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The State of Taxes

If taxes buy civilisation you can understand President Trump’s lack of interest in paying them. However, it is an indictment of contemporary democracy that someone running for office can characterise tax avoidance as being “smart”. There is a pervasive problem about the attitude towards taxation in many western democracies. The vast bulk of the population seem to be resigned to the fact that for them they as inevitable as death but that somehow for the rich it is an optional sport.

There is a growing literature on this issue making clear the scale of the problem and the urgent need for reform. Reform which closes loopholes and ensures tax authorities have the support and resources they need. But also reforms which ensure income and wealth is effectively traced, not hidden away in secrecy regimes. And where progressive rates of tax are consistently levied on all forms of income.

One work which has looked at this problem in in detail in the United States is “The Triumph of Injustice: How the Rich Dodge Taxes and How to Make them Pay” by Emmanuel Saez and Gabriel Zuckman. It provides an incisive overview of taxation policy and practice from the start of the 20th Century to the current day.  Drawing on a century of tax data from a range of sources it analyses the total tax burden paid by groups from the very poorest up to the multi billionaires. It looks at Federal, local, sales and property taxes. It also includes payroll deductions for things like Medicare which are compulsory and effectively hypothecated taxes.

Using this data it outlines the levels of basic income inequality, how this was reduced by progressive income tax in the middle years of the 20th Century but how, since around 1980, that process has been reversed.  It explores the role of secrecy jurisdictions or tax havens in undermining the taxation of corporations and high net worth individuals. It also looks at the industry of tax avoidance that has grown up, ironically as tax rates have come down.

The results are sobering. In the period since 1980 the amount of income captured by the top 1% in the US has grown spectacularly from 10% of national income to 20%. This is the result of two processes which interact. Firstly, differential salary increase rates where higher incomes increase at higher rates than lower incomes. Secondly, lower effective taxation rates on higher incomes. 

The results of this process are illustrated by Saed and Zuckman with a wealth of data. They begin by looking at the current distribution of incomes in the US. To obtain some kind of a base line they start with the nations GDP, make a couple of technical adjustments and divide the figure by the total adult population  to get to an average  $75,000 per adult. However, averages tend to hide at least as much as they reveal. So the next step is to look at how the income is distributed amongst various groups.

Four groups are identified: the working class or the bottom 50% of the adult population; the middle class, the next 40%; the upper middle class, the next 9%; and the rich, top 1%. Taking the figures for 2019 the average income for members of each of these groups was as shown in Table 1.

Table 1 Average Income by Population Group

Table 1 Average Income by Population Group

 

 

 

 

The second issue relates to the level of taxation applied to these various groups. What Saed and Zucman show is that over time this has come down, so that now the amount paid by those on the top 0.1% of incomes is very close to that paid by 90 % of the population. Indeed they show that the 400 highest earners in the US paid lower effective tax rates than the bottom 50% of earners.

The graph below, taken from their book, shows how effective taxation rates for the top 0.1% has evolved over the course of the 20th Century in comparison with that of the bottom 90%. There are three things to take away from this chart. Firstly, at the start of the last century and through to the late 1970’s taxation was essentially progressive with the richest paying a rate at least twice as much as the vast bulk of the population. Secondly, from 1980 taxation rates became essentially flat.  In other words the rate of taxation on fortunes and pittances were not that far apart. Third, from the start of the 1930’s through to the late 1970’s the average rates charged on the top 0.1% were high not just in comparison to the 90% but also high in absolute terms.

The high average rate which takes account of all taxes, some of which are regressive, was driven by some vey high progressive Federal rates. In 1944 the top marginal rate of the Federal income tax was 94% on incomes of $200,000 or more, equivalent to a salary today of £6m. 

One of the key conclusions Saez and Zukman want to drive home is that rates of taxation are not cast in stone. It is not a case of ” ’twas ever thus.” Far from it. There were times when taxation rates were very high and when avoidance was minimal. The low levels of taxation on the rich are the result of conscious political decisions coming out of contested belief systems. They could be changed.

One of the arguments against change is that such high rewards are needed to ensure a growing economy and rising GDP. However the average growth rate for the period of high taxation and lower inequality was much better than that for the period since 1980 since when growth rates have slowed. Some will argue the two things are not necessarily connected. Happy to concede that but of course it means that high progressive taxation wont necessarily undermine growth going forward.

Saed and Zukman look at what can be done in a world where sovereign states compete with one another to tax corporations less and less, and where the absence of progressive taxation, amongst other things has allowed inequality in wealth to sky rocket. They address the need to treat all forms of income  uniformly, so income from financial assets (the main source of income of the rich) is taxed at the same rate as income from employment. They explore a wealth tax and how this might work and they look at the scale of resources which could be brought into support public services that have been starved of resource for the past decade.

