Economy

The Pope, Taxation, Competition and Managing the Economic Crisis

The Pope, titular head of an organisation that spans the globe and claims over 1 billion followers, has just visited the UK. He has apologised profusely for the sexual abuse of children by priests, warned against the rise of secularism, and promised greater transparency and openness.

Plainly something is up. This is worlds away from the Catholic Church which the Fern’s Report of 2005 described as having: “A culture of secrecy and fear of scandal that led bishops to place the interests of the Catholic Church ahead of the safety of children”.

The world has changed. The Catholic Church is now an unwilling participant in a competition of ideas which also includes the choice not to have any beliefs at all. Such competition can make even the most stodgy and autocratic of institutions liven up a little.

And now we have governments attempting to convince their own citizens that budget cuts are necessary, taxation can’t really rise to cover the deficit and people are going to have to make do with less.

There is a link.

Taxation and Missing Causality

Back in November 2008 I presented a series of scenarios around how taxation is levied and how those taxed respond. I made some pretty dire predictions. Amongst these was that raising taxes asymmetrically (only on the very rich, for example) simply acts to raise prices for the poor.

Tax itself is a subject mired in misery, contradiction and confusion.

When you buy a new mobile phone you have an immediate connection between yourself and the company which received your cash. If you like the phone you will probably return later for upgrades. If you don’t you’ll take your future money elsewhere.

Taxation works a little differently. The government promises to pool cash from a wide range of people in order to purchase very expensive things that everyone can benefit from. It’s a type of collective buying or insurance.

But the narrative there falls down. Even with insurance – where you hope to never have to make a claim – you are covering your home or car and paying for that directly. If you need to make a claim and the company lets you down you will immediately shift your allegiance. If you can get a better price from another insurer you’ll similarly move your account. If you no longer own a car you cancel your policy.

The benefits you receive from taxation fail this causality test.

Firstly, you can’t actually tell if you’re getting a good deal. Would another type of police service be cheaper? How about different courts? Schools?

Secondly, you can’t always tell if you’re benefiting. Your kids have left school but you’re still paying property taxes to cover other people’s kids. Or perhaps you never had any kids and don’t plan to?

Thirdly, even if you can identify a problem or can see a way to improve the benefits you receive, you can’t take it up with the service directly. You have to wait for elections and then hope that the candidate you support – if they win – can get around to solving the problem or championing your cause.

When the state threatens to raise your taxes or cut your services it becomes even more confusing because your taxes are pooled to pay for a wide variety of benefits. You might end up paying more taxes to continue to support the programs you have no interest in while those you enjoy are cut.

And then there’s redistribution

Some countries have tremendous welfare systems. Tremendous, meaning massive rather than good. The French permit their citizens to retire at 60 (potentially 62) and remain at leisure for some 20 years thereafter. Someone has to pay for that.

If people pay tax and receive equivalent benefits then there is some sort of balance, even if inefficient. One could argue that you may wish to spend your money on other things, or could get a better deal for the same service, but at least you get what you pay for.

If the young are taxed more heavily to pay for the benefits of the old and retired while, at the same time, are becoming a shrinking proportion of society (as in France) then something will break.

France is running a deficit of 8% of GDP in order to finance its 35-hour working week and early pensions. Its labour participation rate – the proportion of people working relative to the absolute number of people who could work – is one of the lowest in the OECD at 64.5%. Unemployment is at 10% but unemployment amongst minorities and immigrants is 1.7 times higher than for native-born French. The median age for the population is 39.

Here are some more statistics for you. 83% of people aged 25 to 54 are working. Only 38% of those 55-60 work. Retirement starts at 60. Doing the calculations means that 42% of the population support the other 68%.

It gets worse, though. Redistributive taxation means that the 42% don’t pay tax equally. The very rich pay the bulk of taxation; which is probably how you may feel it should be.

