Wednesday, December 5, 2012

Probable tax policies.

Fiscal conservatives may not be aware of a factor driving centre-left parties in the debates over the spending in the US, and over tax rates rates in the UK and France.

Arguments against increases in corporate rates and capital gains are based in sound economic reasoning, but at this stage of the economic crisis most politicians in power recognize that "recovery" is abstract and distant compared to more exigent concerns.

The logic of political survival asks a question which economists have not. Politicians are asking themselves, "would we rather govern in a poorer economy, or be the opposition in a better one?"

Tax rates will rise significantly in western countries for the sole reason that to stay in office, governments must continue to distribute rewards to households that depend on public sector jobs. The middle-class that U.S. President Obama talks about is a euphemism for these households. Neither America, nor Britain, is a "nation of shopkeepers." That auto-workers, nurses and teachers can swing a national elections suggests that the we are more nations of public servants and subsidized industries than of thrifty entrepreneurs - at least when it comes to who votes.

America has the most productive and entrepreneurial people in the world, undoubtedly, but there are not enough of them elect a president or a senate majority. The US president is caught in the difficult situation where he must choose between freeing small-to-medium size businesses to hire more people, or to promise Mitt Romney's %47 that their lifestyles will remain secure through continued spending. Reducing the tax burden on businesses to encourage new private sector jobs is unlikely to translate into political support for Democratic party candidates precisely because most of the  households who might benefit from new jobs are already reliant on federal spending. Shifting money from the public to private sector would threaten these households' stability.

The essential definition of an economic crisis is that politicians are cannot choose between relative benefits, but rather, they are in a reactive position, triaging political costs. Taxing upper-earners and corporations makes for a lot of noise and a messy cleanup, but the political cost is lower than a popular revolt against austerity policies, which would take governing parties out of office.

To see how policy in Britain, Canada and America will evolve over the next couple of years, it's worth looking at what will keep these centre-left parties in power. It will likely mean economic disaster in a few areas, but the smart money would bet, "not in swing ridings and districts." Enacting more redistributive policies to pay for public services and to lever up more debt is a probable scenario in the U.S., not because it makes economic sense, but because it makes political sense.

What I think ostensible progressives miss is, redistributing wealth actually destroys it. It's like redistributing food by taking a crop and spreading it among so many people that no-one person is sufficiently nourished to replant it. It allows the distributor to reward those who toe his party line, but it does not benefit everyone equally as the believers repeat, and it serves mostly to keep subjects just strong or educated enough to remain loyal. 

However, there are a lot of people who don't mind being poorer if everyone else is poorer with them, and they vote. To me, this is the moral equivalent to killing a neighbour's cow because you don't have one. Economically wrong, but for all those vicious little people, a clear political victory. As an example of a large group of influential middle-class voters who believe this, the Occupy movement was a radical Statist movement that demanded more central government redistribution of private wealth. While they identified a few of the right problems, their solutions all came back to the same thing: redistribute resources according to collective political principles, not individual economic ones. I have no doubt Occupy wanted to make the world a better place, but it was only for themselves at the expense of others. 

The crux of it is, there is not much point making economic arguments against threats from inflation, profligacy, debt levels, and financial repression. It is no longer an economic problem of how to manage how much our governments spend, but a coarse political question of who must pay.

The irony is that a sudden increase in capital gains tax will cause a stampede out of the markets as people take profits before the taxes come into force, tanking share prices and further damaging the capital bases of the very pension funds and social security regimes the government is soaking the wealthy to bail out."Special payments" from dividends from companies looking to front-run the capital gains tax increases are not just a way to get the money to shareholders before the fiscal cliff, it's a way to keep them from ditching stocks en masse to do any final profit taking before they have to give it up to the state.

But the attack on the wealthy has been planned for a while. The co-ordinated attack on offshore jurisdictions by the G20 sealed the exits for capital flight almost 5 years ago leaving politicians free to enact capital controls, inflationary policies, tax rises, and other forms of financial repression, so that the smart money couldn't escape.  What's more troubling is that a stock market crash brought on by the U.S. fiscal cliff wouldn't have significant negative political consequences for centre-left parties, because they benefit from instability in markets. Rather bleakly, right now, exacerbating an environment of fiscal uncertainty is a risk they can afford to take.

Publicly soaking the rich is not intended to actually plug holes in financing. We're some orders of magnitude past that and there is no way to redistribute our way to prosperity. Austerity on government spending will inevitably result in civil unrest form the households who depend on public spending. Attacks on the wealthy are  a symbolic gesture to mollify the people who are already to go into the streets. Those people will in turn require repression, and making a show of soaking the rich offsets the political cost of suppressing popular revolt, which would otherwise be booked against the governing party's political legitimacy.  If economics is a dismal science, political survival is a scorched-earth one. Taxing the rich isn't a solution, it's just a hedge.
The essence of the financial crisis is that nobody wins.
The real question everyone should be asking themselves now is, who will be made to lose?

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