Now go to:

Keith Rankin's site

Go to   Athens/Delphi: David's Pi_ge

Go  to   RainForest:  David's  Page :

http://www.oocities.org/RainForest/6783/

The Rankin File: #33

Tim Hazledine calls it "trust accounting". Margaret Levi called it "quasi­voluntary compliance". Deirdre McCloskey calls it "socialised self interest" (see "Competitiveness Buffs are the Real Merchants of Doom"). Francis Fukuyama (Trust: Social Virtues and the Creation of Prosperity, 1995) called it "social capital".

An efficient economic society is one in which people voluntarily comply with rules and norms which they know lead to better outcomes for all, if obeyed by all. Such economic efficiency is unstable, however, because people only obey the rules if they see that others are obeying the rules. Efficiency and mutual prosperity depends on morality, cooperation and trust.

In a Hobbesian (second­best) society, people only obey the rules because they are coerced into doing so by a powerful state apparatus. People accept such coercion, because in the absence of both voluntary compliance with the collective rules and the autocratic state, society lapses into the mafia­dominated anarchy of "war of all against all" that Immanuel Wallerstein ("Immanuel Wallerstein on the Crisis of the World System") fears we are moving into, and which appears to be reality in Russia today.

Quasi-voluntary compliance with the collective requirements of an advanced economy - paying taxes, etcetera - is the situation where compliance is essentially voluntary, but is backed up by a reserve power on the part of the state to coerce obeyance. So long as that reserve power is rarely needed, then the system is efficient. People need to know that the reserve power is there, however; otherwise they would be likely to assume that others were cheating. We are a trusting species, but not naively so.

"Free-riding" is the economists' term for doing what Hazledine calls "taking the money". It is the single activity that most undermines trust. Interestingly, in a recent American experiment it was shown that economists were more ready to free­ride than were any other professional group. It is a worry when an amoral section of the population analyses the society as if everyone was like themselves. The result of such analyses, as Hazledine notes, is the replacement of quasi­voluntary compliance with full­on coercion. The economists' model of self­interest, when applied, is self­fulfilling. Reforms based on such a model necessarily reduce the amount of voluntary compliance with the rules that bind our economy and our world's economies together. Thus, they cannot to other than create massive inefficiencies by creating voracious demands for monitors, managers, enforcers and the like.

The shift from liberal cooperating societies to a Hobbesian world requires a bigger, not a smaller, public sector. That is why tax demands keep rising, even as the public services we demand diminish. Nevertheless, the contradictory logic of "reforms" consciously demands a small state as the forces unleashed require a growing enforcer state. The implication is that even the Hobbesian social contract is unstable under conditions of rampant economic rationalism.

One of the activities that most breaches the liberal social contract of quasi­voluntary cooperation is tax avoidance, as Levi notes in her section on Australia (especially during the Fraser regime of the late 1970s and early 1980s). It is for this reason that the "Winebox Inquiry" was really much more important than it might have seemed to a number of people with excessively legalistic minds. The fact that people - big people - are being seen to avoid paying taxes is actually more important than the loss of revenue from those big would­be taxpayers. The state loses it legitimacy as a state when most affluent citizens are seen to cheat. I mean moral cheating, not just legal cheating.

Another most insidious form of non­compliance is public lobbying on the part of organised business for tax cuts. In 1996 and in 1998 the top one­third of the New Zealand population got or will get "tax cuts" / "growth dividends" significantly higher than the rest of the population. Yet organised business is seeking a particular form of tax cut that is exclusive to the rich; a cut just to the top rate. The damage may be done, even if their wish is not granted, by their telling the rest of the community that it's OK to not pay taxes. The result is that, not only is revenue squeezed, but significantly greater amounts of revenue (absolutely greater; not just relatively greater) are spend on "transaction costs", meaning on enforcing, managing, monitoring.

It seems that big companies have been no less avid tax avoiders since tax rates fell in the late 1980s. Indeed, if, as I have argued, seeking lower tax rates through the political process is just another form of tax avoidance, then a society with falling tax rates for this reason is likely to experience an increase in all forms of tax avoidance. Thus, non-payment of taxes rises as tax rates fall. It's a vicious cycle. As researcher Patrick Caragata noted in the Dominion of October 30, it is the big businesses most able to pay taxes who get away with paying the least. That is a bad sign for an economically efficient civilised society that depends on an unstable form of fiscal contract; a fiscal contract based on "trust", on compliance with minimal enforcement.

Caragata "concluded that companies that were more efficient in generating revenue and profits ... had the highest probability of paying no tax. The top 25 percent [surveyed] have an average probability of paying no tax of 48 percent, but the bottom 25% have a probability of paying no tax of 27 percent."

{ This document is:                  http://www.oocities.org/Athens/Delphi/3142/rankinfile.html
{ the above references are to: http://www.oocities.org/Athens/Delphi/3142/krf30-doom_busin.html
                                    and:     http://www.oocities.org/Athens/Delphi/3142/krf20-crisis.html

Back  to:  Rankin File  Archive

Go  to  Keith  Rankin's  page

( viewings since 28 Dec.'97: )