My best shot at – Globalization

Whether or not the globalization is good for someone is difficult to say. But it is quite easy to tell if it is bad for someone. And the first thing that those who are wronged by globalization will tell you is: globalization took their jobs. One could argue that the jobs simply moved elsewhere and those who have them now needed those jobs even more. But globalization does not need to be a zero sum game. True progress brings benefits to all or at least close to it.

Let’s take a simplified look at how it works now.

• First a developed and rich country signs a free trade agreement with a populous developing country.
• Next thing that happens is that the highly subsidized agriculture from a developed country floods the developing country market with their products, driving local farmers out of business. This does not create many new jobs in the exporting country because the agriculture in developed countries is highly automated.  However, in developing countries the farming is less automated so the job loss is hugely disproportional.
• Now when the poor country is full of desperate people looking for any kind of job to sustain their families, the rich corporations start opening factories (often by moving them from the developed countries). The wages are low, the risks of injuries and death at work are high as the labour laws are weak or nonexistent, and there is little to no regard for the environment.
• The developed country is soon flooded with cheap imported goods, and the process of moving manufacturing continues, leaving more and more workers in the developed country without jobs. They are now desperate and forced to work for lower wages just to sustain their families.  The rich corporations suddenly have dual benefit from cheap labour both at home and abroad. It boosts their profits and even more - executive bonuses.
• The situation is getting even worse by burning an awful lot of fossil fuels to move agriculture products and manufactured goods back and forth over long distances instead of making them locally. Is the global pollution exacerbated by unbridled globalization?

Two centuries of struggle for fair labour laws, working conditions and pay, are being undone as the jobs are moving to countries with worker’s rights similar to those in Britain in 1800’s and  the US in 1870’s. It is de facto a global repeal in the making. On paper, the laws will stand and even improve, only there will be no decent jobs, just minimal wage jobs for families to live on. 

Is it all bad about globalization and free trade?

Of course not. There are many benefits to human kind in connected world. They teach that in macroeconomic courses. So instead of reaching for protectionism and isolationism, let’s see how to make globalization better.

Globalization 2.0

Let’s assume that these four countries sign a free trade agreement: UK, Canada, Australia and New Zeeland. That would be easy. Those countries have the same head of state, similar labour laws, social safety net, similar wages and environmental policies. They have strong democratic institutions and are connected on security issues, defense and have strong cultural ties. If for example these countries had free movement of goods, services, capital and workforce, they would all benefit similarly from unhindered trade alleviating the gluts and shortages, without jeopardizing domestic jobs creation. In this idealistic example we see that the free trade between “similar” countries brings benefits, with little drawback.  While these four are the unique example that cannot be replicated, let’s explore the possibilities to extend this idea more broadly.

The tier based trade

The concept is simple. Define the set or rules to qualify countries into tiers. These would be the qualifying criteria:

•         Wages in terms of real purchasing power. The idea is that similar work should pay for similar quality of living.
•          Labour laws. The employees should have similar working conditions and safety, working hours, and  benefits.
•          Economic freedom.
•          The rule of law. Laws are meaningless if they are not enforced equally to everybody.
•          Protection of property and investment.
•           Protection of environment.
•           Protection of intellectual property.

 It is important to refrain from including issues like human rights and similar politicaly/ideologicaly sensitive topics. However, the rule of law and economic freedom implicitly encompass those topics. I believe that the criteria balance the employee rights and environment with investors’ interest.

This is how it would work: 

Countries from the same tier trade without tariffs and the labour force is moving freely among them. The higher tier countries charge tariffs for importing goods from lower tier countries and vice versa. The higher the difference, the higher the tariffs.  

The goal is to make investments similarly profitable in most of the countries. The lower the wages in one country for example, the higher the tariffs.

What are the benefits? 

The governments in developing countries would be motivated to provide better labour laws, improve the standard of living and go through other reforms in order to qualify for the higher tier and thus be more attractive to the investors. As of now it is quite the opposite. Suppressing employees rights, keeping wages low and environmental regulations loose  attract foreign investment as long as there is at least basic infrastructure in place.

