The industrial phase of capitalism had to be challenged. In the 19th century, two humane doctrines emerged. One was social democracy. It sought to protect people who lived in poverty. In the 20th century, Europe tested that philosophy through the Welfare State. Now, after 70 years of that experiment, we know that it has failed to eliminate poverty, homelessness, and premature deaths on an epidemic scale. Why did it fail, and what can leaders of populist movements do about it?
The solution lay with the competing doctrine which achieved global support in the 19th century. Drawing on the tenets of classical economics, this movement became known as Georgism, after its most articulate champion, Henry George, the author of Progress and Poverty.
Henry George explained in poetic prose that, to combat poverty, something more sophisticated was needed that the crude tools favoured by social democrats for redistributing income. We now know, from the historical evidence, that George was correct.
Over the decades since World War 2, sovereign governments exercised complete control over taxes. With that power, they extracted income from rich people to help the poor. And yet, throughout Europe today, many millions of people live degraded lives, their incomes either non-existent or insufficient to raise them above the barest subsistence levels. They rely on tax-payer funded subsidies, or on charity. Millions of families depend on parcels from food banks to put meals on tables for their children.
Social democracy not only failed. Tragically, it failed because its tax tools were self-defeating. Taxes were applied without discrimination. No attempt was made to determine whether a person was rich because he added to the nation’s wealth, or because he extracted other people’s wealth. The difference is between earned and unearned income.
- Taxes on wages and salaries damage the incentives of people who work to add value to the wealth of the nation.
- Unearned income, on the other hand, is privileged with low tax rates. The primary source of unearned income is the rent that we all help to create.
This combination, instead of solving problems, intensified the humiliation suffered by people who were priced out of work by the tax regime.
POLITICIANS excuse themselves by blaming “market failure”. But people – whether workers or investors – operate within rules that are enacted by government. So if the results of economic activity fall below the levels that could be achieved, under ideal conditions, we have to fault those who set the terms of engagement. And that means pointing the blame at the policy-makers who created, and continue to reinforce, the tax regime.
The ramifications of this failure have now reached existential proportions.
By damaging the nation’s productive capacity, governments intensify the levels of poverty and inequality. This creates a vicious circle. One consequence is a financial crisis for government. The rate at which the nation’s income increases falls behind the rate at which people on low incomes need welfare subsidies. So, because government budgets are insufficient to honour their financial obligations, the public sector falls deeper into debt, and becomes increasingly inefficient. The human cost assumes the form of an accelerating rate of deprivation. This economic chaos then transmits itself into the political arena.
- Right-wing parties retreat to extreme positions such as nationalism; and
- Left-wing parties resort to countermeasures such as ever more complex regulatory regimes. These add new layers of damage to the lives of the most vulnerable families.
Politicians on the Right blame foreigners (as in Germany), while those on the Left hide behind protectionism (as in France). These responses manifest themselves in the erosion of social solidarity, the debasement of human values and the nurturing of a mean spiritedness. One consequence is the threat to break up nations such as the UK, Italy, Belgium and Spain. We have already seen this in the vote for Brexit.
IN THE 1960s, governments of the social democratic persuasion tried to overcome their failings by nationalising industries. Britain led the way in Europe, and failed. In response, the search went out for a Third Way. Tony Blair hyped that experiment. It, too, failed. Now we are confronted by the dangerous geopolitical outcome: a power vacuum across Europe. The paralysis of policy is creating the space for the re-emergence of fascism.
The popular movements that claim to represent the vulnerable sections of society need to re-examine the doctrine of taxation. The remedy does not lie with the strategy proposed by the OECD. It advocates the use of more “broadly based” taxes. Decoded, this means: conceal the damage inflicted by taxes. In other words, the OECD is advising governments to side-step some of the core principles of democracy in their financial dealings with tax payers: accountability and transparency. No wonder we now suffer from a “democratic deficit” to match budget deficits!
The emerging political movements, which seek to give voice and representation to the excluded portions of society, have one overriding obligation. They need to learn that, if they really want to help people, they should learn the benefits of drawing revenue from the stream of income which we all help to create. Switching to a rent-based revenue system would make it possible to remove taxes on wages and the profits from people’s savings. This, in turn, by an organic process, would automatically lead to full employment. Productivity would begin to rise, again, along with an increase in the real wages of employees.
The empirical evidence that endorses this strategy is available from countries as diverse as Denmark, Taiwan, Hong Kong and Australia. The policy is administratively simple to introduce, but it does require courage from politicians who have to explain the implications to the public. Mainstream politicians lack that courage, but we have now entered an era in which they are being pushed aside. It remains to be seen whether the populists can muster the needed courage.
One thing is certain. The rewards would be great.