To complain about economic policy is fair enough, but to complain that a policy is unethical is to rather miss the point -- economics is amoral. That is, it is neither moral nor immoral, it’s simply outside such justifications or strictures.
This does not mean that there is no room for morals in public policy. Rather, that the morals come before or after the economics, in the aim or goal of a policy, in the results of it, not in the economics of it.
Another way to put this is that economics doesn’t tell us what we ought to do, or what we should be trying to do. Our goals can be whatever it is that we wish as far as the subject is concerned.
Economics is about the mechanism, nothing else. So, for example, it could be true that the rich should carry a greater part of the burden of running society. I certainly believe so.
Others might say that no, the tax levy should be equally distributed -- for each citizen is indeed just that, a citizen. Each should pay an equal part of running the civilization.
Those are moral claims and they’re not economics. Economics can and does go on to tell us what happens when we have progressive taxation, or per capita tax systems, but it doesn’t, shouldn’t and cannot tell us which is the moral system, only how either or each would work.
We need this basis in order to be able to evaluate the recent claim from Transparency International about the ability of businesses to convert black money to white.
That is, we must divorce the impact of the economic policy from our considerations of morality. They’re to consider the problem on different axes.
It may well be in the fact that this ability to transfer ill-gotten gains into legal holdings is immoral. After all, if those profits or that money is ill-gotten it is, by definition, gained immorally.
So, we can indeed state that this ability to wash the funds is something against moral precepts. Why shouldn’t the crooks have to pay taxes like the rest of us, why should they be able to get away with something?
But that is still different from our economic consideration of the same policy. We desire the resources of society to be employed in making society a better place. A richer one, obviously enough. So, what is the best policy for us to follow to allow this to happen?
Economic research tells us quite a lot about this. We need to make it easy, and cheap, for people to be taking part in the formal and legal economy.
The more we make that tax-paying and moral -- if you wish to call it that -- activity more expensive than the lying and cheating in the black economy then the more of the economy will move from tax-paying to that cheating.
That’s just the way us humans work, we do less of more expensive things. This thus puts a limit on how much more expensive we can make being law-abiding.
To give an example, the Soviet tax system was highly progressive. The rich should have been paying much higher taxes than the normal worker. They didn’t, because everyone lied about their taxes and incomes.
We could also say that a flat tax system, one where everyone pays the same rate of tax on their income, is immoral. Because the richer should, as Adam Smith even pointed out, pay a higher tax rate as well as just more tax.
The Russian tax system, subsequently, of a flat rate 13% income tax can be described as immoral. And yet, it raises a lot more income for the government, because people don’t lie and cheat as much as they used to. That is, it might be immoral but it’s economically efficient.
Which brings us back to this ability to wash black money into white. What is it that benefits in the long run? The answer is to allow that cleaning. Because that then brings that formerly black money into the legal economy, where we can tax it in the future. We overlook the past illegal cheating in order to gain tax revenue from it in the future.
We can describe that as unethical, and we might even be right when we do. But it’s still probably good economic policy, as the end result will be us all being made better off.
Which is what we should be considering, when mulling over economic policy. Not whether it’s right or wrong, but will it work?
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.