The timing of this book could not be better. Once Covid-19 is brought under control there will be an enormous bill to pay. That bill, like the bill for the Wars of the 20th Century needs to be shared in accordance with ability to pay. Expect much more debate about taxation in the coming years. Hopefully it will become clear that smart people pay taxes, and that smart rich people pay higher taxes than smart poor people. And the benefit of that is civilisation for all people.

The Triumph of Injustice: How the Rich Dodge Taxes and How to Make them Pay. Emmanuel Saez & Gabriel Zucman. WW Norton and Co. 2019.

 

 

 

 

 

 

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Capital and Ideology

Thomas Picketty has produced another enormous tome. Like Capital in the 21st Century, it is an excellent analysis of the growing problem of inequality and comes at a really interesting time. Whereas his first work looked at the economic drivers of inequality and produced the formula r>g where r stands for the annual rate of return on capital and g stands for the growth rate of the economy. In essence claiming that the wealth of owners of capital’s income will increase at a faster rate than the growth in the overall economy. This facilitates a remorseless concentration of wealth in the hands of fewer and fewer people. In essence that book looked at the mechanics of this process. 

Capital and Ideology is a companion volume which essentially looks at how the inequality produced by this mechanism is justified. It does so by setting the process of justification of inequality regimes in there long term historical setting. He explores the transformation from, what he sees as a sort of pre-modern template for all inequality regimes, ternary or trifunctional societies, to the inequality regimes of modern unified states. 

Trifunctional sytems are those which divide society into three variously described social orders. Essentially, a clerical, a noble and a mass grouping. The clerical is the religious and or intellectual order, the noble is essentially the warrior class, and the final group is the third estate, the property-poor remainder of the population. Picketty applies this trifunctional analysis to an enormous canvass. Ranging across a number of European civilisations but also, India, China, Iran and others. He sees this system of distinctions as the oldest and most common type of inequality regime.

His analysis is aimed at showing how the trifunctional historical roots of different societies shape the changed circumstances of inequality and continue to echo in the forms of justification used today. Throughout there is an impressive wealth of historical data and analysis. 

Picketty also looks at how the “age of exploration” and imperial dominance impacted the shape of the global economy, the emergence of the modern centralised state and a new template to support the new inequality regime. A template structured around the deification of property ownership. Under trifunctional regimes there was an overlapping of property rights and regalian powers at the local level. In other words the local baron owned the land, defended it, taxed it, maintained order and dispensed local justice. The emergent modern age was organised around “a strict separation of property rights, ostensibly open to all, and regalian powers, a monopoly of the centralised state.” 

This model persisted through to the beginning of the 20th Century when three challenges arose causing a crisis for the ownership model founded on private property. The three challenges were around, growing inequality within European ownership societies; inequality amongst countries as colonial competition and increasingly powerful independence movements contended; and finally a nationalist and identitarian challenge which reinforced competition amongst European powers with the consequences of economic collapse and two world wars.

All of this led to a different view of property and willingness to redistribute it as an outcome of conscious public policy. A massive reduction in levels of inequality resulted with the advent of social democratic movements across the world, building upon demands from the 19th Century for wider franchise and greater state support for the unemployed and the old. Accelerating the creation of social states with substantial public services and economic and industrial engagement by governments. The New Deal in the US, the National Health service are just two, albeit shining, examples of how the needs of the majority of the population started to be met.

In truth the first two parts of the book are building up to this point and the last three are an analysis of how the period of classist, social democratic politics after the end of World War 2 consciously addressed the issue of inequality and created a trente glorieuses where the living standards of millions in the west were increased beyond any historical precedent. It then analyses the period from 1980 when a new model of Hypercapitalism evolved through the twin processes of globalisation and communications technology innovations, and the new justificatory regime which supported this model. One dressed in notions of equality of opportunity, set in a context where the levels of wealth concentration are returning to levels last seen in the gilded age of the robber barons.

This is a political economy history book but focussed very much on the here and now and critically the ideas and ideologies which have created and sustain the world we live in. By setting these in a historical framework Picketty aims to show how what exists at the moment as the economic reality is contingent and can be contested, but more importantly can be changed. The book does not just analyse the world but aims to change it. Picketty sets out what can be done via progressive taxation of all sources of income and wealth to reduce unsustainable levels of inequality. He addresses the issues of tax avoidance and secrecy regimes; the problem of European unity; the beggar my neighbour race to the bottom of corporate taxation; inequality in educational opportunity and much more. The book does not lack ambition.

