chapters, etc

Liberalism and Human Flourishing

6. Tax and Spend: The Active State

6.1. Taxation: Principles and Practice

Taxation is crucial to delivering a political system for that works for everyone. Debt is another source of public funding, especially for large capital projects, but should be used only when necessary as it transfers wealth and power to the rich. Besides raising money for necessary public activities, taxation can be instrumental in reducing inequality, both directly through redistribution and indirectly through financing education, housing, health and social programmes. As discussed earlier, although legally enforced, paying taxes is not akin to forced labour. At the very least, it is a moral obligation to recompense society for benefits provided. A state should be free to set its own tax rates, although it may agree to harmonise rates with other countries: the essential proviso being that tax rates have democratic approval. I advocate the following principles:

Tax should be progressive rather than proportional (or “flat”) because, for increasing levels of wealth, individuals have progressively larger proportions which are surplus after meeting basic needs. Taxes can be made more steeply progressive if the level of inequality is high or the democratic will is to reduce inequality over a shorter time period. Such taxes are not oppressive as long as they do not prevent taxpayers funding their needs and meeting all but the most extravagant aspirations. In other words, opportunities and life plans should not be significantly affected.
Tax should be as simple as possible, without loopholes or special cases. This makes it easier for all individuals and businesses to operate, and reduces any potential advantage gained by the wealthy through their ability to hire expensive advisors.
Liability to tax should arise in the country where income is generated or where the asset is located, instead of the country of personal domicile or registered business address. It is fair that each country where wealth is generated, through appropriation of its resources and activity of its citizens, receives the tax on that wealth.

The principle of progressive taxation applies both to income and capital, though the rate for taxes on the latter should generally be much lower, unless society is dangerously unequal. As Picketty argues, the greatest inequality arises from a highly skewed distribution of capital and applying a capital tax is the least invasive way of addressing that; also, for wealthy individuals, the boundaries between employment income, rents and capital gains are blurred, so if the state only taxed income it would not take account of their other sources of wealth. Regressive expenditure taxes should be phased out or reduced.

Taxing in the countries where wealth is generated, would make tax-havens redundant. There would be no need for double taxation relief or complex residency rules. This is a matter of fairness for all countries, but would be particularly beneficial for developing countries. Multinationals could not avoid local taxes on sales and profits. They would receive the same tax treatment as domestic companies in each country of operation. Calculation of a company’s profit on a country-by-country basis can be deemed where country-specific accounts are not produced.

Taxation reform requires international cooperation and greater transparency, but it is achievable through automated financial reporting and an evolution from regional to global agreements.

6.2. Role of the Public Sector

Given that markets do not operate well under all conditions and that social needs may outweigh individual entrepreneurial aspirations, there is no general philosophical reason to prefer private economic activity over public. The principle should be "what works best in the circumstances". Natural monopolies may be better run by the state. Private monopolies and restrictive practices can be curtailed through independent regulation. Public monopolies also need regulatory oversight. The state should ensure compliance with accounting, quality and employment standards. Markets need to be regulated, but according to these principles: not too onerous and fair to companies that observe good practice, but implacable against offenders.

Markets encourage innovation, provided there is sufficient access to capital and prospect of reasonable return. Access to capital requires a banking sector and a stock market able and willing to provide it. Banks and shareholders should have long-term relationships with companies and this can be encouraged through taxation. If adequate long-term funding for business is not provided by the private sector, the state could set up a state-owned commercial bank, nationalise banks or have large enough shareholdings in them to influence policy. A reasonable return is more likely if innovations are protected by patents, but if the latter are too long-lived, profits will derive more from rent-seeking than a fair payback on innovation. The state must invest in socially necessary projects where profits are too low for private involvement. The state may enter partnerships with private industry or co-operatives, in parts of the economy that are critical or have potential, but only on terms that are good for society as a whole.

Extensive functions are performed by modern, developed states, for example: regulation of the economy and the justice system, maintenance of public health (needed to avoid epidemics, like those endemic in the nineteenth century), provision of health care, social care and education.

An active state, if too centralised and bureaucratic, without proper checks and balances, could degenerate into authoritarianism, but this can be avoided by decentralisation, institutional oversight, judicial independence and democratic accountability. In a strong democracy that is both egalitarian and deliberative, well served by an independent press, the government is held answerable to the electorate. Being egalitarian, where all sections of society may vote and engage in political activity, there is less likelihood of the state serving narrow sectional interests. Being deliberative, where citizens have through education acquired the capacity and motivation to consider matters carefully, there is less chance of falling prey to demagoguery or manipulative reporting. There is less chance of either if the press is independent of both governmental and wealthy interests, fearlessly investigating and publicising instances of malpractice in government and business.

As discussed in 3.2, rights should be determined periodically in a suitable democratic forum, such as a constitutional assembly, because social attitudes change and, with them, the assessment of moral values. The law needs to be simplified, so that it is accessible to all. If application of the law is to approximate to justice, then success in legal action should not depend on ability to hire expensive lawyers.

The minimum income, as stated in 3.2, covers basic material goods not provided free by the state, together with a contribution towards those expenses necessary for genuine opportunity. Citizens in individualistic societies will be less inclined to vote for adequate minima than those in societies where there is greater solidarity. Where the minima are low enough to deny the possibility of a fulfilled life amongst the less advantaged, the citizens have chosen to abandon their commitment to a political philosophy aimed at human flourishing. The implementation of the philosophy provides the democratic means for its own rejection, as should any implementation of a consensual philosophy. However, in its principled but pragmatic reduction of inequality, countering of market imperfections and provision of social programmes, this philosophy provides the basis for a stable, well-run, economically efficient and humane society.