each week in order to qualify for the scheme. This is the approach taken with working tax credits in the UK, where people are required to work either 16, 24, or 30 hours in order to qualify (depending on the number of adults and children in the household).

The problem with this approach is that the threshold is going to be somewhat arbitrarily set and will not be suitable for many people. Some people who we would want to assist will not meet the threshold and therefore miss out. The main point is that the threshold will have to be set with the aim of either assisting full-time or part-time low-earners. However, both of these groups could be among the less economically fortunate.

Furthermore, the introduction of a threshold will change people’s behaviour. Some may ensure that they work the numbers of hours required in order to meet the threshold, despite the fact that they and/or their employers would have preferred them to work fewer hours. It will thereby alter the amount of work done in society, potentially providing disincentives for some people to work and extra incentives to others.

Finally, if you add an hour requirement into the system in order to make the tax credits more effective and targeted, then there should be a means to monitor the number of hours worked by those claiming for hour credits. After all, it might appear sensible to introduce several thresholds with each qualifying someone for a different subsidy scheme. However, the more nuanced the scheme the greater the degree of monitoring that will be required. If the number of hours is potentially going to be monitored then my challenge is to ask why not go the whole hog and make good use of this information to generate a more effective system?

This is a challenge I would present to an interesting earning subsidy proposal from economist Edmund Phelps in his book Rewarding Work. Phelps proposes a subsidy that would be paid to employers for each low paid employee with the greatest payments for the workers with the lowest hourly pay. This proposal is the closest in intent to my hourly subsidy proposal, in that the subsidy would lead to higher pay for low-paid workers. However, Phelps proposes that only full-time workers should be eligible. This makes the scheme much less flexible around people’s requirements. If someone has caring or other responsibilities, or simply wants to work fewer hours, they will not receive any support in order to do so. Again this is setting an overly restrictive hours threshold, as part of a system which requires hours to be monitored anyway. 

In summary, earning subsidies are a popular proposal among economists as a way to help the low-paid without discouraging them from working as much as a basic income or negative income tax would. However, the tax credits in place tend not to be generous because this might encourage people to work fewer hours. Some people and governments have realised that earnings subsidies are much more effective if they can be applied on a per-hour basis. However, if account is being taken of the number of hours worked then I would suggest that it is much better to do this properly and provide the subsidy on a lifetime hourly basis. This would target payments to those who have a consistently low income, which is the best available unobtrusive indication of poor economic fortune.

On Earning Subsidies (Part 2): What are the potential downsides of earning subsidies?

In my previous blog I explained earning subsidies and set out some of those who might react against such a proposal. The positions presented there are no doubt genuinely held and internally consistent ones, though I will not respond to those views in exactly those terms. I will pick out a few genuine concerns about earning subsidies and respond to them in this post.

Of course, when discussing policy options such as earning subsidies the important issue is what you compare them too—the appropriate baseline for comparison. One option is to compare any proposals to the idealised free-market situation in which a minimal state simply provides defence and enforces markets. Given that this imagined society is clearly not good for a large proportion of people—if not everyone—I don’t think I need to compare earning subsidies against this baseline. The two most appropriate comparisons are the following: i) a system which does less for the worst off in the name of economic efficiency and ii) a system which takes an alternative approach to helping the worst off such as “Predistributive” policies such as a reasonably high minimum wage along with other benefits at fairly generous levels. I covered much of the latter comparison in my previous blog on Predistribution.

However, there are some points in favour of Predistributive policies. A minimum wage would cost the government a much smaller amount in order implement; the cost of paying low-paid government workers more and enforcing the minimum wage regulation instead of the cost of topping-up the income of all low-paid workers.  Nevertheless, for the reasons I set out previously the advantages of earning subsidies should vastly outweigh this downside where there are sufficient tax revenues available to fund the earning subsidies.

I will therefore focus on the comparison with a more free-market approach—baseline i) above. The argument here might be that earnings subsidies would change the economy in ways that would make things worse overall and therefore undermine the advantages of the policy. I applied this strategy when arguing against the application of a high minimum wage and so it is only appropriate to consider this against earning subsidies.

I would certainly accept that generous earnings subsidies would change the job market. Just as with the minimum wage the higher net pay could be expected to induce some people to work more than they would have. These additional workers (or hours worked by existing workers) might displace other workers, though unlike the minimum wage the final result is less likely to be involuntary unemployment.

What might be the other changes to the job market? Some people may switch to lower paid employment which they prefer, for example because they enjoy the work more or find it more fulfilling. In this example the person will choose work that pays more, but earning subsidies might enable them to take the work they find more fulfilling. In this way earning subsidies might shift workers towards jobs that they find more enjoyable and away from jobs that provide others with goods and services they would prefer (where the wages people are paid tend to indicate that the work done is more highly valued by others—this is not always true but is enough of a tendency for the discussion here).