By bringing into the public consciousness the experiences of the past, where, for example, property rights were so sacrosanct when slavery was abolished it was the slave owners who were compensated, it provides depth  and shade to many contentious issues of the hear and now.

This book is very much a marathon but one where you are running through the pages of history brought to life in limid prose and substantial detail. Acres of statistical evidence are marshalled and reveal trends in the longue duree which impact now on the issues shaping national and international political debate. They are deftly handled by a writer at the top of his game. Dissecting ideologies and debates of the past and illustrating how they continue to be evoked in political debate. Like a marathon the work is daunting at the start but on completion there is a real sense of elation. I have every confidence there will be those who profoundly disagree with it and I am certain some of the arguments are contestable, however, as a catalyst for change it is unrivalled.

It would be fascinating to hear what Picketty has to say about the political economic implications of Covid-19 as I suspect they may provide a catalyst for much more profound change than anything we have seen to date.

It is said that those who fail to study history are condemned to repeat it. Picketty is doing his best to help us overcome this failure. Help him. 

“Capital and Ideology” Thomas Picketty. Belknap Harvard Press 2020.

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Dancing Out of Lock Down – A Slowy

How do we get out of lockdown? Clearly the government are wrestling with the issue as we speak. They don’t want to share their thinking as they’re afraid the great British public are incapable of holding two ideas in their mind at the same time. Clearly, the government can draw on the advice of all manner of highly qualified professional advisors. And it is certain that whatever strategy eventually emerges will be guided by “the science”.

In what follows I attempt to think through some of the issues from a lay persons point of view. This is not to second guess what “the science” will show but to be able to ask sensible questions of the science when it emerges.

Some of the most consistently informative and convincing material I have read about Covid-19 has been that produced by Tomas Pueyo whose characterisation of the progression of the disease is particularly persuasive. He identifies basically two phases which he labels The Hammer and The Dance, illustrated below. In essence the Hammer is getting a grip of the disease and suppressing the spread.  This is done through strict social distancing and lockdown. The Dance is where the lower rate of infection is maintained by retaining social distancing after lockdown but supplementing this with testing, tracing and isolation.

This process is inevitable in the absence of either a vaccine, a cure or herd immunity. All the evidence seems to be that the first two are unlikley to be available for some 12 to 18 months. This leaves herd immunity. However there are a series of problems with this.

First, it is not clear that individuals develop natural immunity. Second, even if we assume natural immunity is secured by infection and recovery then in a UK population of 66m people we need 39m to have contracted and survived the disease to get to the 60% personal immunity level needed for herd immunity.

How close are we to this number? In the absence of mass testing we can only guess at the number already infected.  If we assume that the mortality rate is 1% of those infected as of when I started writing this (Saturday 18 April) the number of those that have died in the UK is reported as 15,464. This would suggest just over 1.5m people have the disease. [Warning this is uninformed common sense and may be something an epidemiologist would laugh at.] Logic says we therefore need another 27.5m to get infected and survive.

This brings us to the third problem, which is the cost in lives of securing herd immunity. In the absence of any treatment reducing the mortality rate, in order to get to herd immunity we might expect the ultimate death toll to be in excess of 390k people (1% of 39m). Without breaking the link between infection and mortality rate via a vaccine or cure these numbers look logical but unacceptable.

This would suggest a strategy is needed which buys us time. In other words reduces the number of deaths until a vaccine or cure is found. This can be done by: a) minimising the overall infection rate, the infamous “R” and; b) reducing the “R” even lower amongst the most vulnerable population. The initiatives to date by the government can be said to have been successful id a little late at dealing with a), however the picture on b) is rather mixed. The proposal that those who are particularly vulnerable should shelter at home makes sense to achieve b) however allowing the disease to get hold in care homes is the exact opposite.

So coming out of lock down what does the government need to do? It has set out a 5 point plan:

  1. Protect the NHS ability to provide sufficient critical care and specialist treatment across the UK;
  2. Need a sustained and consistent decline in the daily death rate;
  3. Reliable data that the infection rate or “R” is down to manageable levels across the board;
  4. Confident operational challenges, specifically testing and PPE are in hand;
  5. Confident no proposed change will risk a second peak in infection that overwhelms the NHS.

At the moment evidence seems to be building that the first three of Dominic Raab’s five tests for the movement out of lockdown will soon be met.

Test 1 is clearly a minimum requirement. Demand must be brought down to well within the capacity of the equipped and staffed ICU beds in the UK. Clearly the current level of demand is far too high. Demand needs to be reduced to a level which can accommodate spikes in demand, and the need to restart elective surgery and urgent cancer treatments. It also has to be at a level which does not put such an intolerable strain on front line staff.

