Leiden, a.d. V Kal. Feb. MMDCCLXIX A.U.C.,
“Taxation is the weapon against inequality,” do you know that expression? According to Lilianne Ploumen, Dutch Minister of Foreign Trade and Development Cooperation, taxation is the weapon agaisnt the outrageous inequality in developing countries today. I agree with her that inequality in developing countries is absolutely of unethical proportions, but I doubt that progressive taxation is the solution. What developing countries need first and foremost is to solve the inequality of property rights, which would allow people to create their own businesses under the protection of their government. Right now it is the other way around, people often have to fear their own government. The key issue is that I doubt that corrupt, oligarchic elites will ever assent to having to pay more taxes, while they might be persuaded that extending property rights are to their benefit.
Ploumen starts her speech with referring to the Oxfam report which stated that the richest 62 people in the world own as much as the poorest half of the world population. While honestly I do not see why this as such is problematic, those very rich people often became rich by selling products to affluent consumers, there is a bigger problem with this methodology. Looking at the list of 62 richest people, we see that there are some very obvious absentees, such as Vladimir Putin, the Marcos family, the Suharto family, the Assad family, the Gadaffi family, etcetera.
The reason many countries are so poor, is that they have leaders who make themselves rich at the expense of the poor. They do not recognize, leave alone protect, the property rights of their citizens. They use monopolies, corruption and blackmail to take the wealth of their citizens. The source of poverty, so indirectly of inequality, in these nations is that property rights are not protected, and even actively infringed upon by the government or the political allies of the leader of the country. So, inequality is exacerbated by monopolies, corruption and blackmail, while poverty remains because economic growth is next to impossible, and never prolonged, in such conditions.
Historically all countries started with such elites, at least I cannot think of any case which started with a progressive taxing system (if you know one I would be very interested to learn about it). Rather, countries started with a landed aristocracy, which exploited peasants and taxed the growing merchant and industrial class, if those came into existence at all. In those countries in which the growing merchant/industrial class won the political struggle against the landed aristocracy, economic growth and on the longer term democracy were often the result. Only after those countries democratized did they start building welfare states and introducing progressive taxation to redistribute income. Sweden and Denmark did not become rich as welfare states, they built those after they became prosperous democracies.
At the moment many developing countries find themselves in the same situation as the developed countries found themselves only 300 years ago. Indeed, just like the currently developed countries back then, many developing countries in a sense already have redistributive systems, only they redistribute income from the poor to the rich. So, why would a swindling, nepotistic elite start paying into a progressive taxation system, if the current system serves them so well? If they have the power to remain a swindling, nepotistic elite, would they not also have the power to prevent a progressive taxation system? I think a working democratic system is a requirement for a redistributive system which helps the poor.
Yet, even if those countries decided to introduce redistributive, progressive taxation, it is by no means obvious that this system would actually help the poor in the long run. While in the West we are used to welfare states which do not look at political affiliation, in many developing countries the welfare states that do exist are actually used to buy votes and political support. If a person cannot depend on his own productive powers to sustain himself, because of the lack of property rights, giving political support to the oppressor in exchange for cash, housing or subsidized products is a rational choice. Having some stable income instead of having even less, unstable income is the optimal choice in that situation. Clientelism is a very old phenomenon, already discovered by the Romans: Panem et Circenses!
Right now, I think (or rather, Hernando de Soto and Acemoglu&Robinson) the priority should be to extend the right to property rights to many citizens of developing countries. This will allow people in the developing countries to at least increase their own prosperity without their new grown wealth being taken away by their own government, it will lead to economic growth and will create a middle class. Those countries need to lift people out of poverty, not just to decrease inequality. Growth-focused policies might even increase inequality, while reducing poverty. This is another element Minister Ploumen should keep in mind. While she denounces Communism, Communist countries often were very egalitarian, sadly also dead poor.
In short, it will be difficult enough to convince the current elites of countries that protecting the property of the lower classes is in their own self-interested benefit. If we want them to support plans that will make the poor better off, those plans will have to increase the absolute wealth of the elite, even if their relative wealth declines. Even getting that done already implies a tremendous political struggle, which took several centuries in Western countries. Starting with telling those elites that they not only should stop monopolizing the national economy and to stop taking other people’s property is a major challenge, telling them that they should even pay more taxes is simply unrealistic. It would be political suicide for any leader wishing to stay in power.
Bottom Line: I agree with Minister Ploumen that inequality is a problem. But her idea is like trying to run before you learned to walk.
P.s. Minister Ploumen also declares trickle-down economics dead. I think it is fair to say that in the developing world it has largely failed. If trickle-down economics is to work at all, it requires capitalism, not monopolies, corruption and blackmail.
P.p.s. In all fairness, I should also mention that Minister Ploumen is using the taxation argument to defend her renegotiations of tax treaties to prevent tax evasion. This is laudable, very laudable indeed.