In any class on medieval history, much of the discussion of society revolved around the system of serfdom in Europe. Serfdom was the practice by which, in medieval Europe, peasants were tied to the land of a particular lord or knight. They worked particular plots of land for the lord, who in return, provided the serfs with protection. This protection took the form of both military and police protection, often with the lord sitting in judgment over civil disputes between his serfs, punishing law breakers and enforcing order. The lord got the benefits of the serfs' labor, the serfs got the protection of the lord and his armies. Depending on where in Europe you are looking, the formalities of the arrangement differ, but generally, the serf was oath bound to do the lord's bidding and put the lord's business above his own affairs. In return the serf was granted the rights to certain lands where he could earn a living. As the system grew and cities grew larger, the complexities of the arrangements changed, with taxes substituting for labor where the profession of the serf in question earned him money instead of harvests from the land. I use harvests here, because I'm including both resource extraction like mining and traditional farming yields. In the end, a serf was a man bound to work a plot of land for his lord.
This is often negatively compared with the modern era. In a modern first world country we are not oath bound to work the land, we may choose our own professions and we may leave our homestead and make a life of our own elsewhere. Serfdom is also often compared with slavery because the serfs were oath bound to a particular bit of land and a particular lord, with no ability to leave or find a new one. But this ignores a significant and important distinction between slavery and serfdom, namely that slaves lives were owned by their masters, to be dealt with as they saw fit and serfs were not. Any act, any request of the lave owner to the slave was to be followed without question, with the penalty of arbitrary death hanging over a slave's head. A serf, on the other hand, while oath bound to his lord, was still considered a living human being, he could not be denied the amenities required to maintain his life, he could not be blocked from attending the local church, got holy days off work and was not obligated to do any immoral acts for his or her lord.
Now that we have covered what serfdom was, this brings us to the title of this piece, namely, that we are still serfs despite living in the modern era. As I said above, serfs were oath bound to work for the benefit of their lords. However, as professions beyond mere resource extraction were born, serfs started to pay their debt to their lord in taxes instead of labor. Today we follow much the same practice, and in many industrialized parts of the world pay between 1/4 and 1/2 of our annual labor in taxes to federal, state and local governments. While we enjoy the freedom to move about our countries, we are still bound to the countries where we are citizens. In fact, citizenship can rightly be viewed as just an oath given to a country whereby you get the protections of the government and are given the right to work within that government's borders. So, we are bound to our government and its land and we still owe it a significant chunk of our labors; the only real difference between our situation and that of serfs then is that we have a right to vote for who runs the government whose laws we are subject to. But in an era where the parties are entrenched in both law an society, where the differences between the parties in practice is very small, where many local elections go uncontested, query whether or not our votes actually make a bit of difference in how and by whom the country is actually run. Does a sham say in government matter more than no say at all? If we are still bound to a country by citizenship, still owe taxes to our lords, and our opinions have very little impact on how the countries we live in are run, how exactly are we different from the serfs of the middle ages? We're all still serfs.
Monday, September 29, 2014
Monday, September 8, 2014
High Taxes Have Consequences
Today's The Wall Street Journal has two seemingly unrelated stories. The first is in the "World" section entitled: "Japan GDP Shrinks at Fastest Pace in More Than Five Years", the other is in the "US" section entitled: "Lew: Imperative for Congress to Solve Inversion Problem". At first glance the flight of US multinationals and Japan's continued economic woes are not connected. However, delve into the stories a little bit and it becomes obvious that both of these articles are reporting on national crises created by bad tax policy choices.
Japan's problem is that, after a spurt of expansionary policy changes called "Abenomics", name after Japan's Prime Minister Shinzo Abe, the country then hiked the national sales tax from 5% to 8% (a 60% increase). The hike resulted in a 7.1% shrink in Japan's GDP. Now, to be fair, there are plenty of other factors at work here causing Japan's continued economic stagnation, but the massive increase in what is a consumption tax hit consumers' pockets in Japan very hard. Over the relevant period, consumer prices jumped 3.4% while salaries only grew 1.6%; more over, the expectation is for that consumption tax to increase to 10% next year, further eroding consumers' purchasing power. The end result is that people bought less goods and saved for cost increases in their future and the economy wilted. This was an easily predictable result. Basic economics 101 analysis says that when prices increase, consumption decreases. When consumption represents the back bone of the modern economy, even small changes in cost can result in big disruptions.
The US's problem is that its corporate tax, and non-territorial tax system, are globally uncompetitive. With the USA's 35% corporate tax rate, and the fact that it taxes income repatriated from other countries, US based multinationals are pursuing aggressive tax strategies to minimize the cost of these terrible policies. One of the ways companies do this is through an "Inversion". This is essentially where the US company merges with a foreign company and makes the foreign company's country of origin it's headquarters and place of incorporation. The new company then buys debt from what is now its US subsidiary and use the debt on the books of the US sub to minimize its US tax burden. This results in all the company's global profits being taxed at the much lower foreign business tax rate instead of the much higher US rate. And because of the US's non-territorial system, these profits will never be repatriated into the US because the company would face a tax penalty. So the profits are used to expand operations in foreign markets instead of investing in the US market.
