Justice in Economics PDF

The following paragraphs are a translation of the sub-chapter “Gerechtigkeit” in: A. Novy, R. Bärnthaler, V. Heimerl (2019). Zukunftsfähiges Wirtschaften. Beltz Juventa. What do humans need? Psychological research offers insights of basic human needs beyond material welfare. Human wellbeing increa...

The following paragraphs are a translation of the sub-chapter “Gerechtigkeit” in: A. Novy, R. Bärnthaler, V. Heimerl (2019). Zukunftsfähiges Wirtschaften. Beltz Juventa. What do humans need? Psychological research offers insights of basic human needs beyond material welfare. Human wellbeing increases with competence, autonomy (self-determination) and social relatedness (belonging). Competence refers to the ability to acquire competencies to shape those aspects of society, community, work place, household that are important to a person. It requires the acquisition of the ability to learn, understand and apply knowledge. Autonomy is the ability to do what an individual would like to do. Decisions that affect an individual’s life should be taken by the individual in accordance with the goals individuals set for themselves. Social relatedness refers to the need of people to belong and feel save. As social beings, humans require people, groups and communities where they are valued and where they can contribute. How those basic needs are satisfied depends strongly on the socio-cultural context. But the literature suggests that the simple provision of basic needs is insufficient for human beings to live a fulfilled and satisfied life. Satisfaction of all of those basic needs are necessary and they cannot be traded off against each other. The question is though how we best accomplish the distribution of resources for people to meet their basic needs. The answer is related to our approach to justice: what is considered fair and unfair? Approaches to Justice Justice The concept of justice supplies us with several criteria for evaluating human behaviour, economic decisions and social orders. Equal should be treated equally and unequal should be treated unequally. But does this imply equal pay for equal work? If someone is paid worse only for reasons of gender it is perceived as unfair. It is perceived as fair, however, if a person is paid more because he or she worked harder and more diligent. Different concrete situations and varying concepts of justice influence the assessment. In the following we will briefly elaborate on some important concepts of justice. Needs-based justice favours a distribution of resources that satisfies primarily basic needs. It assumes equal rights and human dignity and guarantees a minimal (or appropriate) covering of these basic needs. Examples are claims for an unconditional basic income or the Austrian “bedarfsorientierte Mindestsicherung”. These measures aim at ensuring participation in a society. Even people, who do not or cannot supply activities demanded by the market, should accordingly be protected from poverty and impoverishment. The definition for what is a basic need and what is a luxury good is, however, blurry. According to self-determination theory, the satisfaction of psychological basic needs like autonomy, competence and relatedness is a very demanding task and goes far beyond what is usually understood as basic needs: Free secondary education and free access to universities? Health care and regular treatments? And is the active participation in society, the professional world and public life also a basic need? All these questions have different answers, depending on the perspective taken. According to the concept of performance-based justice, remuneration should be based on what each individual contributes. The Austrian pension scheme is an example for this: who pays more during his professional life, receives more money during retirement. Unequal pay is fair because unequal contribution should be remunerated unequally. As people contribute differently, only unequal compensation can be fair. When all kids gather berries in the forest and every kid is only allowed to eats its own berries - that is the concept of performance-based justice. If all berries would be collected so that everyone gets yoghurt with berries for desert – that is the concept of needs-based justice. The challenge is to individually assess what a valuable contribution is and how to objectively measure it. In figure skating or ski-jumping, objectivity is approached through judges. In science, performance is assessed through indicators like evaluations or the number of citations. Marktgerechtigkeit (justice of markets) is a special form of performance-based justice, leaving the “objectivity-assessment” to the market. The pay of a cook does, accordingly, not depend on her level of training or previous job experience, but rather on how many customers consume at the restaurant and how much they are willing to pay for the cook’s performance (to cook a good meal). Consequently, according to Marktgerechtigkeit, it is fair to have very high wages in investment banking and to have low wages in care jobs because the laws of supply and demand