Extending Democracy; A Path-Dependent Process

Wednesday, 2 September 2020, 4:34 pm
Article: Keith Rankin

In practice, democratic political reforms are usually incremental, though typically seen as part of a process leading to wider and more embedded improvement. Reforms are 'evolutionary' – indeed, in a technical sense – in that they improve the 'fitness' of democratic society. Unlike biological evolution, which is a fully blind process, the process of democratic evolution is only partially blind. There is an inchoate sense of 'destination' about political reform – or at least the idea that reforms take societies to better places, if not the best place.

The Problem of the Local Optimum

Important concepts in evolutionary theory are those of fitness landscape and local optimum. We can think of a contour map, with better places (eg with respect to democracy) being those at higher altitude, and the best place being the highest attainable altitude. Whereas a local optimum may be a hill, the actual optimum is somewhere else, a mountain.

In a blind process, a local optimum can be thought of as the endpoint of a sub-optimal trail randomly followed. In a process with vision, however, it is possible to 'know' that you – or your society – are at or approaching a local optimum, and therefore to know that you could have taken a better path. A part of that knowledge is that, to get on the best path – or even simply a better path than the one you are on – you first have to retrace at least some of your steps.

The more vision you have when you make a choice that takes you on an improvement pathway, the less likely you are to make a suboptimal choice. If you can see that the path you are contemplating takes you up a hill – or even a mere hillock – while another path takes you up the mountain that best represents the optimal policy outcome, then that sightedness minimises the chance that you will make the wrong choice.

Sometimes the difference between a hill and a mountain is subjective. A sighted person with one set of beliefs may consider 'Object A' to be the mountain, and another sighted person with a different set of beliefs may consider 'Object B' to be the mountain. Object A upholds the benefits of one belief-system; Object B the benefits of another belief system. There is conflict.

In other situations, the mountain fully incorporates all the benefits of the hill, while having some benefits that the hill does not have. In this case, all rational sighted persons – regardless of their differing values – would choose the path to the mountain ('Object M') over the path to the hill ('Object H').

There may however be sequencing issues. The mountain M may offer benefits X, Y , and Z. (These three should be understood as uncontested benefits; as agreed benefits, though the relative importance of each benefit may be subject to disagreement.) The hill H may offer benefits X or Y; or both. A person whose narrow or impatient vision is particularly focussed on benefit X or Y may choose the hill over the mountain, despite the fact that both choices give both benefits.

(In posing this set of binary choices – Option M versus Option H – each choice involves comparable cost; the choice is based on the 'seeing' of the benefits. However, choosing H and then reversing that choice involves additional cost; it's cheaper to make the better choice first up. Having noted that, it is also costly to delay making a choice; an inferior choice might be better than making no choice. The opportunity cost of choosing H over M – and then settling on H - is Z. The opportunity to have Z in addition to X and Y is lost.)

Democratic Benefits X, Y, and Z

In what follows, X is reducing the voting age to 16, Y is making the income tax scale more progressive, and Z is the simple adoption of the Universal Income Flat Tax mechanism (UIFT). Before looking at these benefits together, it is necessary to comment on them individually. In doing so, I make the claim that all three represent objective enhancements to democracy. I also understand that – in today's querulous social environment – there will be initial objections to all three of these suggested benefits. Nevertheless, I am sure that a substantial majority of people believe that democracy is a desirable system of social organisation, and that more democracy is better than less democracy. I believe that the arguments in favour of these benefits are persuasive, at least through a democratic lens.

Last month, the matter of the voting age was in the news: eg Teenagers ask court to lower the voting age, and note this 2018 petition. As I see it, there are three major democratic benefits associated with this reform. First there is a simple extension to the franchise. While this is a valid argument, it is the least persuasive reason because this argument becomes problematic if extended to even younger ages.

The second benefit (Y) is that it makes sense to have a single age that defines adult responsibility; and I am inclined to believe that the arguments in favour of 16 are stronger than 18 or 20 or 21. (Having a single age defining legal adulthood does not refute the fact that there is a life stage from around 16 to under 25 in which older people – especially parents – continue to have duty of care towards their young people. Nor does it suggest that organisations – such as the police force – cannot set their own age limits for recruitment.)

The third benefit is that, at age 16, people for the most part are still at school and living with their parents; and are still relatively open to civic guidance from their elders (including grandparents). So, 16 or 17 is a good age for young people to enter the world of democratic participation, facilitating a cultural bias towards participation over abstention.

On the matter of progressive taxation, the central issue is conceptually simple. It is that, for higher incomes, a person's disposable income (ie income after taxes and public benefits) should be lower as a percentage of their gross market income (ie income before taxes and public benefits). Essentially, it means that taxes should rise as a percentage of market income as market income increases. This commitment to 'progressivity' is one of the core principles of the 'liberal democratic' tradition that was forged in the nineteenth and twentieth centuries.

The particular measure which is widely advocated on the political left in New Zealand is that New Zealand's income tax scale should be extended with the inclusion of an additional tax bracket; something like a tax rate of 40 percent that would kick in at an annual income threshold of about $150,000. Australia has such a tax bracket, as do many other countries. It would in principle increase the progressivity of New Zealand's income tax scale; and New Zealand has one of the least progressive income tax scales among developed liberal democracies. As in case X (the voting age), there are limits. While a new income tax like this may enhance democracy, further extensions of the 'taxing the rich more' concept become democratically (and otherwise) problematic.

