Michael Sandel – the _

During the GST debate in Malaysia, there was a strong push to cut personal and corporate income taxes. Indeed, the government of the day did cut income tax across multiple income band and lowered the rate for those in the top income tax bracket. There were at least four supporting reasons behind the proposal.

One was that it would soften the GST blows faced by households and companies. Second, related to the first, it would the GST more politically palatable. Third, there was a sense that it was fairer (and easier) to tax consumption instead of income. And finally, there was an idea that it was fairer to have flatter tax rates.

It is the fourth point that came across my mind as I read Equality: What It Means and Why It Matters recently. The book records a conversation on economic, political and social equalities between economist Thomas Piketty and philosopher Michael Sandel.

Within the context of flatter taxes, both parties highlight the importance of the middle class in forming any social compact. The middle class is important because in most settings if not all, it is the middle class who would fund the arrangements the most. Such compacts involve the financing of public institutions and infrastructure that in theory would introduce positive externalities that no private endeavor could bring.

But the middle class needs to be to convinced to come on board and pay up. It is not enough for them to become the beneficiaries of any institution generating positive externalities. This is especially so when they know the poor would not be paying as much as they do, if at all. Jealousy and a perverse kind of envy when it comes to taxation (or lack of) are something that need to be kept in mind.

This could be addressed by having a progressive taxation regime, where members of the upper class are required to pay more through steeper tax rates.

As Piketty states it in the book:

It’s also what contributed to building a new social contract where the middle class would accept contributing to the social state. They knew that they would benefit from it, but also that people at the very top were going to pay a lot more than they would. Whereas today, of course, there’s a big suspicion by the middle class—more than suspicion—that people at the top are not paying their fair share. It makes them say, “Okay, then I’m not going to pay for people who are poorer than me.” [Page 17. Equality: What It Means and Why It Matters. Thomas Piketty. Michael Sandel]

Of course, the tax monies received by the authorities have to be put to good use and that means for the betterment of society. That betterment at the very least is the various effective functioning public institutions, which are central to the creation of sense of community and belonging, but also long-term public investment in a myriad of fields.

That sense of community and belonging achieved through some social compact financed by progressive taxation is a profound point at a time when far right extremists are championing identity politics and driving a plural society, like the one in Malaysia, apart.

From here, Piketty (and Sandel) are presenting progressive taxation is a tool to fight off the far right. It is a tool to create institutions that inculcate that sense of civic community and belonging to rival whatever the far right is offering.

Piketty and Sandel had the conversation (which has been edited into a book format) from the standpoint of the political left. I would not classify myself as a leftist. Yet, the ideas are useful for a person like me, who believes in civic nationalism with a dose of liberalism.

There is a feeling that traffic offenses in Malaysia are generally not taken seriously by road users or the authorities, unless somebody dies or gets hurt. The fines are low and if you wait long enough, it will get discounted generously. It also gets discounted heavily if you pay it quickly. There are threats of court action or towing in cases of illegal parking of course but this almost always never happens due to the hassle it involves. For the authorities, offering discounts to offenders is far simpler and cheaper. But there is a terrible cost to this approach. That cost comes in the form of changing expectations and the cementing of the wrong behavior.

These traffic fines are meant to discourage behaviors that affect the public space negatively (for instance, parking at the junction is illegal because it may cause collision between other road users). But today, these effective fines are too low that instead of functioning as deterrent, they are now an enabler of bad behavior. The fines become fees.

What this means is that instead of a person paying fines to make amends, now that person pays fees to allow him to commit wrongdoing. So, people now are paying fees for the permission to break the law.

Fine as fee is among the subjects of Michael Joseph Sandel’s What Money Can’t Buy. The subtitle is more descriptive: The Moral Limits of Markets. Sandel is a political philosopher who is perhaps best known for his Justice lecture series.

Fine as fee is only a specific example of a general set of cases where incentives designed to discourage certain behavior end up encouraging it instead. More precisely, (some) market-based incentives have the capacity of corrupting individual behavior by making previously frown-upon actions acceptable, which in the end makes the experience of public space sharing less desirable. There is a hint of the tragedy of the commons here.

