umarsaeed

Sympathies from the Spike

In Criticism, Culture, Financial, Fresh, Politics on September 1, 2011 at 9:46 AM

During the years when Eric Blair (George Orwell) was voluntarily living as a vagrant in London, he wrote an essay in 1931 titled, The Spike (full text). A Spike was a workhouse where the nomadic homeless went to find shelter and food in exchange for their labour. Upon entering, he was stripped of all liberty, respect and dignity. He and the other “tramps” (homeless) were treated like dogs; they slept wherever there was space, they were fed scraps and it was assumed that they were carrying disease.

Orwell was sent to the workhouse kitchen, the most coveted task at the Spike. Once finished, he threw away five waste bins worth of meat and vegetables. Upon returning to the Spike, he watched his fellow tramps gnaw at stale bread. Some couldn’t even eat the food.

Near the end of his stay, Orwell was surprised to find himself in an argument with a distinguished vagrant who agreed with the Spike policy of wasting food.

“They have to do it,” he said. If they made these places too pleasant you’d have all the scum of the country flocking into them. It’s only the bad food as keeps all that scum away. These tramps are too lazy to work, that’s all that’s wrong with them. You don’t want to go encouraging them. They’re scum.”

Despite being in the Spike with the rest of them, this upper-class tramp had separated himself from everyone else. His voice still resonates in America today among the poor and middle class. There’s no need to tax the rich in order to make the bottom more pleasant. Motivate the poor by making it uncomfortable.

A progressive income tax system is the modern equivalent of Robin Hood. But the real question is, why is anyone other than the filthy rich worried about the effects of a progressive tax system? What compels the struggling middle class and poor to believe helping their own cause is bad for the country? Is it honour? Pride?

As it turns out, it’s pettiness. A recent study about “last-place aversion” confirmed what Orwell had observed 80 years ago. Specifically, some poor people oppose policies that might help their current state because they fear that those same policies will bridge the gap between them and the people below.

One paradoxical consequence of this “last-place aversion” is that some poor people may be vociferously opposed to the kinds of policies that would actually raise their own income a bit but that might also push those who are poorer than them into comparable or higher positions. The authors ran a series of experiments where students were randomly allotted sums of money, separated by $1, and informed about the “income distribution” that resulted. They were then given another $2, which they could give either to the person directly above or below them in the distribution.

In keeping with the notion of “last-place aversion”, the people who were a spot away from the bottom were the most likely to give the money to the person above them: rewarding the “rich” but ensuring that someone remained poorer than themselves. Those not at risk of becoming the poorest did not seem to mind falling a notch in the distribution of income nearly as much. This idea is backed up by survey data from America collected by Pew, a polling company: those who earned just a bit more than the minimum wage were the most resistant to increasing it.

I suppose I shouldn’t be surprised that our own insecurities are blinding us from seeing the obvious solution. America has lower average and marginal tax rates than most Western countries. At the extremes, America’s average tax rate is 30% while German and France tax their people at 50%. For the cream of society, America’s top marginal tax rate is 35% while Britain’s is 50% and Sweden 57%. Canada currently falls in between these ranges.

Social cohesion plays a big part in peoples’ attitudes. The Economist found that countries that are racially homogeneous are more likely to accept a Robin Hood style tax redistribution. Immigration explains why Sweden doesn’t care about high taxes but America does. Perhaps, the last-place aversion is not only about distancing yourself from the bottom, but it is a more general cry that we shouldn’t be helping certain kinds of people.

But America’s tax system has a bigger problem than low tax rates. It has been designed as a rule-based, checklist-driven, letter-of-the-law type of system. They make a tax rule, and big business finds a loophole a few months later, and the government wastes time without capturing tax revenue. Rich people have a full legal arsenal to navigating around the tax laws that the government creates. It’s a completely different game at that level. Money flows through different entities around the world, structured precisely to avoid the criteria that the government has set in its laws.

The American government struggles to put up a fight in courts against this type of circumvention. These companies aren’t hiding the money; they’re playing within the the law in the deep end of the pool. This losing battle compels the practical politician to think, ‘We can’t outwit the corporations, and we can’t change the system, so let’s just leave it and focus on something else.’

I grew up with Canada’s progressive tax system. In the past, tax rates were higher, and today they are lower. But it remains a cohesive and comprehensive system that is backed by the courts. We rely on human judgment to interpret the spirit of each tax law. The judge determines what the tax law was originally designed to do. Then he does it. Case dismissed.

Although all Canadian politicians bicker about whether tax rates are high or low, very rarely have they tried to change the underlying structure of the tax system. Poor people get the most tax breaks and the lowest rates. The top pays the most. The middle rides the parabolic curve in between. The slope of the curve may change, depending on the elected officials, but the shape of the curve remains intact.

Irrespective of a traditionally open immigration policy, the shape of the progressive tax system is widely accepted in Canada. We are forced to care about lesser fortunes. The kindness of strangers is entrenched in our tax laws. Ideas such as the flat income tax have been laughed at. As Canadians, we’re not fighting this with pride, honour or pettiness. We accept that it’s good for us, whether we like it or not.

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  1. Interesting Umar, especially in light of Warren Buffet’s “we’ve been coddled too long” statement recently. However, here’s an article in The Star saying a slightly higher tax on earnings over 250k and again over 700k would generate a lot of revenue for Gov’t. $12b isn’t a lot in US economy, but here, it goes a long way.
    http://www.thestar.com/opinion/editorialopinion/article/1045149

  2. The “long way” argument isn’t made enough. Currently, rich people are simply storing their tax savings (gold is not investment, it’s storage) whereas if that money was redistributed to the poor it would go towards purchasing goods in the local economy.

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