Thursday, September 20, 2012

Tax evasion as an automatic stabilizer

A short while back, a lot of attention was given to disparaging comments made by Christine Lagarde about tax evaders in Greece. I certainly agree that tax evasion is an issue in terms of fairness, as it shifts the burden of funding the government budget from evaders to those who honestly pay their taxes and might render government attempts to shift behavior into certain directions, by taxing them differently, ineffective.

However, as far as macroeconomic stabilization is concerned, I am surprised that there is not more people who proclaim the virtues of tax evasion during a recession. Let me consider how economist of different convictions might think about tax evasion:

 On the one hand, those old-style Keynesians still out there should think of tax evasion as a kind of automatic tax cut in bad times. Assuming that workers are more likely to try to avoid paying taxes when times are bad or that the unemployed will look for black market jobs, the avoidance of tax in a recession should increase the government deficit and thereby stimulate the economy. At the same time, the marginal propensity to consume out of undeclared income is probably greater than out of declared income, as black market transactions tend to be handled in cash instead of being initially deposited into a bank account.

Supply-siders on the other hand should see this a victory for the Laffer curve: Tax evasion serves as evidence that high taxes might in fact lead to lower tax revenue due to distorting human activities away from the purview of the tax collector. Similarly, tax evasion should be more likely to occur in those parts of the economy where taxes are most burdensome and therefore serve to alleviate part of the distortions introduced by the government.

Even the market-monetarist should find something to delight in it: as workers can receive part of their compensation untaxed, they should be willing to work for lower wages and thus the downward adjustment of sticky wages should be accelerated by the tax evasion. In effect, the social norm that taxes may be avoided in bad times delivers the employer payroll tax cut that Scott Sumner, for instance, has advocated, but without having to go through the slow process of the legislature.

All things considered, the debate about tax evasion should be a lot more lively than it is, with supporters holding their own against detractors. I don't know why that is not the case. Is mood affiliation with the coalition against the thing with the bad name "evasion" the reason?

This all assumes that medium-term government debt stabilization is more easily feasible once the crisis is over and that the central bank does not actively try to sabotage the recovery, but those things are a given, right? Right?

Monday, September 10, 2012

Nobody produces in Shanghai anymore...

I enjoy reading articles that see the same phenomena that I am interested in though a different lens. Recently, I stumbled across just such a specimen in the form of Eli Friedman's essay "China in Revolt". It is an assessment of the current state of the Chinese labor movement, which has entered a new era of empowerment as the Chinese economy bumps up against the limit on growth imposed by increasingly scarce skilled labor:
Minimum wages are going up by double digits in cities around the country and many workers are receiving social insurance payments for the first time.
Labor unrest has been growing for two decades, and the past two years a-lone have brought a qualitative advance in the character of worker struggles.
Friedman supports this thesis with several stories of successful, albeit oftentimes violent, struggles by workers in various parts of China for higher wages, more rights etc. 

While this might sound like a success story for the proletariat, Friedman loses me on the almost comic attempt to paint this relentless march towards prosperity for the working class as just another Pyrrhic Victory:
Perhaps workers can win a wage hike in one factory, social insurance in another. But this sort of dispersed, ephemeral, and desubjectivized insurgency has failed to crystallize any durable forms of counter-hegemonic organization capable of coercing the state or capital at the class level.
...Capital, meanwhile, has relied on several tried-and-true methods to prop up profitability...

Within the factory, the biggest development of the past few years is one that will be drearily familiar to workers in the US, Europe, or Japan: the explosive growth of various kinds of precarious labor, including temps, student interns, and, most importantly, “dispatch workers.”
...But the big story in recent years has been the relocation of industrial capital from the coastal regions into central and western China.
Where Friedman paints the movement by capitalists towards employing more people in the Chinese interior as a desperate attempt to prop up a failing system, I see prosperity spilling over from one region into the next, as increasing wages and productivity in one part of China makes it increasingly worthwhile to complement the increasing focus of coastal workers on high wage and high productivity activities by moving some less-skilled jobs into poorer provinces where they still provide better opportunities to workers than the alternative of subsistence agriculture. 

While the labor movements in many countries often invoke the imagery of locusts moving on after a greedy feast when they speak about the global movement of capital, I think this completely misses the point that factory jobs spill over into other regions because of the high wages they have brought rather than the devastation.

I think the best way to think about the problem with the locus metaphor is through the paradox in the words of Yogi Berra:
"Noone goes there anymore. It is too crowded."

Moving on only makes sense for capitalists if the high wages in a place have made it relatively unsuitable for low-wage tasks required for some aspects of production. This is the result of too many capitalists trying to employ the inhabitants of a certain country or region and can therefore not coincide with capitalists having abandoned that same place to see it drop back into misery.