There is one real world example I would like to cite from the book. It revolved around child-care centers in Israel that had difficulties with parents who were always late in picking up their kids. To discourage late pickups, the centers introduced a fine. In theory, this should encourage parents to pick up their children on time. But it became a perverse incentive, a concept undergraduates learned in their introductory microeconomics classes. Instead, it changed parents’ behavior for the worse, who now see the fine as a payment for late pick-up service. Incidence of late pick-ups rose afterward, as parents were more than happy to pay for the convenience. The lesson here is that that fine (a market-based solution) changed the expectations about late pickups: from something that reflects irresponsibility to just another non-judgmental service.

But this example and more are not a Freakonomics kind of entertaining read that opens up the world of economics to lay readers. Sandel attempts to convince us that market-based incentives change norms, unlike the typical economics assumption that these incentives itself are valueless and only reflects preexisting preferences.

Sandel’s ultimate thesis is that we have evolved from having a market economy to becoming a market society, where market mechanism has pervaded throughout all aspects of our life. He is worried that such proliferation is crowding out non-market norms and that the outcome is for the worse. Some of these norms are the egalitarianism (for example, lining up as opposed to express lanes where you pay to get ahead), the sacredness of human life (as opposed to paying for human organs or babies), honesty (as opposed to paying for friendship or dates), empathy (as opposed to auctioning immigration rights to refugees), civic mindedness (as opposed to paying to pollute or simply be a litterbug) or in general, the inculcating of the public spirit or civic duties which the market more often erode.

What Money Can’t Buy can be seen as an anti-market work but I think that is an unhelpful way of looking at it. Instead, it should be seen as a warning that not all realms of life should be opened to market mechanism or solutions. We should not bribe our kids with cash so that they eat their greens or clean their rooms or get an A at school. Sometimes should be encouraged through non-market means. There are social and moral limits to markets and there is wisdom in acknowledging those limits, even if one is—especially if one is—as I am, generally a pro-market person.

This brings back to our Malaysian case of traffic offences and fines as fees where people pay to commit offences. The possible solutions (apart from the market ones that involve more severe non-discountable punitive pecuniary penalties) appear to be a non-market one: towing, driving license suspension, lengthy court cases and even jailing.

Yet, most of these non-market solutions require government enforcement and enforcement requires funding, i.e. tax revenue. This goes back to the contributory factor behind the proliferation of market mechanism in our life: shortage of public funding means a retreat of public service, and that empty space gets filled up by private enterprises.

And yet, non-market norms where it exists can be cheaper than market norms. As Sandel writes, and I agree with this:

“[f]rom an economic point of view, social norms such as civic virtues and public-spiritedness are great bargains. They motive social useful behavior that would otherwise cost a lot to buy. If you had to rely on financial incentives to get communities to accept nuclear waste, you’d have to pay a lot more than if you could rely instead of the residents’ sense of civic obligation. If you had hire schoolchildren to collect charitable donations, you’d have to pay more than a 10 percent commission to get the same result that public spirit produces for free.”^[1]

^[1] — The mentions of nuclear waste and donation refer to an earlier real world examples in the book.

On nuclear waste: Switzerland needed a site to store nuclear waste. In a survey, when residents of a village were asked whether their would accept the government constructing a nuclear waste site at their location, 51% said yes out of sense of civic duty and the common good. But when the same question was asked with cash compensation added in, the result changed. Now, only 25% would agree, with the rest felling offended that they were being bribed.

On donation: two economists did an experiment involving high schoolchildren going door-to-door solicitating donations for certain cause. These children were divided into 3 groups. The first group was given a motivational speech about the worthiness of the cause, the second was given the same speech while getting to keep 1% of any donation collected and the third was also given the same speech while getting to getting to keep 10% of donation collected. The result? The first group collected 55% more donation than the second group. Meanwhile, the third group did better than the second, but worse than the first. Lesson: doing it for free out of civic duties leads to better results, but if you want to pay, it has be to a lot.