guarantee higher incomes to the former. Fair is, thus, what is offered at the market, not the effort that a certain performance entails. What is chosen on the market reflect the preferences of the participants. But these preferences are not just given intrinsically but are influenced by external factors such as socialisation and marketing. Apple, for instance, has raised its marketing expenditures by 50 percent in 2016 alone to a record high of 1.8 billion US Dollar. Nine of the biggest ten pharmaceutical companies spend more on marketing than on research. Furthermore, the concept of Marktgerechtigkeit does not take into account the differing starting points of the participants in the market. Not everyone has the same opportunities of being successful in the market (or can spend unlimited resources on influencing people’s preferences). Additionally, some contributions are not considered, such as the unpaid care of relatives or children. Does this mean that caring your relatives is not a contribution or performance in itself? And is the contribution of an investment banker that much higher than that of a caregiver? Marktgerechtigkeit and performance-based justice often arrive at different conclusions. Justice of opportunities is concerned to offset inequalities of individual starting points. People should be entitled to have the same initial opportunities. For example, empirical research shows that a child from an affluent family is often better graded in school than a child of a poorer family. The latter probably receives less help from its parents, since they are less likely to have a good education themselves and cannot afford tutoring. The former is likely helped by its parents with a higher level of education or paid tutoring. In order to prevent equal treatment of unequal individuals, legal and socio- economic measures can help to provide equal opportunities. In the above example this could be done through the provision of free tutoring for children from households with less income or decent, affordable public childcare to ensure all children are equally supported. Structural inequality with regards to access to education or in the labour market can be counteracted through positive discrimination. Positive discrimination favours groups in society who are historically and continuously disadvantaged because of, for instance, race or skin colour, gender or social milieu. Examples are companies incorporating a quote to hire people with special needs, academic scholarships for low- income groups, quotas for women in leading positions or less strict regulations for CO2 emissions for world regions who have historically emitted less CO2. Participatory justice is an expanded concept of justice of opportunities. Every individual should have the chance to participate in the social and economic life of a society. People are able to participate in their community, their neighbourhood, city and society if they have access to goods, services and infrastructure and if they are involved in social decision-making processes. In short, it is about access and participation. Infrastructures that enable people to have a good life include health and care systems, public transport as well as environmental and cultural goods. Participatory justice is different to needs-based justice as it is not reduced to the distribution of resources. It includes more than just formal equal opportunities and the absence of legal discrimination. Additionally, it includes performance-based justice because it seeks an economic system in which people can live to their full potential and where it is worth contributing something meaningful. The last years have seen an increasing ecological awareness which has influenced the understanding of justice and, thus, also participatory justice. It includes environmental justice as a responsibility for people who are negatively affected by the consumption and production in the affluent parts of the world – mostly low-income group in affluent countries and the population of poor countries. Additionally, generational justice values the interests of young and yet to be born generations. It is, therefore, necessary to consider that a participation in the economic and social life is to be ensured also in the future and in other parts of the world. Source: Translated textbook chapter by …. Translated by Hans Volmary Inheritance tax is fair but unpopular — is there a solution? As the Conservatives contemplate abolishing the charge, Labour is exploring a lifetime gift tax. By George Eaton David Lloyd George once laconically observed that “death is the most convenient time to tax rich people”. But though inheritance tax is paid by just 5 per cent of UK estates, it remains one of the most reviled taxes (a 2015 YouGov poll found that 59 per cent of people regard it as “unfair”). The right in the UK and the US have long inveighed against “the death tax”. In 2007, George Osborne thrilled the Conservative Party Conference — and spooked Gordon Brown — when he pledged to increase the inheritance tax threshold to £1m. As US president, George W Bush introduced legislation