Power, Trust and the Household Charge

Sheila Killian: This afternoon Erich Kirchler gave a very interesting seminar here at the Kemmy Business School on the factors that affect taxpayer compliance or evasion. He finds two dimensions – power and trust – impact on the overall tax take. If the taxing authorities are seen to have high power, unsurprisingly this will mean greater compliance with tax laws. However it is equally important, particularly for self-assessment, that there is high trust in the system. If taxpayers don’t trust the authorities to use tax revenue properly, then the level of taxes raised will fall.

Professor Kirchler mapped the overall tax take along these two dimensions as a “slippery slope” that looks like this:




You can see how the ability of a country to raise taxes falls away if the power of the authorities, the trust in authorities or both are reduced.

Voluntary compliance is very a delicate thing, requiring a public understanding of the role of taxes in maintaining society. It’s very difficult to foster, particularly in a post-colonial society. In Ireland, only a few generations ago, to avoid your taxes was seen as a patriotic act of rebellion, and to pay was seen as funding the oppressor. We have an emerging maturity about taxes, visible in the way in which tax evaders are publicly criticised now, but this new understanding is shockingly easy to damage.

In Ireland, the fact that the household charge became the focus of the protest against austerity indicates that it has been damaged here. Since there is no sign that people believe the authorities have less power than before, it follows that trust in the system has been lost somehow, in a way that relates to the austerity measures, and the public discourse around them.

Some questions around this:
- If taxes in Ireland are seen as being used primarily to repay banking debts which are seen as unfair, does this diminish the overall trust people have in the tax system?

- How much does the artificial divide which has been created in the public mind between the public and private sectors degrade this trust?

- If the social norm becomes non-payment, even as part of a protest, will we reach a point on that slippery point beyond which it will be difficult to recover?

by Sheila Killian


Source of graph: Journal of Economic Psychology, Volume 29, Issue 2, April 2008

Rebuilding Trust: Priority Number One

Slí Eile: There is an urgent and unavoidable need to generate hope at this time. In a previous blog here, there is a series of principles which need to be debated. Too many people are losing, not only their business, their jobs and their homes but too many are losing all hope for themselves and their families. We are in danger of talking and thinking ourselves into a deflationary trap brought on by an imbalanced public debate in which TINA (There-Is-No-Alternative) is dished out 24/7 to a public that has many very angry and very fearful individuals, groups and communities.

Any international agency, Government or partner to the process of consultation and deliberation which grew up over the last 20 years needs to reflect on the long-term economic, social and personal risks in pursuing a very partial and extreme response to the current economic crisis. In the stampede towards ever-rising house prices, incomes, tax cuts and conspicuous consumption for sections of society many of us started thinking or assuming, implicitly, that this could more or less go on indefinitely (soft landing accepted). This was dangerous. It typifies the bad effect of ‘group think’ dished out in big Property Supplements, wages-chasing-house-prices spirals, inflated salaries for top execs entitlements culture. Individuals stepping outside this group think were treated as pariahs and eccentrics in some cases. All that hubris and false confidence has, suddenly, given way to denial, shock, anger, fear, paralysis and a deadening hopelessness and passivity in the face of the economic and political onslaught unleashed by the Great 2008 Recession. Now, we have a continuation of ‘group think’ in the opposite direction.

The first principle of any economic and social recovery is a recovery of TRUST and COOPERATION. Informed by the values of democracy, solidarity and equality I would argue that we need a new Social Solidarity Pact to replace Social Partnership in its recent form. While there are sharp and seemingly irreconcilable positions adopted by various partners from ISME to ICTU to IBEC to others, the situation now calls for courageous and imaginative leadership from all progressive forces committed to rebuilding a new Ireland and one where common interests can be identified. Part of this must involve ‘doing no harm’ There is a real danger that fiscal stance, uniquely in EU terms, will go overboard in the coming 24-36 months as additional cuts will drive up unemployment, further erode tax receipts and barely make a dent in the overall fiscal deficit (indeed as pointed out on numerous occasions on this website the deficit keeps rising above the anticipated level as each fiscal correction takes its toll on consumer income and confidence).

The next 100 days: thinking about risk, trust and ethics

Slí Eile: “the citizens of this country are understandably angry about the state of the banks. They are bitterly disappointed by the failure of our regulatory system. They are appalled by the details of the reprehensible behaviour of some in the financial system and in the property sector in whom they placed their trust and they are also angry with the Government. Many ask why we are putting money into the banks while they endure the brunt of the difficult budgetary decisions which we must take. There is now unfortunately a breakdown of trust in the entire system.” (Minister for Finance, Dáil Eireann, 16 September 2009).

…. a ‘breakdown of trust’ …. ‘in the entire system’

Lets mull over that especially as it is said by the elected representative with responsibility for spending close to one half of GDP, overseeing the banks, NAMA, macro-economic policy and all those major choices and ‘hard decisions’ pending in the next 100 days.

How did we arrive at this point? Why? If trust is like a pane of glass shattered in an instant or over many instants – how can it ever be rebuilt again? We are all only too familiar with the story of betrayed trust from residential institutions for children to banks to politicians and many other organs of respectable society.

Trust
A surprising feature of any economic system is trust. Trust is to the operation of markets as oxygen is to life. A collapse in market ‘sentiment’ – read ‘feeling’, ‘mood’, ‘instinct’, ‘perception’, ‘belief’ – can be dramatic, sudden and stampede-like.
That soft, touchy-feely, hard to quantify, hard to legislate for thing is known as trust. At its core, trust is what people expect others to do or not do. It is an expectation founded on experience or something else related to human evolution and experience over many generations.

