Average looking

Tax cuts no longer solve cost-of-living problems

Hi readers. This was supposed to be another entry in my series about democracy, but I hit a bit of a writing wall on that, with unfinished drafts intersecting with general recent busyness and travel commitments. So, let me come back to you with that. Meanwhile…

One of my daughters is learning about statistics at the moment. She is very clear on the idea of “average” (she calls it the “mean” to be fancy, but ‘average’ is fine with me, because I think we all have a super-clear idea what that means); even though she’s having to think a little harder about things like “standard deviation” and “confidence intervals”.

I think you also understand what an average is but—just in case—it’s when you take all the things, add them together, then divide by the number of things:

The average of 10, 10, 10, and 100 is 32.50

I want you to really pay attention to that. Like, really notice how three-quarters of the items in that dataset are 10, and yet the average is more than all of them combined.

(also, for my daughter’s reference, that’s an example of a large standard deviation)

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One of the first things a math teacher will tell you is, when things are pretty equal, thinking about them in average is pretty useful: The average of $10, $10, $10, and $15 is $12.50. That “$12.50” is fairly close to all the original dataset numbers, so it’s relevant in helping you understand the contents of the entire dataset.

But, what any good math teacher will also tell you, is when a dataset contains inconceivably-large differences, presenting them as an average becomes a completely pointless exercise.

It’s with that context that I want to talk about the kind of ordinary people who like tax cuts, and go on talkback radio, or write social posts or Letters to the Editor proclaiming how much difference tax cuts will make to the economy. And what a crock of steaming shit that sort of thing is.

Because, in virtually every modern tax cut, what the people who loudly cheer for them are not seeing (because the ultra-rich don’t call into talkback radio to mention it, or point it out in Letters to the Editor) is how most people might get $14/week or something back, some wealthy people are getting $8,000 a week back from the same policy.

The challenge we’ve walked ourselves into is, centre-right parties ideologically hate to raise taxes at all because they fundamentally believe individuals are better financial stewards of their money than governments (representing societies-at-large) are. And centre-left parties don’t want to raise taxes, even on the rich, because they already get blamed for too much bureaucracy.

You’ll notice these are basically the same (right-wing) argument, but that’s the nature of neoliberalism and the shifting of the Overton window. So, there’s a strong perception from the actual voting public (i.e. people who are neither desperately poor or otherwise disengaged) that tax increases are purely designed to take money “out of our pockets” and don’t deliver the equivalent value. A tax cut is therefore a very easy-to-sell policy for boosting the economy on average.

And, you know, I have some sympathy for those who reach these conclusions. Things like public healthcare and social safety nets and education and roads do seem to cost a shit-load of money, and these projects are often delayed or suffer from massive cost-overruns. Or they appear to only enrich consultants or criminals or “lazy bludgers”. So, I don’t want to argue here against improved efficiency in the public sector, or even smaller government bureaucracy. While I might not personally agree with the premise of those positions, I’m know any cherry-picker will be able to pick out clear examples of ‘wasteful public spending’—examples of that definitely exist!

Instead though, I want to consider how the “average person’s” wealth has been on a consistent upward slope since the 1970s and yet, somehow, for an awful lot of us, that just doesn’t reflect reality.

The average hourly rate of $10, $11, $9, and $100 is $32.50

The average cost of T-shirts worth $12, $17, $14.50, and $998 is $260

This all speaks to a very simple idea. An idea that we’ve become so distracted by self-actualisation, we’ve entirely forgotten: If we build a society of people, each with some foundational needs (shelter, healthy food, clothing, basic healthcare, and so on) which are not being reliably delivered. And we, simultaneously, are meeting atmospherically-excessive demands and desires for some minority in the same society, then our society is most-likely still over-achieving on delivering for the “average” person.

If you’re in politics or economics, that’s a good-looking headline!

And, the neat thing is it keeps working for you (right up until the guillotines arrive). Even if that luxuriated minority has so much stuff that even their excessive tastes can’t absorb it all, they can still just sit on a bunch of underutilised resources, or buy up more of our collective infrastructure and housing to grow the imbalance, and that will still be good for the average person… Share values, or savings, bonds, vacant houses, art, food waste—all of it is great on average.

