This is the second instalment of the article which appeared earlier in OCtober 2006.
Much of the early influence on this chapter comes from the writings of two social commentators, James Dale Davidson and William Rees-Mogg, the former editor of ‘The Times’. In their seminal work ‘The Sovereign Individual’, first published in 1997, I came across an analysis of taxation as a primary function of the Nation State, and a very clear explanation why the conditions of the ‘Information Age’ in which we are now living, meant that governments would find it harder and harder to collect the same level of taxation which they needed, simply to maintain the status quo of society. The changes being introduced by such facilities as the world-wide-web, digital technology and information networks, meant that tax-payers would find new and more efficient ways of hiding, disguising and disseminating their wealth from governments, whose needs to acquire such money were becoming more and more acute.
“…In the twentieth century, advanced industrial nations have taken between 30 and 60 per cent of national income to finance the welfare state. Between the disintermediation, jurisdictional and encryption problems of global computer networks, this capacity is now vanishing. The welfare state was already becoming burdensome in the early 1990s. By 2010 or thereabouts it will simply become unfinanceable, as will all kinds of unfunded state pension…” The Sovereign Individual. p7
The authors’ arguments predicated the emergence of a new kind of citizen, who they call ‘the sovereign individual’, a new kind of independent wealth-creator, whose access to technology and the power of their own intellect, would mean that they no longer needed to consider themselves as the property of an individual state or political collective, but would be free to negotiate their own terms with which they proposed to deal with governments in the future.
This new individual was placed by the authors in the context of his relationship with the nation state thus;
“…The new megapolitical conditions of the Information Age will make it increasingly obvious that the nation-state inherited from the industrial era is a predatory institution, one from which the individual will want to escape. It is an escape that desperate governments will be loathe to allow. The stability and even the survival of Western welfare states depends upon their ability to continue extracting a huge fraction of the world’s total output for redistribution to a subset of voters in the OECD countries. This requires that the taxes imposed upon the most productive citizens of the currently rich countries be priced at supermonopoly rates, hundreds or even thousands of times higher than the actual cost of the services that governments provide in return…” The Sovereign Individual. p116
The Americans, concerned as ever with the number of wealthy members of US society whose commercial or financial activities are registered in offshore, low-tax jurisdictions, either in the form of corporate tax shelters, or offshore hedge funds, and whom the US regulators have perceived could be cheating on their Internal Revenue obligations, sought to deter US citizens from taking their money out of the country by a proposal, made by President Bill Clinton in 1995. Clinton wanted to enact an exit tax or a ‘Berlin Wall for capital’ that would require wealthy Americans to pay a substantial ‘ransom’ to be permitted to escape with even part of their money.
The American authorities have always looked upon the offshore sector with mistrust, seeing them as jurisdictions into which money and value can be imported, and held in conditions of absolute secrecy. Their suspicions of the intentions and the activities of the off-shore sector were amplified by the fact that when they investigated those whom they suspected of taking unfair advantage of US markets, as in insider trading cases, they could not get any assistance from financial institutions or law enforcement agencies operating in these areas.
Nothing infuriates an American regulatory or law enforcement agency more than discovering a foreign jurisdiction which does not have to comply with their demands for cooperation. I use the word ‘demand’ advisedly, as in my experience, the USA generally does not ‘ask’ for assistance, it demands it as of right, and becomes very agitated when it finds its demands being denied, or worse, ignored. For years the offshore sector generally had merely ignored US demands for reciprocal assistance, and the Americans, in turn, had for a very long time, been looking for a means of prizing open the books and records of the offshore banks, in order to pursue their own investigations, into both outright criminal allegations, and, more importantly, into American tax evasion.
“…All advanced tax systems depend upon reporting to the tax authorities by people who make payments. A bank pays interest on a deposit account, reports the interest to the revenue authorities and the income is taxed. If the bank is outside the national jurisdiction, then it cannot be obliged to report the interest. When the internet becomes the normal route for transactions used as freely as the telephone, it will erode the reporting of transactions…” The Sovereign Individual, 1997, Pan Books, p.7.