Trust is predicated on the basis of perceived or acknowledged risk – where I risk some good or resource on the assumed or perceived good will of others to act honourably. I trust you to reciprocate a favour or service at some future date; you trust another to reciprocate a favour done to you; I trust that person and that person trusts me on the basis of his/her trust in you. Generalised inter-personal trust is the result of a countless number of exchanges over time.

But ….. trust among various social groups and between various political, legal and corporate institutions is the agent which sustains economic progress. For all its warts and limitations, social partnership between 1987 and 2008 helped us to emerge from where we were to a position of relative economic strength. It was built – to some degree on cooperation and trust – the idea that give and take can yield gains for everyone in the medium-term that are would not be possible if each economic interest seeks to maximise its interests without regards to others.

Clearly, trust has been shattered ‘in the entire system’ and this is as serious as it gets. Rebuilding it will require radically different policy responses and joined up thinking. If some form of social and economic partnership is to emerge from this current impasses it will have to take a very different form to what went before. It may even have to take a much more emphatic cross-border and transnational dimension where, increasingly, the only way to deal with global issues such as the race-to-the-bottom, climate change and market instability is through combined global cooperation allied to local initiative.

Risk
NAMA, Post-Lisbon, Sovereign debt defaults, Social Cohesion, Global Warming, future pension liabilities, terrorism, poverty….. or loss of employment and income, break-up of relationships, ill-health – the list is endless. Risk – like power – is everywhere. But, is it such a bad thing?
Have we too much of the wrong type like cholesterol? How do we manage risk – personally, corporately, at the level of society?

If we as parents, community, society do not invest in our young children what are the risks for them and everyone else? Everything has consequences and sometimes we have to make difficult choices with different types of risks. If only we could calculate the risk mathematically and feed it into a risk model to give us the optimum response strategy! But, life is of course not that simple.

In strictly market terms, ‘risk’ denotes that which is associated with effort or capital (any type including physical, human, community, ethical) where the ‘return’ or the outcomes are uncertain. The uncertainty of return provides a justification for a premium ‘payment’ to the one who undertake the risk. Underlying any risky venture whether in terms of economic production, medical intervention or venture sport … there is a time element. One decides to chose one option or course of action over another on the basis of rational, moral or instinctive grounds. The result of such a choice may not be apparent for a long time. The ‘payback’ or secondary impacts (on others as well as oneself) takes time to yield.

How does risk apply to trade in goods, services and finance capital? Since the world is far from the deterministic machine image used by some 19th century social engineers and theorists, the impact of any investment or consumption strategy is unknown. All we have to go on is (i) past experience and data (of which we have more than ever), (ii) some theory or set of theories about the way people, markets, institutions work and (iii) preferences with regard to which things matter most in life.

In many ways the financial swinger market party of the last two decades gave a huge outlet for indulgence in ‘risky’ behaviour. Ironically, a lot of the party goers got infected and now very few will party anymore for fear of contracting more bad assets. Put another way, banks stop lending to each other and nobody trusts anyone else or what the value of anything will be in a year’s time. Short-termism which drove us to where we are now becomes even more dominant. And so we have an extraordinarily short-termist approach to correcting the fiscal deficit while people just assume that one or both of the following will happen: property values will recover by a sufficient amount as to pay for NAMA in the coming decade and international recovery will, eventually, lift us out of the slump in demand and consumer/investor confidence.

Ethics
Greed has been cited as a key ingredient in the current crash. We had a relentless, ego-driven, empire-building, look at my stash mentality. Compete, grow, conquer, excel …. It gave full vent to primitive instincts. That amazing book ‘Lord of the Flies’ by William Golding tells a story about school boys stranded on an isolated island where chaos breaks out as they divide into competing groups. I often wonder how thin a veneer civilisation is over an underground of very destructive forces…..check out Dick Fuld who drove Lehman to collapse. But, we would be very wrong to think that the sum of greed on the part of many individuals was the only factor that brought us to where we are. The very institutions, cultural norms, societal structures and assumptions that underpinned our ‘entire system’ were based on a view of how things worked and how things should work.

Just when many in Government, economics and finance thought that a bit regulation and fiscal smoothening would see off any repetition of the Great Depression we got the Great Recession. If people just looked at the recent experiences of Japan, Sweden, Finland and many other places and thought through the possible sequence of triggers set off by one big banking collapse in the US economy they would have realised that a massive and systemic collapse in confidence, trust and coordinated market response is possible. People can act like rational beings in a way that wrecks the larger polity and market. It is a type of Prisoners’ dilemma so beloved by game theorists.

The next 100 days will tell a lot. A courageous Government in Ireland would:

* acknowledge the full truth of how we got to where we are now
* give example and take the lead by applying its own medicine to itself
* engage all those charged with economic recovery in an open dialogue based on facts and values leading to practical solutions and policy adjustments painful as they will inevitably be
* take charge of the seriously ill banking system in a way that is just, workable and effective from the point of view of restoring economic confidence in the medium-term (none of which I think NAMA meets)
* afflict the comfortable and comfort the afflicted.

I am afraid that on this very last point, we are witnessing more the exact converse.

Trust, Empathy and Trade

Sli Eile: That norms of trust, empathy and cooperation underpin the simplest of economic transactions has been a recognised fact by economists back to Adam Smith. The latter got something of a bad press for his take on calculated self-interest and the invisible hand. Yet, he also wrote the 'Theory of Moral Sentiment'
Writing on a US blog, Maia Szalavitz says:

The U.S. has historically been considered a high-trust society. Now, post-crash and post-Madoff, America may need to reconsider trust: where it comes from, how it can be damaged, and how it can be repaired as one of the essential ingredients for a lasting recover.

Any lessons or relevance to the other side of the Atlantic?