But, in case you’re still on the fence about whether this is just fine-and-dandy trickle-down goodness, I’d like to propose a really simply motto for how a sustainable, productive society actually should work. I feel like your agreement or otherwise might also be a good Turing test for your humanity: No-one gets the good stuff, until everyone has the basic stuff.

The average lunch budget of workers spending $15, $20, $25, and $9,780 is $2,460

Back in the middle of last century, in most Western economies, now-inconceivable tax rates of 90% or more were not uncommon for the small group of ultra-high earners. In addition, taxes were applied at elevated rates on ‘unearned’ income (rent, dividends, interest) compared to more ‘productive’ income. Obviously, we’re all living now with the push, especially since the late 1970’s, to drastically reduce these individual taxes, and the ideological switch which turned tax from a tool for funding social need to an individual burden.

The logic of a reduced tax burden—and the ‘incentive to be productive’ tax cuts are justified by—seemed to make sense at the time. That’s because, back then, there was still a tangible sense that money was a neutral tool, used to buy and sell things. Systems like Bretton Woods, which literally linked the size of global trade to a vault full of physical gold bars, had only recently been abandoned. And the memory of just how quickly excessive wealth was turned into explicit power in the hands of the Robber Barons had been long forgotten, thanks to the Keynesian era of more public-centric finance.

So, it has taken some time for it to become clear again that allowing money to operate as a commodity in its own right, turns it into a cudgel for the wealthy minority. Where the poor use extra money to improve their survival, the wealthy use it to buy assets, lobby governments, and increase their autonomy over labour.

More explicitly, money for some represents how they exist in the world; while for others it is simply a tool for building a world that meets their requirements.

But, having now all experienced this divestment of our common wealth, alongside the degradation of public services which the vast majority of us couldn’t possibly hope to privately cover the costs of—healthcare, roads, policing, and education—it’s worth wondering why we haven’t universally realised we fucked up and should now be demanding a return to the ~90% taxes on excessive and ‘unearned’ income and wealth?

I think it comes back to those good-looking averages.

It looks like we’re doing ok. And, if you’re not, then you assume most other people must be in order for the “average” to keep improving. What we’re failing to see is, ordinary people going slowly backwards, and ultra-wealthy rapidly accelerating forward still plays as an improvement on average.

Wealthy people already pay less tax, utilising the financial industry and growing their wealth via low-tax methods (capital gains and equity, education, access, deductible income). I wrote a whole bunch of newsletters about it. They’re already set up to efficiently grow, so it’s hardly a conundrum when you’re a political party trying to grow the economy on average to just give them the tools to do that growing.

That wouldn’t matter so much if things were a bit more equal because, against a majority, it still wouldn’t grow the average enough to really move the needle in an especially politically ambitious way. But when the richest fraction-of-a-percent of people own half of the total wealth and therefore growth potential, it’s political suicide to allow their wealth to atrophy.

So, the stock ‘universal tax cuts’ are perfect politics to simultaneously super-charge the wealth of the wealthy, boost the average economy, and still appear like you’re thinking about the common voting punter.

But tax cuts do cost something.

You might subscribe to the Modern Monetary Theory crowd and say “just print more; taxes are just incinerated-money anyway”, but even that only works insofar as the direction the new money points the economy in is a productive one. Only, how do you ensure that, outside of running a ‘controlled economy’? So, instead, tax cuts generally come at the cost of reduced public services, which in-turn makes it more expensive to live for people who rely on public services. Or they require borrowing, which just shifts the burden into the future. And who does the country largely borrow from?

Wealthy people.

It goes without saying, governments are only able to ‘borrow’ from people with excess to lend. And, when they borrow, via fixed-interest government bonds and even through vehicles like Public-Private Partnerships, it reduces the pool of money available for lending. This then results in increasing interest rates, and increased interest rates on ‘safe’ investments like bonds and savings accounts and secured loans is superb for people who have money to lend, and painful for those who are on the borrowing side of the equation (like middle-class mortgage holders!).