The politicians' response to the US crisis is predictable. They took turns getting in front of the media and tried to bully companies into not leaving the country. When this failed, they then moved on to insisting there be tax policy changes to keep this from happening. The sensible response to a crisis created by bad policy would be to improve the policy, namely make US corporate tax globally competitive. Of course, that would mean accepting declining tax revenue, so obviously that isn't what happened. Instead, President Obama is pushing to change how the IRS interprets existing regulations while congress is trying to create new tax laws to penalize companies for doing inversions. Essentially, their response to high costs causing companies to leave is to increase costs. Fortunately, congress can't even agree on the weather outside, let alone tax policy changes, so I expect most of this hew and cry to have no tangible results. What policy response will come out of Japan from their crisis is yet unclear. But expect more bureaucratic incompetence.
The problems in Japan and the USA are strait forward, but politicians lack the political will to make the necessary changes to fix them. The end result is that change must come from people in the voting booths. Bill Clinton defeated sitting president George H. W. Bush with the slogan: "It's the economy, stupid!" This was in response to Bush reneging on his promise not to raise taxes and the economy suffering as a result. Today I would like to create a new slogan to be chanted at every politician when they start whining about the very obvious economic response to their bad tax policy decisions, its: "It's high taxes, stupid!". Or, for when regulators don't understand how the ever increasing burden of their laws harm the economy: "It's the regulatory burden on business, stupid!" The economic problems in much of the first world can be boiled down to these two statements.
Japan's problem is that, after a spurt of expansionary policy changes called "Abenomics", name after Japan's Prime Minister Shinzo Abe, the country then hiked the national sales tax from 5% to 8% (a 60% increase). The hike resulted in a 7.1% shrink in Japan's GDP. Now, to be fair, there are plenty of other factors at work here causing Japan's continued economic stagnation, but the massive increase in what is a consumption tax hit consumers' pockets in Japan very hard. Over the relevant period, consumer prices jumped 3.4% while salaries only grew 1.6%; more over, the expectation is for that consumption tax to increase to 10% next year, further eroding consumers' purchasing power. The end result is that people bought less goods and saved for cost increases in their future and the economy wilted. This was an easily predictable result. Basic economics 101 analysis says that when prices increase, consumption decreases. When consumption represents the back bone of the modern economy, even small changes in cost can result in big disruptions.
The US's problem is that its corporate tax, and non-territorial tax system, are globally uncompetitive. With the USA's 35% corporate tax rate, and the fact that it taxes income repatriated from other countries, US based multinationals are pursuing aggressive tax strategies to minimize the cost of these terrible policies. One of the ways companies do this is through an "Inversion". This is essentially where the US company merges with a foreign company and makes the foreign company's country of origin it's headquarters and place of incorporation. The new company then buys debt from what is now its US subsidiary and use the debt on the books of the US sub to minimize its US tax burden. This results in all the company's global profits being taxed at the much lower foreign business tax rate instead of the much higher US rate. And because of the US's non-territorial system, these profits will never be repatriated into the US because the company would face a tax penalty. So the profits are used to expand operations in foreign markets instead of investing in the US market.
The politicians' response to the US crisis is predictable. They took turns getting in front of the media and tried to bully companies into not leaving the country. When this failed, they then moved on to insisting there be tax policy changes to keep this from happening. The sensible response to a crisis created by bad policy would be to improve the policy, namely make US corporate tax globally competitive. Of course, that would mean accepting declining tax revenue, so obviously that isn't what happened. Instead, President Obama is pushing to change how the IRS interprets existing regulations while congress is trying to create new tax laws to penalize companies for doing inversions. Essentially, their response to high costs causing companies to leave is to increase costs. Fortunately, congress can't even agree on the weather outside, let alone tax policy changes, so I expect most of this hew and cry to have no tangible results. What policy response will come out of Japan from their crisis is yet unclear. But expect more bureaucratic incompetence.
The problems in Japan and the USA are strait forward, but politicians lack the political will to make the necessary changes to fix them. The end result is that change must come from people in the voting booths. Bill Clinton defeated sitting president George H. W. Bush with the slogan: "It's the economy, stupid!" This was in response to Bush reneging on his promise not to raise taxes and the economy suffering as a result. Today I would like to create a new slogan to be chanted at every politician when they start whining about the very obvious economic response to their bad tax policy decisions, its: "It's high taxes, stupid!". Or, for when regulators don't understand how the ever increasing burden of their laws harm the economy: "It's the regulatory burden on business, stupid!" The economic problems in much of the first world can be boiled down to these two statements.
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