However once you have got the disease down to a manageable level you need to turn to Mr Raab’s last two tests. These look sensible but rather problematic.

PPE remains a mess with the scale of the problem reducing the further away you get from the front line. It remains the case that for significant numbers of nurses, doctors and carers the lack of supply of PPE is an existential fear. Senior management, on the other hand, is confident there is sufficient PPE, although they are happy to change the guidelines on what PPE is appropriate mid-crisis, and not in a more stringent direction.

Which brings us to testing. Testing is the music needed for the Dance.

Matt Hancock has committed to achieving 100k tests per day by the end of April. At the moment the number of tests actually being done per day is around 20k. Matt Hancock says “Ahh yes, but there is capacity for 40k”. Unfortunately success is not measured by capacity but by results. I could have run a lot faster but I didn’t. Capacity is a necessary precondition of results but it is not sufficient. If we had infinite capacity to test everyone in Wick it would not be that much help. But put that aside.

Are 100k, actually completed, tests per day enough? It turns out they may be just about there if estimates of the level of testing needed to effectively monitor the disease post lockdown in the US, by the Harvard Global Health Institute, are correct. They suggest that a testing rate of a minimum of 152 tests per 100k population are needed to effectively monitor and manage the disease. Such a level should enable those showing any signs of disease, even mild flu like symptoms, to be tested in the community plus an average of 10 contacts.

Given a population of 66m divided by 100,000 gives you 660, multiplied by 152 = 100,320 tests per day required in the UK. Clearly there may be demographic or geographic or cultural drivers that move these numbers a bit but you would have thought they were in the right ballpark

So in order to go to the Dance without risking a second, unmanageable wave of infection, we need in place an infrastructure to enable a minimum of 100k tests per day to be carried out, all the contacts of those testing positive to be traced and all those infected isolated. A lot to put in place in less than three weeks.

Trying to draw some conclusions from all this.

First, what may delay coming out of lockdown is not the reduction in death rates etc it may be more about the materials and logistics for managing the virus after the end of lockdown.

Second, the end of lockdown is not the status quo ante. Far from. Our social, cultural and economic lives will continue to be severely constrained for some 12 to 24 months after the end of lockdown.

Third, this has specific economic consequences. Turning the economy off is a lot more straightforward than turning it back on. If the government does not continue to provide support to businesses in what might be a very long transition phase. more businesses could go bust coming out of lockdown than did going in.

Third, vulnerable groups are likely in for a particularly tough time. The reality may be they need to “shelter” until there is a vaccine. If this is the proposal from government it is not acceptable. They need to apply their minds to drive “the science” to come up with some way in which the vulnerable can get out of their homes, particularly those that live alone. Some creative thinking on this should be happening now and by pressure groups for the elderly and sick not just the scientists.

As Churchill might have put it coming out of lockdown is not the end, it’s not even the beginning of the end, it may however be the end of the beginning.

 

 

 

 

 

 

 

 

 

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Masking the public

Am I missing something? Can it be the case that, if the public wear masks whilst observing social distancing outside the science shows those masks have no beneficial effects in preventing them contracting the Covid-19. However, at the same time it is vital that NHS staff, working in close proximity with a room full of infected people have masks to prevent them from getting the disease.

Is it the case that the greater the likelihood of infection the better the masks work? And the less the likelihood of infection the worse they work? Is there one or two sciences at work here? An indoor and outdoor perhaps?

Is not the truth of the matter that masks do help but there are not enough of them? In circumstances where masks are limited it makes absolute sense to prioritise the available resources to those who are most at risk and in a hierarchy of risk the general public are at the bottom. What is more I suspect there are few members of the general public who would want to be the cause of front line staff not being able to get the PPE that their job demands.

Given this why do the Government not say so. I suspect we are going to find over the next few days that the indoor and outdoor “science” will come together and it will not be about the pointlessness of masks.

The public face a much lower level of risk given their ability to exercise social distancing. This is not open to people caring for those with the disease. A purpose made protective mask is vital for the latter. Something, that may be less effective but have some benefit would still seem to make sense, so a home made mask is probably a reasonable precaution. If it is the case, say, you can get 70% of the benefit of a mask from a scarf or some other home made variant whilst supplies of proper face masks are limited why not say this.

Whilst I have a lot of sympathy with those actually managing this disaster it annoys me when the general public want clear advice about whether they should wear cotton masks over their nose and mouth and the government’s response is to try to pull a mask of woolly “science” over their eyes.