Again, this would all be standard, manageable, economic reality if it wasn’t for the vast difference in choice available to the wealthy at the moment. See, growing wealth inequality exaggerates the ability of people with money to turn it against people without: If you’re wealthy and house prices rise, you can sell one of your ‘excess’ houses for profit; if you’re wealthy and interest rates rise, you can negotiate cheaper loans due to your increased collateral or simply concentrate your wealth in safe interest-bearing places; if interest rates fall, you have the equity to borrow more and buy up physical assets that will inevitably increase in value; if inflation increases you can move assets around or leverage the reducing real cost of any loans you have.

Basically, once the cost of actually “living” is not the slightest concern for you, you’re able to use all these financial conceptions to your advantage, while poorer people suffer with the reality of them.

This is how lots of people in developed counties are really struggling at the moment but, somehow, lots of economic measures are doing ok. House prices are high, new car sales and luxury goods are doing well, the sharemarkets are smashing records, bitcoin is popping, multi-national companies are posting impressive profits…There are, it’s fair to say, two very different realities—two alternative universes.

So, into that synthesis of univei¹, we add generic tax cuts. This, as I mentioned, has a real cost to public services, but it also puts more money into the economy. Some of that money will of course get spent on literal bread and haircuts, but any that goes to a wealthy household, who don’t need it, will just go into bidding up things like property and sharemarket prices.

They could spend it on innovation and paying any employees more, but why would they, when property and public infrastructure have much more dependable returns? And, in an unequal economy, where a bunch of this extra money is not spent productively, we get increased real inflation—everything gets more expensive simply because, while an average person is barely better off, the “average” amount of money per person has still gone up significantly, and its power is disproportionately spent on shit that further increases wealth inequality.

A government which has borrowed a lot (for example, to pay for tax cuts) actually likes this, because inflation reduces the cost of their borrowing and increases their tax take from the ordinary population, as wages have to rise and consumption tax-takes increase. Meanwhile, the rich continue to hack the system by buying physical assets, thus further reducing their tax burden and ensuring their wealth increases faster than inflation, while the less well-off just face a perpetual cost-of-living crisis because they can’t afford the real assets needed to offset inflation, and their wages and savings become worth less every day.

The average wealth of households with -$260k, -$30k, $140k, and 17.8M is $4.4M

If you wanted to grow your average economy by 10%, you can:

Devise policies to increase the combined wealth of the poorest three-quarters of households by roughly 2000%…

Or, grow the wealth of the richest household by around 13%.

The monetarists would say the solution to inflation is to slow down the economy by further increasing interest rates. But we now understand what happens when you do that in an economy with wealth inequality. What the past few years have demonstrated is inflation is incredibly painful for ordinary people, and eminently hackable for the wealthy.

That leaves us with only two true solutions to a cost-of-living crisis: improve productivity, or remove money from the system. Improving productivity costs money: You need to make commutes faster, fund science and education and art and accessibility, attract immigrants and keep them here with adequate infrastructure, offer kick-ass healthcare and social welfare or work-guarantee system to keep people productive... Basically, all the stuff that scaredy-cat governments consider way too hard or expensive.

This seeming-contradiction speaks to a bigger, more general problem, which is that much of neoclassical economics is designed to make it seems like the economy operates in logical, consistent, ways—with big transactions and wealth operating with the same physical rules as our ordinary markets and wealth do. It’s supposed to provide simple formulaic solutions to our economic woes. And, I’ve talked about that simplicity myth a lot, because it’s almost universally wrong.

Almost.

Because, in this case, there is a simple, formulaic solution: You tax people more. We’ve already established you can’t tax the poor or middle-class at that point, because they are suffering in an (unproductive) cost-of-living crisis. But we also need to stop ignoring the “average” fallacy where, because while our economies continue to grow, the lives of ordinary people in them are not actually being proportionally improved.

So, the solution? Tax the rich.

For fuck’s sake.

-T

1. I always found the word “universes” clunky, so just trying to make a new plural stick.