On the matter of the simple adoption of the Universal Income Flat Tax mechanism (UIFT), there is no contest to the argument that this is an extension of democracy. By reimagining the existing progressive tax scale, and filling in the few 'cracks' so that no adult is economically disadvantaged, this is a wholly desirable democratic reform that enables every economic citizen to receive a weekly public equity dividend (of $175) in exchange for an income tax rate of 33 percent. (All people earning over $70,000 per year already gain the full $175 weekly benefit; they can calculate their disposable incomes by reducing their gross weekly incomes by 33%, and then adding $175.)

(Note that existing critiques of proposals for a Universal Basic Income are critiques of policies that have substantial differences or add-ons compared to the simple UIFT proposal. Right-wing critiques of 'big-bang' UBI proposals mainly focus on financial costs, financial priorities, and labour supply disincentives. Left-wing critiques of these UBI proposals mainly focus on financial priorities, income inadequacy for the most disadvantaged, and the lack of help for people with special needs that exists in some UBI proposals.)

This simple reimagination proposal (UIFT; Benefit Z) has a small financial cost – the cost of filling the few cracks that inevitably exist in present bureaucratised income support regimes – and many financial and non-financial benefits.

The problem I am concerned about here is that, if either of the other proposals (Benefits X or Y) is implemented first then, then the subsequent costs of Benefit Z are raised. Both Benefits X and Y – on their own – reflect sup-optimal pathways towards the greater goal of democratic reform.

The Young Person Problem

Most of the 'cracks' in the present 'bureaucratic regime' are people aged 18 to 24. While a few are in secondary school, most are either in tertiary education or low-wage (often casual) employment. Of those in tertiary education, most do not qualify for a student allowance on account of their parents' incomes. (Instead they have the option of a nine-month student loan 'living allowance'.) Of those in low-waged employment, they get nothing like the unconditional $175 per week that many of their parents receive.

This means that the financial cost of the simple UIFT proposal relates mostly to people under 25 years old.

The natural age to treat as the age of adulthood at present is 18, given that it is the age of enfranchisement, and that 18 is the age for which income-tested 'Working for Families' 'tax credits' are no longer payable, on children's behalf, to their parents.

By decreasing the age of enfranchisement from 18 to 16, that would require the UIFT mechanism to displace Working for Families at age 16 instead of at age 18. All 16 and 17 year-olds would qualify for the larger benefit. Thus, the financial cost of a subsequent UIFT would be raised by the cost of paying public equity dividends to 16 and 17 year-olds. This in turn increases the chance of the UIFT – Benefit Z – being rejected on the grounds of financial cost.

It means that it would be better to introduce the UIFT before reducing the age of adulthood to 16. Once a UIFT (Benefit Z) is in place and seen to be neither too expensive nor employment-discouraging, then the later argument for reducing the age of democratic entitlement to 16 should be unproblematic.

To get onto the optimum pathway – the trail to mountain M rather than the trail to hill H – Benefit Z should come into force before Benefit X.

The Progressive Tax Problem

In 2020, it would be simpler and less costly to implement simple UIFT – Benefit Z – than in Australia. In Australia, the tax rate would have to be 37 percent (rather than 33 percent), but that's not the problem. Australian economic citizens would get a public equity dividend of $240 per week, and pay 37 percent tax on all their income. The bigger problem is Australia's top tax rate of 45 percent levied on annual income in excessive of $180,000. Australia already has Benefit Y.

If the 45% tax was to be retained upon introducing UIFT, then Australia would have a two-rate rather than a single-rate tax scale. It would mean that people with declared earnings of more than $180,000 per year would experience a clawback on their public equity dividend. That would be undemocratic – to deny a rich person a public equity dividend would be as undemocratic as to deny them the vote. Yes, rich people too have rights.

The more sensible thing to do in Australia would be to simply wipe the 45% tax rate, as redundant and inefficient. That could be politically unpopular though, especially with voters on the left whose principal policy ethos is to transfer (redistribute) money in a targeted way from the rich to the poor.

So, if New Zealand introduces, in 2021, an Australian-style top tax rate, then the pathway to a simple UIFT would be impeded by the practical requirement to abolish that new top rate. It means that, if the second-mentioned of the democratic reforms – Benefit Y – was introduced first then we would be on Pathway H, climbing the sub-optimal hill rather than the more-optimal mountain.

Pathway M – to the mountain – is reached with least cost by implementing Benefit Z first; and X soon after, once any fear of Z has been dispelled. What of Benefit Y? Well, a natural part of the UIFT mechanism is to raise the tax rate and to raise the public equity dividend, under circumstances that economic productivity is increasing or that the income distribution is too unequal. If we properly understand the definition of progressivity, then it turns out that UIFT gives us an efficient way to achieve Benefit Y. The requirement is that simple UIFT is implemented first, and that its underlying capability to counter inequality is employed.

Summary

In our eagerness to make small changes that enhance our democracy, we may be encouraged to make small ad hoc reforms that subsequently make the more important reforms more politically difficult and more financially expensive to implement. So long as we choose to not be blind – so long as we reject wilful blindness – we can see both the mountain and the hill which represent socio-economic improvements. If we start climbing the hill rather than the mountain, then the mountain becomes further away and more difficult to reach. That's why vision is an important decision-making tool, and why we should understand 'vision' to be 'seeing' rather than 'believing'.

© Scoop Media

Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

Contact Keith Rankin

• Website - Kieth Rankin