Categories
Liberty Politics & government

[2126] Of Mill and best and brightest in government

I admire John Stuart Mill’s On Liberty. In it, the author succinctly describes the limits of the state and individual liberty. His defense of individual liberty against the transgression of the state and the majority is impressive to me, who is already familiar with core points Mill articulated in On Liberty even before learning Mill’s name. While all points are well-argued and logically derived from reasonable premises, I am hesitant to embrace a few of his conclusions. One of those conclusions revolves around talents and government.

Near at the end of On Liberty, Mill makes the case against government interference in the market. The context in which he frames the argument is the enhancement of the capacity of the government, or rather the state, to do evil. In order to limit this capacity, he disagrees in having the best and the brightest individuals be employed as part of bureaucracy of the state.

The idea of having the best and the brightest as part of the civil service is quite relevant in Malaysia. Various individuals in Malaysia have suggested that the civil service should attract the best through various means, including, and possibly, mainly by offering most competitive salary. Apparently, the same argument was raised in England at least before 1859, the year On Liberty was first published.

Mill’s opposition is beautifully put in a way that uses the benefits proponents of such mechanism celebrate as the mechanism’s weakness. He writes that these highly talents individuals would make the bureaucracy highly capable and beyond criticism of the public. Why? Paraphrasing Mill, the public will become ill-qualified “to criticize or check the mode of operation of the bureaucracy“. This sort of shield from criticism brings about authority to the bureaucracy to embark on programs which may or may not be useful. Furthermore, with the freedom from criticism, the bureaucracy will be comfortable in where it is and not improve.

According to Mill, if the bureaucracy is to be on its toes, they must be entity or individuals capable of raising criticism against the bureaucracy, “independently of the government“.

Perhaps, most eloquently, the more well-stocked the government is with the ablest of all mankind, the capability of evil by the state “would be greater“, delivered more “efficiently and scientifically“.

This as well as other points made against the idea of big government made in On Liberty are persuasive. I am doing an injustice by summarizing his idea here. The best way to fully appreciate the robustness of arguments made by Mill is to read the book.

Regardless of that, I think Mill may have taken a step too far down the street in forwarding the proposition on talents and the state.

I do not see how having the less capable becoming part of the bureaucracy can necessarily be beneficial to free individuals. Such bureaucrats, holders of public office and perhaps politicians may as well introduce policy based on unenlightened policy that incongruous to culture of liberty, considering that there is a relationship between being a liberal and education level.

Capable if not the best of talents will be needed to introduce and enforce policies, including those which are the most liberal. Without these talents, others out of the government would be able to outwit the state in matters such as protection of individual liberty and fraud, which is the function of a state in liberal tradition. A state that is unable to perform such function effectively is a worthless state.

Besides, Mill in On Liberty is concerned with capability of the bureaucracy to improve. Criticism is important but only capable talents can effectively bring about improvement to the bureaucracy. If improvement is a concern, surely capable talents need to be hired as part of the system to act upon the criticism.

More ominously is that the argument, while maybe attractive in a world where there is only one state and no external threat, does not account for a world with multiple different states. In a world where there are other hostile states, having incapable individuals running the bureaucracy may be disastrous. States compete with each other to forward its interest that may not coincide with the agenda of promotion and conservation of liberty. Wars do happen and incapable bureaucracy increases the likelihood a state — we are interested in liberal state — capitulating to tyranny originating from external forces.

The argument cuts both ways really. The trick is to ensure there are the brightest in and outside of government. The brightest in government will be tasked to introduce and to carry out good policies while the brightest outside will be free to criticize those inside apart from pursuing their own interests in the free market.

Therefore, I think Mill’s proposition should not be accepted unconditionally. The position taken by Mill should only be accepted when a majority or sufficiently large fraction of the best and brightest are already hoarded by the government. It should be a matter of degree, not of absolute.

Categories
Economics

[2125] Of we build buildings to increase our GDP

KULA LUMPUR: Three sites in the city have been identified for the development of iconic structures to spur growth in the economy.

Sources say they are Dataran Perdana in Jalan Davis, the area surrounding Stadium Merdeka and the vicinity of the Matrade Centre in Jalan Duta.

All the plots of land are privately owned. Two belong to government-linked companies — Pelaburan Hartanah Bumiputera Bhd and Permodalan Nasional Bhd (PNB) — while the Naza group owns 25ha in the vicinity of the Matrade Centre.