As it would  in the end improve life in developing countries it would in the same time protect  manufacturing jobs in developed countries. Furthermore, more production would be for the local or nearby markets. It is good for the environment because transportation over long distances creates more pollution.

This model is more sustainable than the current one, creates less social frictions, and as the pressure on the workforce eases, it is less likely to have social unrest and/or populist governments that will advocate protectionism and isolationism.

Who would implement it?

Ideally it would be done in WTO. In reality it is more likely that some smaller group of countries implement it and then others join freely. One group of countries could cluster around the US, another inside EU.  Even existing trade agreements can be updated using this model or something similar.

There would be one notable exception to this model: agriculture. Every country has its own agriculture fetish, whether it be milk and dairy in Canada, corn in the US or pretty much everything in France. It doesn’t matter. In Globalization 2.0 agriculture should be exempt from free trade, because it is too political. Otherwise it will be dead in the water from day one.

This is my best shot. Thank you for reading.

My best shot at – Taxes
Part 1: Personal taxes

Here is the imaginary story about two friends who live somewhere on the West Coast of North America.  Any similarity with real persons is purely coincidental.

Samantha earns $95,000 annually working in a biotech firm. She has a master degree in biochemistry. Her best friend, Vicky earns $55,000 working for the local government. Since Samantha earns much more than her friend, it is all but fair that she pays income tax at higher rate than Vicky, right?
OK, let's look a little bit closer.
Samantha grew up in a single mother family and had to do everything on her own. She is still paying back her large student loan. She is married with two children, but her husband is unemployed and staying at home with children. He used to have a part time job, but after having a second child the day care cost were higher than his income, so they have decided that they would live on a singe salary for the time being. They live in two bedroom apartment that they pay $2,500 a month. (She does not qualify for government sponsored affordable housing because she has "high" income.) They cannot even begin to save for down-payment for their own place as they live from month to month due to high living expenses, housing being the highest.
Vicky never married. She lives with her boyfriend in the apartment on the second floor of her house that she inherited from her parents. Her partner earns $65,000 annually working in education administration. They both have great benefits and pension plan. They have two one bedroom apartments on the main floor/basement of her house that they rent to their friends for cache. Nobody knows how much they charge their tenants, but the market price is from $1,000 per month each. Since their parents paid their tuition fees, they have no student loan and they do not need to save for down-payment.
Let's look at numbers.
Samantha's family has $95000/4 = $27,750 per family member annually before taxes. From that income they pay the rent, food and other bills.
Vicky's family has $120,000/2 = $60,000 per family member annually before taxes plus undisclosed amount from their tenants. And of course they do not pay the rent as they own the place where they live. The last offer from realtors estimated Vicky's house at $2,5000,000.
Now meet Vicky's first neighbour Jonas. He lives across the street from her with his two daughters. They bought their house for cache after they sold his parents' farm in Norway. His wife works on the oil rig and is paid and keeps her money in one of the tax havens. His older daughter plays piano and goes to IB school, while the younger is in French immersion elementary school, which is practically a government paid private school (equivalent to public school in UK). She's also a promising figure skater. Their house is newer than Vicky's with bigger lot. Jonas' house was estimated at $4,000,000. His family has access to universal health care, education system and other infrastructure and services for free as his wife works overseas and does not pay income tax and he does not work.
So Samantha pays the highest income tax of all three (Jonas does not pay income tax at all), while having just enough to make the ends meet, without any hope to owning her own property in her lifetime. 

While this story is imaginary, there are many cases similar to those in many parts of the word; Australia, the US, Canada, the UK, Israel to mention a few. 

It begs the question:

What is wrong with current tax collection?