However, the overall rate of French social security and tax on the average wage back in 2005 was 71.3%. In other words, raising taxes isn’t actually much of an option.

Which is why the credit crisis doesn’t mean governments can displace private enterprise

All of this means that governments running big deficits can’t solve the problem by creating a bunch of industrial champions and taxing the rich to make up the deficit.

China certainly believes this. They are driving a belief that governments are better guarantors of economic growth than are private companies. Governments which have large trade surpluses can certainly spend the profits supporting local champions. That doesn’t make it efficient. And it’s not as if France, the US and UK weren’t at one stage also net exporters. At the time they too had plenty of industrial champions. As the dynamics of global trade changed governments had to get back into the business of governing and out of the business of business.

Still, this article isn’t overly concerned about the dangers of surpluses but with the terror of deficits.

Governments which want to bring state expenditure into alignment with what they are capable of collecting and managing in taxation are going to have to get back into the world of causality.

Governments in North America and Europe are going to have to cut expenditure. They will find it impossible to do so without also managing the expectations of those who benefit from state support.

That means managing these three components of causality:

  1. Clear and immediate benefits presented as directly as possible so that taxpayers can measure the benefits from taxes paid a bit more easily;
  2. Greater transparency and competition for services so that taxpayers can judge whether they’re paying “too much” or even wish to top up the service received;
  3. Greater sensitivity and adaptability to beneficiary requirements by distributing control down to communities to increase service responsiveness beyond the election time-table.

The new British coalition government is attempting this with their “Big Society” initiatives. They may not work but I’m sure that many political leaders will be watching closely to find out.

So what does this have to do with the Pope? Well, governments too are a rather archaic construct. The hierarchy of church and state fit unevenly with the immediacy and always-on distribution of social media hipsterness. The Internet generation who will have to pay for these taxes (or for their sins in the afterlife) have become conditioned to a different way of living. Services are free, subsidised by advertising. Competition is perpetual and merciless. Anything that smacks of hard work is ignored.

Moral relativism is much easier, and requires fewer sacrifices, than does the totalitarian truth of Catholicism. And actually paying for services – state provided or otherwise – isn’t even on the menu.

4 replies »

  1. I’ve got to disagree with your point that the internet generation ignores hard work and refuses to pay for things.

    I think the internet is rewarding hard work. It has leveled the barrier of creation. No longer do you need a big studio and distribution network to publish a radio show. Now you can podcast. If you work hard at it, and your good, people will listen. If you’re lazy about it, they will not. You can “make it” based solely on your talents and work ethic. One of the most successful podcasts going right now (Never Not Funny) was started by a comic and the creator of a comedy message board in the comic’s dining room with a laptop and a couple microphones.

    This same podcast charges for its content. In a universe of free podcasts, NNF is successful. It’s not that the Internet hipsters refuse to pay for content. They refuse to pay for crap. If something is genuinely good, and they genuinely like it they (we) will pay. NNF is evidence of this.

  2. Maybe Matt. But I think you have to acknowledge that the media industry is dominated more by stories of collapsing profits and retrenchments than of the occassional success story?

    Plus, there is quite difference between the risk and investment involved in producing a podcast and building a factory? Internet-based businesses require a quick return, whereas factories and other infrastructure investments take time and require quite a long-term view.

    The exceptions, where the “Internet generation” pays, make for interesting analysis. Often they are based on asymmetric control (like Apple apps) or free entry with paid upgrades (like many Facebook apps).

    The point I’m making is a less a “judgement” on the denizens of the intarwebs and more a jab at the changing culture of our trade relationships. One that representatives of more staid organisations – like government or the Catholic Church, say – may struggle to communicate with.

  3. The media industry may be full of stories of failures, but the world in general is not. The industry is failing because they refuse to recognize the changing marketplace and adapt to it. Look at how long the music industry fought the MP3 movement.

    Your point is valid, but I think it’s unfair to blame the Internet generation for an industry’s failure to recognize a changing marketplace.

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