Economists were recently briefed by the Economic Planning Unit in the Prime Minister’s Department on the implementation of the iconic projects, as part of efforts to boost the country’s gross domestic product (GDP). [100-storey skyscrapers planned for Kuala Lumpur. Vasantha Ganesan. Presenna Nambiar. New Straits Times. December 7 2009]

Urm, yeah, okay…

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p/s — I cannot resist this. What a bull!

We can definitely thank Keynesian thinking for this. Do you want greater aggregate demand? Build away!

Categories
Photography

[2124] Of Australians all let us rejoice…

Some right reserved.

Categories
Economics Environment Politics & government

[2123] Of Abbott’s plan is suspiciously boilerplate-like

Climate change has been very much the heart of Australian politics at the federal level for the past few months. It is the source of intense debate between the Labour government and the Coalition opposition. Within the Liberal Party itself, the proposed cap and trade arrangement has divided the party. Tony Abbott successfully replaced Malcolm Turnbull as the new Liberal leader exactly because of this issue.

The Turnbull fraction is prepared to work with the Rudd government on the cap and trade proposal. Others, perhaps, now called the Abbott fraction, do not. With Turnbull out and Abbott in, the cap and trade proposal has been scuttled in the Australian Senate.

On the front page of The Australian yesterday, Abbott made known a curious position. He accepts the challenges climate change poses and he accepts emission targets that Turnbull agreed to. What he rejects is any introduction of tax, as direct as carbon tax or as indirect as cap and trade scheme. In his own words, “[t]he Coalition will not be going to the election with a new tax, whether it’s a stealth tax, the emissions trading scheme, whether it’s an upfront and straightforward tax like a carbon tax.” In its place, he proposes implementing “land management and energy efficiency measures.”[1]

This is a curious position because I am grappling to see how his plan could achieve the reduction target he agreed to. Land management and efficiency measures sound like a boilerplate idea that lacks substance.

Despite actual inferiority of cap and trade to carbon tax, if done properly, it could be as effective as the simpler carbon tax. Land management and efficiency measures on the other hand will demand maneuver more complex than cap and trade.

In fact, complexity of a scheme makes it more susceptible to higher probability of failure. That happened in Europe with its version of cap and trade. One major feature that is attributable to European failure is the granting of free permits. Free permits arrangement is present in Rudd government’s proposed cap and trade scheme.[2]

Furthermore, Abbott’s measures appear similar to the Bush administration’s proposal of encouraging development of technology to address the need to manage carbon emissions in form of the probably now forgotten Asia-Pacific Partnership for Clean Development and Climate.[3]

Technology is indeed the golden bullet. It can reduce emissions given a unit of activity. Of course, the technology is out there: carbon sequestering, micro mirror in space, the spraying of aerosol in the atmosphere, nuclear power, wind, solar, etc. But which one?

That is the weakness of Bush’s proposal.

Any proposal has to be concrete with implementable actions, Abbott’s measures are mere boilerplate. It lacks substance. It lacks actual implementable measures.

Boilerplate solution is sorely inadequate.

Perhaps it is unfair to criticize Abbott’s measures since it is still early days. After all, he is less than a week old as the new leader of the Liberal Party and as the Opposition Leader. It may be only fair to give him the opportunity to think and present his idea more thoroughly.

Unfortunately, time is running out. This is not a tired old green rhetoric. Election may loom and the Liberals risk further marginalization if there are no concrete alternative solutions, especially since the new Liberal leader accepts the need for action.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — TONY Abbott plans to fight a climate change election using land management and energy efficiency measures to slash greenhouse emissions instead of an emissions trading scheme or a carbon tax.

[…]

Pressed for an alternative, he said the Opposition remained committed to an unconditional target of reducing emissions by 5 per cent by 2020 but would not embrace an ETS or a carbon tax. He said there were “lots of things” that could be done to reduce emissions through other means, many not involving significant costs.

These included more energy-efficient buildings, better land management and biosequestration. NSW Nationals Senator John Williams claimed Australia could offset 100 per cent of its carbon emissions for 100 years by lifting soil carbon by 3 per cent.

Mr Abbott also said he would welcome a debate on the use of nuclear energy, although he did not think it was a short-term option.

“The Coalition will not be going to the election with a new tax, whether it’s a stealth tax, the emissions trading scheme, whether it’s an upfront and straightforward tax like a carbon tax,” he said “We’ll have a strong and effective climate change policy, we’ll have it early in the new year,” he said. [Tony Abbott’s tax-free carbon plan. Matthew Franklin. The Australian. December 3 2009]

[2] — See Carbon Pollution Reduction Scheme at Wikipedia. Accessed December 4 2009.