As someone who lived and paid taxes in Canada, the US and the UK I noticed no significant difference in tax collection and its purpose. This is the situation that we have today:

• The heaviest burden of taxation is born by ever shrinking layer of working families.
• There are cities where some live in multi-million dollar houses and pay less tax (in absolute terms) than families who rent basement apartments. If the owners sell that property, they walk away with lifetime average wage worth, paying zero dollars in taxes.
•  In many countries people cannot afford to live in the cities that they serve. 
• The income  inequality is targeted the most by taxation (due to progressive taxation) and the property inequality the least, while it is the ownership of the property that distinguishes the wealthy from the poor and what gives the true advantage in every aspect of life.
•  Those who own properties in one country and have residence and pay taxes in another, contribute much less than the domicile population, while enjoying the same benefits. Some of them have members of their families living in those properties and having no income, but use health care, education and other expensive services for which they do not contribute fairly if at all.
• There are many investors who buy properties just to park their money, pricing out local population. They enjoy social and political stability, protection of their property, the rule of law and other privileges guarantied by democratic institutions without paying their fair share as their business is elsewhere.

Changing the current taxation model would be an exercise in political futility, but we can try to tweak it to make it better and fairer. 

Unified taxation

This proposal unifies income and property taxes to address property inequality in the same manner as income inequality. Here is  how it would work.

1. The income equivalent of the all properties is calculated. E.g. if a person owns properties with estimated market value of $500,000 (a house $350,000 and a condo $150,000), the equivalent income would be the annual salary that would be needed to qualify that person for being pre-approved for mortgage of that value. Let’s say that it is $100,000.
2.  All person’s taxes are added up. It includes total income tax, municipal property tax and taxes on any other revenues like dividends, capital gains and similar.
3.  Calculate the marginal income tax for the property equivalent income. In our example it would be $29,000 in the Canadian province of Ontario.
4.  Subtract all paid taxes from that sum.
5.  If the result is 0 or negative, the person pays no additional tax. If the result is positive, the difference is the unified tax that needs to be paid. In our example if a person paid $22,000 income tax and total of $5,500 for property taxes the total taxes paid would be $27,500. That person would have to pay $1,500 of unified tax. If that person paid $24,000 for income tax, the total tax paid would be $29,500 and the person would owe nothing, because total tax paid would be higher than property equivalent income tax.

(Another topic of supplemental tax on land is given here. Why a land value tax would get Britain building. While it is written for Britain, it is very much applicable to Canada and many more countries where builders are sitting on the land, not building to prop up the property prices.)

What would Unified Tax achieve?

•  Eliminate speculation from property market. Homes should be places where people live and raise their children. Not a place to park money. Not for speculation. Not for “Plan B”.
•  Compensate for tax loopholes exploited by the rich or any other tax avoidance (renting for cache, “grey” economy, pot growing etc). While the rich can move their money overseas to avoid taxation, they still live in their luxurious properties which they own (or members of their families). They live in countries like Canada or UK precisely for these reasons: Personal and public safety, law and order, security of their property, national security, social stability, good health care, freedom of movement, education, infrastructure  and democratic institutions that guarantee the continuity of all of the above. Well, it takes a lot of money to sustain it. Whether or not the property owners are citizens, have business or income in the countries where they own properties, they and their families enjoy all the benefits and they should pay their fair share, just as the rest of population does. No more, no less.
•  More reasonable property and rent prices. Holding unoccupied property would be too expensive and that property would be rented or sold thus boosting property supply. There would be no speculative buying that hikes prices in hottest locations. Families would not be priced out from those areas, just to put pressure on prices in other locations.  Also, some people would be motivated to move to less expansive properties after retirement. It will all calm property and rental prices.
•  Working families would be able to live closer to their work, as those properties would be more affordable. Shorter daily commute would mean less traffic congestion, and more importantly less pollution.
• Less expensive services. From grocery to services like child care or haircut, all businesses have to price in the property and rent costs. The customers in the end have to pay for it through higher bills. It applies to everybody: tenants, owners and visitors. 
•  Lower taxes without budget deficit. As fewer taxpayers avoid paying taxes, the wider population would contribute to the budget revenues, so the rest of population can enjoy lower rates and better benefits.

   

This is my best shot. Thank you for reading.