One argument against earning subsidies, then, is that they are going to help people who are not really economically unfortunate to do jobs that are less socially productive than the work they might do otherwise. Where this effect occurs society is made worse off while the worker in question has been made better off. In a sense I would accept this point, but my response is that I don’t see a big problem here—the person in question is happier and more fulfilled and the job they would have done is still available for someone else to do. People who have a passion for particular jobs may be more likely to obtain them and this will free up higher paid jobs for other people. Economic productivity may drop very slightly, but I would not think it would fall very much.

A relatively common complaint (usually by left-wingers) against earning subsidies is that employers will respond to them by reducing gross wages. As a result workers get the same pay as they would otherwise but employers save a lot of money on labour costs. The criticism is that government spending is therefore being used to support businesses which pay low wages rather than on other things.

I would not necessarily expect this effect to occur, as it implies that firms choose to pay more than they need to in order to ensure that their workers have a certain level of income, but let us assume that it does. In a competitive market the effect over time of the subsidy will be that the cost of the goods and services provided by these low-paid workers would fall. This is likely to have knock-on effects throughout the economy as the firms buying goods and services from these suppliers will also end up dropping their prices. Cheaper prices are no bad thing, as everyone—including low-paid workers—will benefit from these.

If like-for-like wage falls for low-earners were to occur as a result of earnings subsidies, then these would appear to be an expensive way to assist low-earners. Their effect would be to lower prices for all and hope that this helps low-earners as much as others. However, I do not think that employers would be in a position to drop wages for low-earners (particularly if my other proposal for a guaranteed work-programme were in place).

Indeed, perhaps generous earning subsidies and a generous guaranteed-work programme might provide low-paid workers who do unpleasant and unpopular work with additional wage bargaining power. The guaranteed work scheme would provide an alternative, and earning subsidies would ensure there were plenty of other low-paid alternatives. Employers might have to offer workers more than they would to undertake otherwise low-paid jobs.

I accept that in this scenario consumer prices for some goods and services could increase. However, this would occur in cases where the work is highly undesirable and wages are only kept low due to the desperate position of the workers doing the job. Redistributing towards people who do highly unpleasant jobs does not seem like a particularly bad outcome to me, even if some prices increase as a result.

In the above scenario, however, it is important to stress that not all prices would increase and that some would probably decrease as well. As I have said, my proposals, as with all earning subsidy proposals would change wages and prices compared to other policy-approaches.

Compared to other policies to help low-earners the economic downsides of earning subsidies are not nearly as serious. I do not think the effects on economic incentives are likely to be serious enough to cause us to give up on a powerful method to assist the worst off. Most importantly, a wage and price increase spiral is much less likely.

Is it futile to attempt to provide generous earning subsidies? However, the level of assistance available will depend on several factors. One is the amount of government revenue available for the programme. The other factor is the type of earning subsidy available, and in the following blog I will explain why my hourly averaging tax system provides an excellent method of providing an earning subsidy. 

On Earning Subsidies (Part 1): Why earning subsidies?

Earning subsidies are my preferred method to improve the situation of the economically worst off. The government provides a top up to the income of workers who earn a low amount. These are utilised often under the name of ‘tax credits,’ for example Working Tax Credits in the UK and Earned Income Tax Credits in the USA. The new Universal Credit in the UK is gradually replacing Working Tax Credits.  

Unlike the basic (or unconditional, or citizen’s) income this subsidy only goes to those who work. This is achieved by only taking account of income received as a result of working (earnedincome), or by taking a declaration of the fact that someone is working, or the number of hours which they have worked.

If earning subsidies directly assist the right people, why are they not universally accepted as a good idea? Some on the left think that employers should be paying their staff rather than leaving the government to pick up the tab. This is no doubt often because they want the state to do a lot of other things and money spent supporting workers leaves less money available for other projects. Many on the left are also heavily involved in the Trades Union movement, and Unions will also be sceptical of earning subsidies for similar reasons.

Those on the right might be sceptical of earning subsidies for several reasons. Some think that free markets produce the correct outcomes and that it is always wrong to interfere with them. Others may see earning subsidies as a disincentive for people to work harder or show ambition, and that this might have unwanted economic consequences. The left-wing characterisation of the right-wing view on this might be that they want workers to be desperate and have little choice but to take terrible jobs for very little pay. I hope that this characterisation would not be correct, but I fear there might be some terrible people who would hold this view.

I will consider the more sensible concerns about earning subsidies in the next part of this series of blogs. I should mention that despite the ideological opposition described above most pragmatic and centrist politicians and activists are supportive of earning subsidies. There is good reason after all—channelling government spending to people who are doing economically useful activities but getting paid very low wages for doing so. In the third part of the series I will explain why my hourly averaging system would provide a much more effective method of assisting the worst-off than existing earning subsidy proposals.