that progressively reduced the tax, culminating in its temporary abolition in 2010. More recently, Donald Trump doubled the payment threshold from $5.5m to $11.2m. At last week’s Conservative Party Conference, Chancellor Sajid Javid maintained this trend by revealing that he was considering scrapping the tax (“something that’s on my mind”). He added: “I do think when people have paid taxes already through work or through investments — capital gains and other taxes — there is a real issue with then asking them to, on that income, to pay taxes all over again.” Javid’s argument may appear persuasive but it is logically flawed. Double taxation is hardly unheard of — we pay VAT on goods bought with taxed income — and it is the bequeathed estate, rather than the person, which is taxed (at a rate of 40 per cent on incomes above £325,000 or £650,000 for a couple, with new allowances enabling £1m in property to be transferred). If “equality of opportunity” is to be more than merely a slogan, a progressive inheritance tax system is essential to prevent privilege being automatically transferred from one generation to the next. As US investor Warren Buffett sagely observed when he campaigned against Bush’s plan, one would not choose the 2020 Olympic team “by picking the eldest sons of the gold-medal winners in the 2000 Olympics”. It would, the financier warned, create an “aristocracy of wealth”. Liberal thinkers have traditionally defended inheritance tax on similar grounds. Adam Smith declared that “a power to dispose of estates forever is manifestly absurd”. Utilitarian philosopher Jeremy Bentham approvingly noted that the tax deprived the successful of their property as soon as they were no longer capable of enjoying it. John Stuart Mill similarly advocated “a limit to what any one may acquire by the mere favour of others, without any exercise of his faculties”. A progressive inheritance tax, he said, would allow lower taxes on the working poor and enable increased saving. But arguments such as this struggle to overcome the emotional opposition of many to inheritance tax. Antipathy towards the policy is not confined to the Anglo-American right. Among the countries to have abolished inheritance tax are social democratic Sweden and Norway, India, Canada and Austria. In OECD countries the proportion of total government revenues raised by such taxes has fallen since the 1960s from over 1 per cent to less than 0.5 per cent (half of Europe’s billionaires have inherited their wealth). Mindful of this, the left as well as the right is contemplating reform. The Institute for Public Policy Research (IPPR) has proposed abolishing inheritance tax and replacing it with a lifetime donee-based gift tax. “If you’re well advised and if you can predict when you’re going to pass away it [inheritance tax] is very easy to avoid,” Carys Roberts, IPPR’s chief economist and the head of the Centre for Economic justice, said. Any gifts made at least seven years before an individual’s death are exempt from taxation, prompting many to transfer their assets in advance. Exemptions for agricultural land and unquoted business assets provide further opportunities for avoidance. Under the proposed new system, a new tax would be imposed on any gifts received by an individual above a lifetime allowance of £125,000. After this, they would be taxed annually at the same rate as income from labour (with an exemption for gifts between partners). The Resolution Foundation has estimated that the measure would raise £15bn in 2020/21, £9.2bn more than the current system. By levying tax on recipients, rather than on the bequeathed’s estate, Roberts said, the objection that inheritance amounts to “double taxation” or to a “death tax” would be diminished. Ireland, she noted, already has such a system in place through a Capital Acquisitions Tax (levied at 33 per cent on transfers over €320,000). After a Labour Party report on land ownership, Land For The Many, endorsed IPPR’s proposal, John McDonnell confirmed that the party was contemplating the idea. “I think it’s interesting,” he told Sky News in July. “We need to have a fairer system of how we can ensure that wealth is more fairly distributed — that’s one idea and we are listening to a whole range of ideas.” In his 2013 book Capital in the Twenty-First Century, the French economist Thomas Piketty raised the spectre of “a society even more inegalitarian than that of the 19th century, because it will combine the arbitrariness of inherited inequalities with a meritocratic discourse that makes the ‘losers’ responsible for their situation.” It is the UK, where wealth is even more unequally distributed than income, that perhaps best embodies this dystopian future. Britain is the land of the baronet and the banker, the aristocrat and the asset stripper. It combines the worst of capitalism with the worst of feudalism. The result is a society in which both income and wealth are grossly maldistributed, innovation is stifled and equality of opportunity remains a myth. The abolition of one of the taxes that restrains such avarice would signal a grim inheritance indeed.