poniedziałek, 14 maja 2018

Do We Need the New Consumption Tax?

Robert Harris Frank, the American economist from Cornell's Johnson Graduate School of Management at Cornell University, will be soon a special guest of Copernicus Festival in Krakow (Poland). The Festival is organised every year by Copernicus Center for Interdisciplinary Studies and Tygodnik Powszechny (popular Polish weekly magazine) to popularise various aspects of contemporary science. The main topic of this year is chance. We invited professor Frank, as his recent book (Success and Luck: Good Fortune and the Myth of Meritocracy, Princeton University Press 2016) is just about chance in economics, or to be more precise, about luck. On the basis of his thorough studies, several mathematical models, experiments and big data analysis, he claims that people commonly perceived as economically successful owe to luck much more than they would be willing to admit. Talent and hard work count too, but much less then we think. Social winners are undoubtedly gifted and persistent, but first and foremost they are extremely lucky. This thesis is combined with two others, expressed in his former books. The evolutionary mechanism, responsible for our never-ending arms race to take the highest possible social position, leads the society to waste our scarce resources, which otherwise could be exploited for the common good. Those who dictate the disastrous arms race happen to be the wealthiest, thus the social winners, who usually "take all". The contemporary economy, thanks to the massive exchange of information and diminishing logistic costs is the economy of "winner-take-all". Hardly noticeable discrepancies between competing products and luck are responsible for enormous differences in their market range and prices. In consequences, the restricted group of those who benefit from those products' distribution tends to accumulate the significant part of the world's wealth. It is the source of the increasing wealth and income inequalities.
So far so good. Everything sounds plausible and is roughly consistent with many others contemporary economics thesis. However, what should we do about it, if anything?
A few years ago, in the middle of the financial crisis, The Economist discussed the similar problem. They also noticed the wasteful arms race and its dubious contribution to the common welfare and even less to the individual happiness or subjective well-being. Therefore they also postulated the punitive taxation of the conspicuous consumption in the form of indirect taxes especially excise tax, and wealth tax. However, the primary purpose was to change the behavioural patterns slightly. To make rich people invest more than consume and to force them to contribute more to the common good (allowing at the same time those in the lowest decile to contribute less). The second purpose was due to the fact, that income tax which is commonly applied in the developed world is inefficient and easy to be by-passed, especially by wealthy tax-payers who have easy access to sophisticated tax advisory (full disclosure: I can confirm that being a practising tax advisor for the last 20 years). On the other hand, it was crucial not to curb the economic growth by irresponsible taxation. Robert Frank's tax proposal is determined by the similar assumptions. Similar does not mean the same, and it makes a difference. Firstly he proposes to give up income tax entirely and to tax consumption spendings over the particular threshold. The tax basis is to be reduced of investments spendings and savings. More you consume, higher your net tax is. Secondly, he seems not to believe in a radical shift in consumption patterns, strongly evolutionary determined, and therefore his purpose is to make them more costly, while the collected surplus will be directed to the publicly valuable investments.
Here is the weak point. Somebody is supposed to decide which investments (or more broadly: spendings) are publicly valuable. Friedrich Hayek would say: I am not against planning, the question is however who plans for who. I would rather have millions of planners for themselves then one planner for millions. Without questioning the inefficiency of the evolutionary shaped market, wasteful conspicuous consumption, we need to believe strongly that the government will be wiser and more efficient in this redistribution. It sounds even plausibly when the sovereign is democratically chosen and represents the commonly shared system of values. But what if he is not? Even in the developed, highly democratized world the governing bodies have a dubious legitimacy to speak for all. And what about the rest of world?

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