[3] — The world’s four largest coal-consuming countries have announced a pact to share technology for limiting emissions of greenhouse gases. The US, China, India, Australia – plus Japan and South Korea – signed what is being seen as a rival to the Kyoto Protocol to curb climate change, which the US and Australia have refused to sign.

The new pact will be known as the Asia-Pacific Partnership for Clean Development and Climate. It allows the countries to set their own goals for emissions of greenhouse gases, with no enforcement measures. This is in contrast to the Kyoto Protocol, which requires industrial nations to accept legally binding emissions targets. [US-led emissions pact seen as Kyoto rival. Fred Pearce. Newscientist. July 28 2005]

Categories
Economics

[2122] Of the proper question is, is GST more burdensome than sales and service taxes?

The Malaysian government plans to introduce goods and services tax replacing the current sales tax as well as service tax in 2011. I generally prefer consumption tax to income tax because one, it somewhat accounts for externality related to consumption (making it a close cousin to my favorite tax, carbon tax) and two, it is a flat tax. Libertarians typically love flat tax. And probably, three, it is a middle finger to Keynesians and socialists out there.

My position with respect to GST in Malaysia is essentially one of agnosticism at the moment as I try to grasp its merit and demerit, despite my disposition to consumption tax (If there is an abolition of income tax alongside the introduction of GST, I would probably rush to the defense of GST immediately). I am therefore open to argument from both sides.

I do have problem rationalizing opposition to GST based on the argument that GST is regressive however. To the best of my knowledge, sales tax and service tax are flat taxes. That makes them regressive. They are consumption tax too (practically indistinguishable really) because they too can be passed to consumers (though a study of tax incidence suggests passing the tax to consumer is slightly more complicated due to dependency on elasticities).

Given that both types — GST and the current taxes GST is proposed to replace; for the sake of convenience I am lumping sales tax and service tax as ‘the other taxes’ — are regressive, the appropriate question to mount a proper opposition to GST is how more burdensome GST is compared the other taxes to the lower income groups, not whether GST is regressive or not by itself. In order words, what are the marginal effect?

I do not know the answer. Obviously a study has to be done to answer that but my first impression would be that it is less burdensome — less burdensome by meaning of less taxation — because the rate of GST proposed is much lower than the average rates of sales tax and service tax, at least for 2011.

The proposed GST rate is 4%.[1]

According to Malaysian Industrial Development Authority, services tax in Malaysia is 5% while sales tax is typically charged at 10% although there are goods charged as low as 5% to as high as 25%.[2][3][4] There are exemptions where no tax is charged but leave that aside for now.

Clearly, ignoring the anomaly of exemptions, GST is theoretically less burdensome than the other taxes of interest at the proposed and current rates.

Therefore, I am having problem with the basis of opposition to GST as expressed by several politicians from Pakatan Rakyat and possibly Khairy Jamaluddin. The latter spoke earlier in the Parliament, raising his concern about the regressive nature of GST.[5] Like I said, the proper concern should be how much more burdensome is GST against the other taxes, not that GST is regressive.

For Tony Pua’s assertion that the government should postpone the implementation of GST until average citizens earn higher income[6], which I assume GDP per capita is a convenient proxy for that, this is not convincing.

Assuming that rate of GST is the same as the average of rates for the other taxes — ignoring the effect of changing quantity demanded and quantity supplied as well as elasticities that eventually lead to change of tax revenue; those changes would probably bring down aggregate demand given the efficiency of GST but no matter because that is an entirely different issue — tax collection for both should be the same theoretically.

Theoretically because the other taxes are susceptible to tax evasion. Tax evasion is less of a problem to GST because value-adding activities are recorded more diligently across value-chains. That makes it more efficient in terms of tax collection. This advantage that GST has against the other taxes should enhance the appeal of GST, not less, if one is interested in having better taxation system. The opportunity for tax evasion is not a good point to base one’s opposition to GST, again, if one is interested in having better taxation system.

Note however, again, the proposed rate of GST is lower than the current average rates of the other taxes. Any net gain from the switch to GST is likely due to efficiency of GST rather than increase in theoretical taxes.