It is this question of the way that technology is changing, and will continue to change the face of the relationship between the citizen and the State that is polarising the arguments about the way in which societies can legitimately raise revenue through taxation, and how, in future, they will seek to guarantee those sources of State income in order to maintain a social status quo which has long since passed its legitimate maintenance date.
The problem is that the increasing facilities offered by the Information Age will mean that those individuals with the skills to do so will seek to earn their living in those jurisdictions which make it easier for them to do so. The nation state’s tradition of imposing high levels of taxation upon its collective citizens will be eroded as more and more competing jurisdictions make it attractive for enterprising foreigners to seek refuge with them.
The struggle between the State and the private individual will become an altogether more vindictive one as the technology to aid private capital flight and financial secretion becomes more available, with the means to move their capital in conditions of almost total secrecy. The conditions for conflict are becoming more and more acute.
“…The flight of the wealthy from advanced welfare states will happen at just the wrong time, demographically. Early in the 21st century, large aging populations in Europe and North America will find themselves with insufficient savings to meet medical expenses and finance their lifestyles in retirement…” The Sovereign Individual - p289
This is possibly the most important aspect of the core problem with which the new social environment being generated in the post industrial democracies will be required to deal. The welfare states which for the last 60 years have provided our social environment with cradle-to-grave protections in terms of health, education and social welfare are now facing insolvency. Putting it at its simplest, they are running out of money, while at the same time, they are having to face up to the likelihood of a future in which fewer individuals will be either willing, or indeed available to provide the necessary degree of funding to continue to maintain those benefits at even contemporary standards.
The reasons are simple but stark!
We live in an age of declining birth rates, while at the same time the numbers of our elderly are living longer. At first sight, such a statement does not seem to hold any great terrors for us after all, does it really matter if grandfather lives a few years longer. Well, I’m afraid it does.
If you can imagine looking at a mathematical model of an ordinary, normal society, it would look roughly like an equilateral triangle, divided into a series of horizontal layers. The young, the new potential contributors to the welfare of society would make up the broadest layer at the base of the triangle, demonstrating a wide sector of non-financially-contributing individuals, but who would be growing to make a financial commitment to their society.
The next layer would contain those in regular work or employment who are making a contribution to the nation’s wealth via both direct and indirect taxation.
Another sector above the second would represent that group of individuals who had ceased to be net contributors to society, but as yet were not dependent upon its reserves for their well-being, the retired class who were still able to look after themselves from their own savings.
At the top of the triangle sits the group of retired, non-contributing individuals who are wholly or in a large part dependent upon the state for their welfare provision, whether it be pensions, social health care, hospitals, meals-on-wheels, or any of the other myriad services which civilised societies now deem it necessary to deliver in order to provide the needs of their elderly. The problem for these people and for their governments is that all of these individuals, almost without exception when they were working, will have been the providers of contributions but via state-deducted funding from their earnings or from their savings, whether in the form of direct taxation, national welfare or social security contributions, and over the years, those savings should have amounted to a significant pot of ‘wealth’, to enable those above them in the pyramid, to be looked after and supplied with their needs.
However, the difficulty comes when they themselves reach the point where they qualify to become the net recipients of such benefit, only to find that there are insufficient numbers of people below them in the model to make the necessary contributions to keep them in a stable condition.
In addition, it is now quite clear that these elderly people at the top of the triangle are tending to live longer, and their needs are costing more as society is required to look after them for extended periods of time, hitherto not foreseen. The mathematical model is now higher, with an extended peak, a thinner set of intervening layers and much narrower at its base, a classic isosceles triangle.
An important article entitled ‘The Great Baby Shortage’ in the Sunday Times magazine of the 15th February 2004, reported;
“…Unless we in the West produce more children, we face a nightmarish scenario in which the elderly outnumber the young, placing an impossible burden on the workers who must support them. Productivity will plummet. Unemployment will soar. Education will become unaffordable. Optimism will leach from the national psyche and we will become constitutionally depressed…”
The article demonstrated how, in order to maintain a stable population, women needed on average to produce 2.1 children each, what is referred to by demographers as the ‘replacement fertility quotient’. All the leading post-industrial democracies of the western hemisphere are suffering, more or less, from the same predicament. In the U.K the birth rate per woman is 1.6 children, the lowest reported number since records began to be kept in 1924.
