In a previous posting, I discussed how it was possible for certain individuals or companies to submit large sums in tax at the end of any given year without actually having contributed anything to the economy. If the government became aware of this, would it be motivated to act against it? The existence of antitrust laws and monopolies commissions suggests that governments view some rent-seeking as a bad thing. But there are forces that may push in the other direction, i.e. in favour of allowing such arrangements to continue.
Most obviously, there is the issue of lobbying carried out by the industries who are benefiting from rent-seeking. This may serve to persuade certain politicians to allow a situation to continue even though it is in fact bad for the voters represented by that public servant. Lobbying can take the form of de facto bribes, but also of propaganda, trying to convince the politician that the current setup is actually good for the general public. Some combination of these pressures can and do alter the decisions made by those in authority.
There is also one curious side-effect of parasite activities that tends not to be discussed. This is that it may have the effect of boosting the government's tax revenues, certainly in the short term. This is not an intuitively obvious outcome, so I'll outline an example situation that achieves this result.
Let's return to the example of the money-swiping licence granted to Jones in the previous post. Jones submits four billion in taxes at the end of the year despite doing nothing of value for the economy. What Jones DOES do, however, is to help increase the government's tax haul at the end of the year. But – wait a minute. I've said that Jones contributes nothing to the economy; I'm now saying that her activities boost tax revenues. Surely these two are incompatible? Surely if she genuinely boosts the tax take, this must in fact be a non-zero-sum game, with Jones serving as a bona fide asset to society? And yet this seems wrong, intuitively: all she's doing is swiping money, like a licenced thief. How can these both be true?
The answer is that Jones acts as an instrument for raising the level of general taxation through the back door. Let's imagine that everyone else in the country earns 100k a year, and they pay 25% tax on it. So everybody is paying 25k in tax a year to the government. But Jones manages to swipe 10k off most of them as well. So they pay 25k a year to the government, and 10k to Jones. Ah, but Jones pays 40% of all her takings to the government. So let's recalculate: everyone pays 29k to the government (25k + 4k via Jones) and 6k to Jones herself. The existence of Jones in the system allows the government to grab a 29% rate of tax from everybody instead of 25%. Crucially, the people don't realize they're paying extra tax to the government. They think they're paying only 25k to the state and 10k to Jones. Jones ends up as the focus of their resentment, and the government dodges the blame bullet. The state grabs an extra 4k from everybody, and the extra 6k from each of them is essentially an operating cost of covering the government's tracks and deflecting the blame. (Jones ends up with an immense level of personal wealth as a result of this 6k that is "lost" in every case.)
So there is a significant incentive for the government to allow Jones to keep her licence and keep swiping: it is economically inefficient, but it is politically convenient. An increase in tax revenue, but no increase in blame.
Of course, in the specific case of Jones and the swiping licence, the unfairness would be obvious to all, but it doesn't take a great deal of imagination to see how a de facto swiping licence could exist under the guise of legitimate business. Taking a huge chunk of money in one go always attracts attention, which is why any swiper worth their salt would instead do it through a process of salami slicing, nickel and diming the victim many, many times, ideally using automated processes. Good rent-seekers would tend to be sophisticated, well-organized and in the business of presenting their activities as an essential part of the economy. And the government may have little incentive to interfere if all it sees are increased tax revenues.
"Taking a huge chunk of money in one go always attracts attention, which is why any swiper worth their salt would instead do it through a process of salami slicing, nickel and diming the victim many, many times, ideally using automated processes"
ReplyDelete...or by expanding the money supply such that the swipe takes place by reducing the purchasing power of the taxpayer's money.
Nice clear explanation, thanks.
ReplyDeleteOnly this morning the BBC news report on Barclays profit and bonuses mentioned how high pay for bankers can be a good thing for the country because "we benefit from the higher tax that accrues".
Yes, the problem is that people tend to consider the tax haul in isolation, without looking at how the money was earned. If it was earned purely from zero-sum activities, there is actually no net benefit to the economy, notwithstanding the possibility that the government knows how to spend money more effectively than private individuals, that stealth taxes are therefore beneficial and that this makes parasite industries a useful tool for the country as a whole. (Gordon Brown may have believed this, for instance.)
ReplyDelete