The last century of Asian economic development shows that current tax policy is Very Wrong Indeed.
The last few weeks have seen an uncommon volume of debate about tax policy. First, Alexandria Ocasio-Cortez proposed a 70% marginal tax rate on those earning more than $10 million. After this proposal had generated foam-mouthed ire from every weasel-faced Fox News pundit going, the World Economic Forum in Davos began.
Here, the focus was slightly different: rather than right-wing libertarians disgusted at the suggestion that a government might impose themselves on private property, what we saw was the apparently well-meaning global elite claiming that although they would be happy contributing a vast amount (though not proportion!) of their wealth to philanthropic foundations under their own control, taxes were regressive, ineffective and, fundamentally, not the answer to rising inequality, social and political unrest and plain-old poverty.
There were a series of Epic Clapbacks from historians and economists, who noted that ‘high’ taxes had never previously impeded economic growth, but it was clear that, despite all evidence to the contrary, the billionaires still thought they knew best—a fact compounded, at least in terms of optics, by Starbucks founder and CEO Howard Schultz’s announcement that he would run as an independent for President in 2020, an act which he seems to think of as an extension of the corporate philanthropy he believes is the answer to the world’s problems. Save us, Howard, we need you!
Coincidentally, I’ve been reading Joe Studwell’s comprehensive economic study How Asia Works. Despite its TED-talk title and dry tone, the book is a fantastic exploration of the material results of macroeconomic policy, ostensibly about Asian economies and the reasons behind their success or failure. But, of course, it’s about much more than Asia specifically, and provides a fascinating contrast to the arguments about tax policy and inequality that are currently unfolding in the West.
Often, arguments for higher taxation are made in terms of redistribution, with neoliberal economists and politicians putting forward the idea that the rich should ‘do their bit’. I agree, they should do their bit. But the assumption behind this argument is that it’s their wealth in the first place, that they’ve shown the requisite work ethic, entrepreneurial spirit and innovative nous to attract wealth, and that they are therefore entitled to the fruits of their labour. All we can hope is that they’re kind enough to give some of it back.
How Asia Works demonstrates over and over again how stupid this line of thought is. Asia provides a useful testing ground for economic decisions, as many of the continent’s economies began from similar developmental positions. Their differing states suggest a series of questions: how has South Korea developed successful electronics and automotive industries while Malaysia’s attempts to do the same have fallen flat? Why have many Asian economies industrialised while others, such as the Philippines, still struggle with agriculture?
Studwell provides a series of answers on the level of specific policy that makeup a rough playbook for how to develop an economy: household farming is required to maximise the labour force before larger-scale productivity gains are worth it; export discipline is vital in order to develop a competitive manufacturing operation that can bring in foreign capital and liquidity.
Underpinning these policies is a wider theme. In order to build an economy that works, private ingenuity must be directed by state policy. It’s fascinating to see how the South Korean government, to take one example, gave individual entrepreneurs support and encouragement and, in some cases, applied coercion, in order to ensure that industry grew in the right way. The private sector was allowed to gain wealth, but only if it followed government direction, which was geared towards creating an economy that worked for the entire country, providing technological progress and growth.
One of the biggest killers of economic success is rent-seeking, and it’s vital that governments intervene to prevent entrepreneurs from gaining control of business and sitting on it without innovating, which will benefit the public. In South Korea, for example, automotive manufacturers were required to export vehicles, which led to technological development and global competitiveness. In Malaysia, however, entrepreneurs were able to stick to the domestic market, and so their cars didn’t have airbags, which were required internationally. Therefore, Malaysian entrepreneurs grew rich and sat on the wealth generated from domestic sales, while innovation stalled and the country suffered.
An interventionist state, working in tandem with the animal spirits of the private sector, contradicts the assumptions about wealth that are currently playing out in tax policy debates. In successful Asian economies, private wealth is an incentive to encourage progress that benefits the public, and the right to it comes from the public itself. The public generates wealth and is the source of wealth, and private entrepreneurs should be rewarded only when the public benefit.
According to the Davos elite, the public should apparently be grateful for the personal contributions of the rich, who should be worshipped as wealth-creating geniuses. If only we could all be blessed with such talent!
After reading How Asia Works, it’s hard to argue that that the rich in the West exist as a result of anything other than policy failure. Levelling higher taxes is a good start, addressing a structural imbalance that has enabled them to seek rent while innovation stalls. It’s a useful tool to prevent rent-seeking and spur those without wealth to innovate.
One thing that has been encouraging about the left-wing arguments for higher top rates of taxation has been a redefinition of terms towards this position, a sentiment best put into slogan by Ocasio-Cortez policy adviser Dan Riffle: Every Billionaire is a Policy Failure.