In 1961, 25% of the UK population was made up of children aged between 0-15 years old, compared to an aging population in excess of 75 years old of 4%. In 2002, the comparisons were 19.9% of population were between 0-15, while 7.5% were over 75. By the year 2022, there will be 17.5% of population between 0-15, while the over 75s will amount to 10.2%. Indeed, if the falling birth rate is compared to the rising death rate, it is estimated that the two axes will bisect in 2027, when effective depopulation of the UK will begin.
I could continue to develop theoretical arguments using statistics, but I think the point is well made. We are no longer in the prediction game, but we are extrapolating from known figures. The Employer’s Forum on Age is quite clear about the issue.
“…By 2025, for every two people employed there is likely to be one person over 50 who is retired or inactive.”
This inactivity may be due to reasons other than incapacity and I will address these next, but I think the point at issue here is what is the probable response of government likely to be, when it is confronted with the realisation that it simply does not have enough money with which to meet its social and its welfare demands? Is it going to face the ultimate nightmare scenario of permitting homeless and indigent people to die in the streets and lie unburied, or consider raising direct taxation, a political feature of our social life which governments of both parties have eschewed in recent years, because of its vote-losing unpopularity. Is it perhaps going to increase an exponentially-growing amount of stealth taxation, a method which is both politically unpopular and hardly likely to accrue the amount of money it will increasingly need. Or is it most likely to begin to adopt other, more insidious methods of seeking to attack the black or grey economy, recovering money which it claims to be owed already, with legislation designed to undermine civil liberties, so as to make it easier to succeed in seizing those assets it demands, while making it easier for governments to portray such a move as a populist policy, particularly when coupled with vociferous public statements about the need to be being seen to take away the profits from criminals, and undermining the ambitions of terrorists.
How will the citizen react to these changes? Well, not without a struggle, I am convinced. Empowered through their access to web-based technologies, and with access to the best legal and accounting advice, those citizens who have been successful in creating and keeping a high level of personal wealth will become increasingly unwilling to allow it to be left in situations where an increasingly desperate government can get its hands on it. As with their Roman counterparts, they will seek every means of hiding and disguising their personal wealth, moving it out of the reach of rapacious tax gatherers and secreting it in jurisdictions whose own ambitions will be more in tune with their individual requirements. If necessary, they will seek to escape to other, more wealth-friendly environments.
As welfare, health, and education services, and all the other shibboleths of the old nation state begin to break up because government cannot pay for them, we shall see the re-emergence of the extended family unit, particularly among the once-prosperous middle class, as the core welfare model. Living together as an extended family for a much longer period of time, as in Asia, with publicly-inactive members whose role will be to maintain the family, while the elderly will take upon themselves the responsibility for educating the young – largely through privately funded, exclusive educational establishments which will rigidly exclude those who cannot pay, and also those whose children do not exhibit a sufficient level of intelligence to meet the intellectual demands of the institution.
These institutions will be driven by the need to attract the brightest and best of each generation, in order to be able to continue to demonstrate intellectual excellence, which will in turn be driven by the increasing competition between educational establishments whose examination results will be rigidly graded and whose function will be to turn out the next generation of ‘super consultants’. Schools will guard their entrance requirements by both increases in intellectual standards and fee structures so that only the truly wealthy and the most intellectually entrepreneurial will be able to qualify for admission.
Universities, in turn, will be graded by fee structures, having the power to charge on a scale which will exclude the majority of individuals who cannot meet either their intellectual or their financial standards. In order to meet the need to deliver the necessary level of financial requirement to achieve these standards, full family property inheritance will become paramount – inheritance taxes will need to be abolished, and we will see increasing pressure on Government to reform these taxes - parents will literally become the trustees of their children’s future, and in turn, their own welfare, as their offspring will be required to guarantee their parent’s longer term care, as they grow older and live longer. Having the ability to pass on their fortune intact to their offspring will therefore become for the wealthy, a significantly important investment for their own well-being in the future, and just like their Roman counterparts at the end of the 5th century AD, they may need to find other jurisdictions to escape to in order to enjoy the fruits of their labours.
Where will they go?
Well the Asian market seems as good a place as any right now.