Friday, 27 April 2007

Tax, the Family and Economics

Another evening, another lecture. Tonight I listened to Professor Harold James speak about Tax, the Family and Economics: The Global Dimension, though there seemed very little about the global dimension and a lot of general theory. Nonetheless it was an interesting lecture on what is a hot topic of the day, and if you are truly desperate you can apparently watch the whole thing on 18, Doughty Street (looking out for the back of a handsome head in the front row on the right, if the lights aren’t reflecting off it too sharply).

As the title would suggest, Professor James’s concern was how government policy impacts upon family relations. “Societies that do not reproduce are bad societies” he noted, echoing many other critics who have expressed concern about the fact that most Western European countries, as well as (especially) Japan, have birth rates below the replacement rate (which is just over two children per woman). The state’s impact upon the family is important because for James the family is one of the three essential elements of society: just as we have come to recognise that markets are necessary to enable us to satisfy our desires, and public policy is necessary for us to meet essential needs, so the family serves a vital purpose.

One of the main purposes he cited was the family’s unique ability to solve the question of inter-generational transfers. Lest we get bogged down in jargon (a habit I am trying to avoid), this is the question of to what degree any generation must consider the needs of the next: can we burn all the coal or should we leave some to our children; should we sacrifice our own economic growth because of concerns about the atmosphere our grandchildren will inherit; classically, to what degree should each generation pays for its predecessors’ pensions and its successors’ education? The family is uniquely placed to address these issues. Indeed, that is their main value (from an economic point of view).

Sadly, James argues, that role is being eroded. There are three sources of this erosion. The first is attitude and culture: we have come to see families as a commodity, much as we do houses and cars. We do not expect to be saddled with them forever; gone are the days when people really did marry “until death do us part”. We may all go into marriage hoping and believing that it is forever (otherwise, what’s the point?), but in the back of every bride or groom’s mind is the knowledge that these days we do have an emergency exit. We know full well that marriage need not be for life; if we change our minds, we can. As plain speaking Hungarian Prime Minister Ferenc Gyurcsany observed, "Every man whose wife grows old has earned a younger woman."

[And every man whose wife reads his blog would like to disassociate himself from any such sentiment.]

The welfare state has also undermined the family, because it has removed its main (economic) raison d’ĂȘtre. No longer do we need families to provide for our old age; this is provided by the state. For perhaps the first time in human history, one need not breed to ensure a comfortable dotage; the state will pick up the cost, and cheap immigrant labour will provide the daycare. This has skewed the cost-benefit analysis that (perhaps subconsciously) goes into the decision to reproduce. It can be no coincidence that it is the prosperous countries that see declining birth-rates, while the poor still need to produce large numbers of offspring to ensure that they will be looked after in the future. With (some of) the benefits removed, the opportunity cost appears greater. In (at least the back of) the minds of people in the developed world, the question has become whether one spends £166,000 on raising a child or whether more satisfaction would be achieve by buying a holiday villa near Paphos.

The third issue facing married couples is taxation. Fiscal influences shape decisions (in some cases, that is the point). Our tax system, for perfectly laudable reasons, emphasises helping the poorest and most needy. As a result, it tends to tax working couples hard while rewarding unemployed singles (especially parents). This has been exacerbated by tax credits, which see people paying very high marginal rates of tax if they return to work (because income tax is compounded by loss of benefits which between them erode most of the gain of earning extra money).

High taxes generally generate a rent-seeking and lobbying culture: a lot of time and effort is expended on trying to shape the system and exploit it as much as possible. What is more, because of the unintended consequences that all taxation creates, efforts are made to compensate for these effects that in turn make the system ever more Byzantine. The simplest way of reducing the harm taxes do is to simplify them and minimise them, but that is not government’s way. Instead it seeks to create new exemptions and benefits and tinker and re-jig the system until it is painfully complicated, while each new clause and every new tax does further harm.

It is interesting to see both how this has encouraged the legislation of gay marriage and what further impact this has had. One of the arguments for creating civil unions was to give homosexual couples the tax benefits as heterosexual couples (for example, giving them exemptions from inheritance tax when one partner dies and leaves wealth to the other). This has in turn created new demands from other groups that lived together – for example siblings, non-sexual partners, parents and children – that wish also to enjoy the same tax benefits. The system becomes ever more complicated.

Professor James’s argued that taxes should not be used to shape society. He did not (as I had expected) argue that taxes should be adjusted to support marriage or the family; merely that elements that discriminate against or penalise marriage or the family should be eliminated. Instead, tax policy should aim to be neutral as to marital and family status. By eliminating the imbalances that already skew these decisions, it would remove barriers that currently exist to marriage, co-habitation, responsible parenting and so forth. But it would not create the unintended consequences that follow from efforts to tinker with the system for the purposes of social engineering.

What Professor James did not recommend, though it was implied by his lecture and is what one would have expected from Politeia (which hosted the event), was that the easiest way to reduce the negative impact of complex taxation is to reduce and simplify the it. I wholeheartedly agree that taxation needs to be applied fairly and should not be used as a means of shaping society in the government’s image.

However, just as David B. Smith has noted that efficiency savings are almost impossible unless rates are reduced, so in the same way it seems likely that complexity is a result of high government taxation and spending, which leads to lobbying, rent-seeking and a belief that governments need to tinker to compensate for problems that are, at the end of the day, of their own making. Lower and simpler taxes would rectify these problems, and at the same time free individuals to spend their own money to meet their needs as they see fit. That alone would do more to help the family than any benefit or tax break.

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