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)

What are the Politics of the CLIPH-rate tax?

I believe an argument can be made for my taxation proposals from a number of political philosophies. However, in terms of political ideologies, my proposals occupy an unusual position that does not fit neatly on the usual political compass. This means that it does not readily fall within the common political positions.

I believe this is a huge strength for my proposals: I believe it should be attractive to a large number of people who currently take positions across the political spectrum. However, while this is an advantage in the long-term, it could be a hindrance in the short-term. After all, while there is something about the proposals that most people would like there will often be another element which goes against their current thinking.

For those on the political right the proposal should be attractive as it contains strong private property rights, and encourages work and personal responsibility. Work is encouraged because the number of hours people work (as a generalisation of the scheme) is taken into account in determining tax rates: people who work longer for their income will be taxed at a lower rate. It encourages personal responsibility as the redistribution is calculated on the basis of the amount of work someone does and not the amount of wealth they have. If someone chooses to spend their income in the short term they will not be entitled to any additional resources later on as a consequence.

For those on the left the proposal should be attractive for the amount of redistribution it can provide. I believe my proposals, if applied consistently, should enable the most economically fortunate to be taxed sustainably at the highest possible rates. In parallel, it would provide the highest possible economically sustainable subsidies to workers.

I would think that on the basis of the advantages specified above the approach should be appealing to centrists, who would also approve of my liberalism and some of the related proposals I make. As the originator of the proposals I would consider myself a liberal person.

One way to put the political position of the CLIPH-rate tax is that of a superior version of the so called “third way.” This garnered attention in the 90's and which is associated in the UK with the New Labour movement, and is somewhat related to Clinton’s position in the USA. Left-wingers are now disillusioned with this approach to politics as it was ineffective at delivering economic equality; New Labour was too in thrall to the market and thereby blinded to special interests (often of the very wealthy and the finance industry).

Despite this criticism of the first iteration of the third way approach to politics, I do not think that the answer for progressives is to revert back to statist solutions. Instead, we should be developing taxation and earning subsidy policies that make use of the best of the market while assisting those who do not do as well from the market economy.

The proposals in Rethinking taxation are designed to achieve what the initial third way failed to do. Tax those who do well out of the market system and do as much as possible to support those who work hard but receive relatively little in return. 

Rethinking Taxation now also available from more online bookstores

Rethinking taxation has so far been available from Amazon stores throughout the world.

It is now also available at Waterstones and Foyles in the UK and Barnes and Noble in the US!

Look out for it at your favourite online book store!

What is the Comprehensive Acquired Income tax base?

My proposal for a Comprehensive Acquired Income tax-base takes elements of Comprehensive Income (or Accretion, or Schanz-Haig-Simons) taxation and also elements of Consumption taxation.

The idea is to record the market value of the resources that people receive from their society, at the time at which the person receives them. This means that if someone receives some money, goods or services from another party (whether it be their employer, a return on an investment, or a gift from another person) at a particular time the assumption should be that this would count as gross income and be liable for tax.

As it is designed be applied on a lifetime basis, my Comprehensive Acquired base removes the most controversial requirement of the Accretion approach. This is that everyone’s property should be valued every year in order to find out how much it has changed in value. This would be a very difficult, and no doubt controversial, annual undertaking, and few people propose applying this traditional ideal in the real world. Furthermore, people may not have the liquid assets to pay the tax liability on property they own which has increased in value. The Accretion approach therefore shares this controversial aspect with proposals to tax people on the total value of their property; the wealth tax.

Removing the focus on the annual change in wealth as part of the tax calculation raises the question of when the tax is applied. The simple answer is that gains are taxed when they are realised. When someone receives money from their employer or sells something they own for a profit this would then count as part of their lifetime taxable income. This lifetime tally would therefore increase as time goes on, and lifetime averaging proposals such as mine allow the denominator by which to divide this lifetime total to increase as well.

It is possible within this approach to allow the deferral of taxation on certain forms of gains, for example investment gains. The idea is that certain types of income could be ring-fenced such that any gains that remain within the ring-fence remain untaxed. It is only when people switch resources from these special categories to a form which can be used for consumption (such as a current account) then the lifetime gains on such ring-fenced investments can be accounted. Once the total gain exceeds the total invested then these profits can count as lifetime income. In many cases this profit will occur when the taxpayer dies and their property is valued/constructively realized prior to disbursal. Financial investments and company ownership are the obvious candidates for such treatment, but a primary residence is another potential category.

I have described my proposal at various points as an ‘income’ tax base and as a hybrid with consumption taxation, which needs to be explained. If the state were only to tax financial income this might encourage employers and benefactors to provide resources in the form of services instead of financial income. In order to close this loophole, it is therefore necessary to insist that the market value of goods and services that have been paid for by others should also be included in someone’s lifetime tax calculation.

Clearly the presentation provided above is a relatively simple one and there are more difficult issues and exceptions to take account of. For example, I would argue that certain forms of income should be excluded, such as small non-financial gifts. These gifts, as long as their cumulative value is small, are not resource-transfers but rather tokens of affection which need not be taxed. However, I will have to point readers towards Chapter 4 of Rethinking Taxation for a fuller discussion of my tax base and potential exceptions to the principle that the market value of all income should count as taxable. 

My tax base proposals

In a previous blog I listed my tax base proposals among the innovations presented in Rethinking Taxation (Chapter 4, to be precise). I refer to my proposal as the Comprehensive Acquired Income tax-base. I thought it would be a good idea to briefly explain tax bases and this proposal.

What is meant by the ‘tax-base’? This is what is made use of in calculating the tax of the members of society. Most states employ multiple different taxes which make use of different tax bases (labour income, estate taxes, corporate taxes, VAT, sales taxes, various duties etc.). I refer to the use of multiple taxes as a broad tax base, as many types of transaction are taxed.

The broad base is popular choice for states as it provides a lot of tax revenues, though often each one is applied at relatively low rates. The advantage of relatively low rates on each of the taxes is that it will not discourage economic behaviour too much. The problem is that this will not be very progressive where the most economically fortunate will never have to pay more than the highest amount of tax charged, usually lower than 50% and often more like 20%.

Multiple broad-based taxes fall on those who make a lot of economic transactions, which means the rich and poor alike. VAT, for example, is not a progressive tax base as the cost will often fall on consumers, and the poor usually spend almost all their income on the necessities of life. Some claim VAT is progressive since food is zero-rated. However, many poorer people purchase hot food, while some very wealthy buy expensive ready meals from places like M&S, Waitrose and Fortnum and Masons.

For these and other reasons, many people have suggested the application of a more comprehensive tax base. The Comprehensive Income tax base was a popular theoretical approach by which to judge the tax system up until the 1970s. This is also sometimes referred to as the Accretion tax or the Schanz-Haig-Simons tax base after some of its prominent proponents. Consumption taxation has increasingly been considered an attractive alternative since it was proposed again in earnest in the mid-20^th century.

These comprehensive tax bases are considered less practical than the application of a broad base as it would be hard to reliably capture the amount of spending or income that people truly enjoy. Nevertheless, I believe that developments in Information Technology should lead us to reconsider the options for tax calculations. I propose a lifetime approach to taxation, which does not work well with the traditional comprehensive income tax base, but I believe my hybrid of the Accretion and Consumption tax bases represents a way of capturing the lifetime benefits that people get from their society. 

In my following post I will describe my Comprehensive Acquired Income approach.