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Sender: Lawrence Chickering
Date: Mon, Jun 2, 2014
Msg: 101046

Two related themes that have circulated here relate to the 'fairness' of capitalism and possible uses of taxes to correct problems. These discussions have covered a variety of topics, but many remain. I thought it might be useful to mention a number of them briefly.


A central issue here has to do with whether, in a transpartisan vision, we need more capitalism or less. It is not surprising that the freedom quadrants of left and right tend to want more, while the order quadrants, in various respects, want less.

o An enormous subject so far left out here involves capitalism and the global poor. Some people think that capitalism is the root of all evil everywhere. The Peruvian Hernando de Soto, who is almost certainly the most successful transpartisan anywhere, has a view of capitalism analogous to Chesterton's view of Christianity: not that it has been tried and found wanting, but that it has been found difficult and not tried. De Soto, who is one of my closest friends (I need to be fully transparent here), began as a disciple of Milton Friedman in the 1980s, believes capitalism is almost unknown outside the developed countries because capitalism depends on property rights; and most people in the world have no property rights. In Egypt, for example, 90% of people have no formal rights; and the 10% of people who have formal rights represent a mercantilist class who live off of special privileges conferred on them by governments.

De Soto has published two books, which have been worldwide best-sellers, translated into more than twenty languages each. He is working with heads of state in many countries to reform legal institutions, giving formal rights to the poor. While Milton helped him get started, Bill Clinton is today his most visible public advocate. Targeted by terrorists in Peru for his appeal to the poorest classes there, he played a crucial role in mobilizing an army of more than 100,000 peasants in the early 1990s, which brought down the violent terrorist group, The Shining Path.

De Soto shows that the value of 'informal property' throughout the developing world far exceeds the value of property held by the wealthy. I wrote a description of his work in Chapter 2 of my coauthored book Strategic Foreign Assistance: Civil Society In International Security (2006) and also co-edited (with the Moroccan economist Mohammed Salahdine) a study of the informal sector in five Asian and Near Eastern countries, The Silent Revolution, 1991), crudely based on de Soto's methodology.

o On the obsession with the 'one percent', it is not widely known that more than half of people (53% by one estimate) are part of the one percent at some time in their lives. This is because of the lifecycle of earnings, which show incredible inequality in incomes within the lifecycle of every working person's life -- starting low, increasing to high point in 40s and 50s, and then declining into old age.

o Estimates of wealth omit the capitalized value of transfer payments to low income people, which value is enormously greater than any estimates of the wealth of the one percent. (Compare this point to de Soto's estimates of the value of informal property compared [e.g., in Egypt] to the value of all the shares traded on the public stock markets. With property rights, the value of this property would further increase hugely.)


o The belief that you can materially affect inequality by increasing the tax bills on the wealthy assumes that the wealthy will not change their behavior. France has offered itself as a more or less controlled experiment on this issue by its recent, enormous increases in tax rates on the wealthy. Imagining a very great windfall gain, the French government has spent most of the money and now is in fiscal crisis because tax receipts are coming in at something like 50% of anticipated levels. The greatest reason for the shortfall is that people are moving out in droves -- London is the biggest gainer in the process -- leading some people to imagine that a generation from now France will be a magnificent museum with greatly increased unemployment.

o It is commonly assumed that all one needs to know about tax rates is that are the percentage of income (if the tax is on income) that the government takes from taxpayers' incomes, leaving the balance for the taxpayer. If the rate, for example, is 25%, by this logic, the government gets $25 of each $100 of income, leaving $75 for the taxpayer. If marginal rates on the wealthy (above some income figure) increase from 50% to 75%, on each 100 marginal dollars, the taxpayer at the higher rate will pay $75 and keep $25 after the raise. They will keep, that is half of what they could keep before.

Tax rates, however, may be seen in different ways; and most people, anticipating a 50% decline in after-tax income, will choose to see them quite differently. Tax rates also influence in important ways how people calculate their income. Tax rates determine the real cost of any expenditure that can be characterized as a cost of doing business. At a 25% rate, the taxpayer pays $75 of 'business costs' and the government (all other taxpayers) pay $25 (in forgone tax receipts) -- for example, first class air travel. Having to pay $75 out of each $100 is a big load. On the other hand, when rates are 75%, now the taxpayer only pays $25 of each $100 on first class air travel, and the government pays $75. It is easy to see how taxpayers might respond when things worth $1.00 only cost them 25 cents. I was in London once with a bunch of economists. The subject came up of where people were staying in London (a hugely expensive city). All of them were staying at Claridges, one of London's most expensive hotels. Why? Because 'at these tax rates, I can't afford to stay anywhere else'. Milton's favorite street in London was one that featured three Rolls Royce dealers, kept in business, he said, by high UK tax rates. High tax rates subsidize conspicuous consumption. Remember the huge, gaudy tail fins on cars (e.g., the 1959 Cadillac)? The top marginal rate was 91% then.

o These thoughts may help explain why although personal income tax rates in the U.S. have fallen from 91% top marginal rate up until the Kennedy tax cuts in 1962 (fell to 70%). Rates declined again in 1981 (initiated by the Dems in the House Ways and Means Committee) from 70 to 50% and declined yet again in 1986 to 28%. They have crept back up since then. The point is that despite enormous reductions of marginal rates, tax receipts as a fraction of national income have remained pretty constant. ed o Many economists, wanting to encourage saving, propose a tax on consumption to replace the current tax on incomes. Such a tax could be graduated, with high rates on the rich.

o Jim Turner and I like the tax system proposed by Edgar Feige at the University of Wisconsin. He proposed doing away with all taxes and substituting a user fee on all banking transactions. Such a tax would be highly progressive since the rich use the banking system most; and since the rate would be very low, it would minimize people's efforts to escape taxes. People who wanted to barter of course would pay no taxes. Feige estimated such a tax would save something approaching a trillion dollars. It would have to be adopted by the G20, however, because you would not want it to drive all banking business off-shore. (Full discussion on page 127 of Voice of the People).

Hope these thoughts are useful. Lawry

A. Lawrence Chickering Founder and President, Educate Girls Globally (EGG) Author: Beyond Left and Right (1993) and co-author (with James S. Turner), Voice of the People: The Transpartisan Imperative in American Life (2008)


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