Nevertheless, Pakatan Rakyat or rather DAP does sound good criticism that weeding out corruption and addressing mismanagement of country’s resources would probably enhance the government’s bottom line compared to expected increase of tax collection of RM1 billion due to GST.[7]

Yet, I think Rajan Rishyakaran makes a good point when he writes, “the need for the GST goes beyond plugging budgetary holes — it serves the need to flatten the tax base.”[8]

I would add further that the function of GST is to diversify sources of revenue for the government rather than raising revenue. Unless all Malaysians suddenly convert to minarchism, which I do not mind of course, given the well-known fact that Malaysia has narrow taxpayer base,[9] diversifying the source and indeed widening the base is a good idea.

It is a good idea because, like the Pulitzer Prize winner Thomas Friedman puts it in his article entitled The First Law of Petropolitics, if he is right, government dependency on tax as revenue encourages accountability. That can further develop democratic culture in Malaysia. Dependency on oil revenue does not do that.[10] Add to that the fact that oil is a finite resources, diversification is a a way forward.

If the rate of GST gets higher than the average of the other taxes, then opposition to it is very proper. That however is an opposition to the rate, not GST per se.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

p/s — I realized that I have not defined the meaning of regressive. Consumption tax like GST is a flat tax. By regressive, it does not refer to actual rate increases the lower one’s income is where progressive means the opposite. Rather, it refers to the fact that those with lower disposal income will spend greater fraction of their income on basic items. Since flat tax increases that fraction on the, if I may use the term, poor, it is arguably regressive. The difference between the two ‘regressive’, should be differentiated, even if the effect maybe the same.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — KUALA LUMPUR: The government plans to impose goods and services tax (GST) at 4%, said Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah.

”We are replacing the current sales and services tax, which is currently at 5% to 10%,” he told reporters at the Culture, Ideas and Values Workshop organised by Foundation For the Future at Country Heights Resorts in Kajang. [Govt may impose GST at 4%, says Husni. The Star. November 26 2009]

[2] — See Service Tax. Accessed December 3 2009.

[3] — See Sales Tax. Accessed December 3 2009.

[4] — See Taxation. Accessed December 3 2009.

[5] — The first parliamentarian to raise concern about the introduction of GST is Khairy Jamaludin. When he spoke on this matter, there was hardly any response to it. As usual the mainstream newspapers shied away from this heavy stuff. [Further thoughts on VAT/GST. Mohd Ariff Sabri Abdul Aziz. December 2 2009]

[6] — Today, out of a population of 27 million, there are in effect only 1.8 million tax-payers who pays any income tax, or only 6.7% of the population. Even if we were to take into account only the 12 million working population, it is only 15% of them who have pay any taxes. The 85% who don’t pay are those who actually don’t qualify to pay any taxes because their income is too low. However, with the implementation of GST, every single one of them whether they are earning RM500 a month or RM1,500 a month or even RM2,500 a month, who don’t current pay any taxes, will be forced to bear the heavy burden of the GST.

Therefore, it is only fair that the income levels of the average Malaysian is raised to a level where the overwhelming majority of working Malaysians are already taxable before the switch is made to a GST or indirect taxation system. [GST: First blood. Tony Pua. December 1 2009]

[7] — IPOH, Nov 29 — DAP has urged the Federal Government to reconsider the proposed 4 per cent Goods and Services Tax (GST), claiming it would do nothing to narrow the nation’s current deficit budget and would only further burden the poor and the middle class.

Party secretary-general Lim Guan Eng said that the Government should, instead, concentrate on fighting corruption and realising savings of at least RM28bil annually instead of a mere RM1bil in additional revenue from GST. [DAP: No sense gaining RM1b from GST to lose RM28b to graft. Clara Clooi. The Malaysian Insider. November 29 2009]

[8] — Tony Pua did point out several other ways to raise revenue (auctioning import quotas, for example) and save money. Nevertheless, the need for the GST goes beyond plugging budgetary holes — it serves the need to flatten the tax base. [GST for high-income economies. Only.. Rajan Rishyakaran. December 1 2009]

[9] — International agencies such as the International Monetary Fund (IMF) and World Bank have long pointed to Malaysia’s narrow tax base as being unviable in the longer term, given that only a tenth (or an estimated one million-odd workers) pay income tax and the nation’s overdependence on oil earnings, which contribute more than 40 per cent of federal revenue. [Najib plumps for GST to fill revenue hole. Business Times via The Malaysian Insider. November 25 2009]

[10] — [The First Law of Petropolitics. Thomas Friedman. Foreign Policy. May 2006]