Paul Krugman: Tax Farmers, Mercenaries and Viceroys

Back to a bad old future:

Tax Farmers, Mercenaries and Viceroys, by Paul Krugman, A Monarchy Commentary, NY Times: Yesterday The New York Times reported that the Internal Revenue Service would outsource collection of unpaid back taxes to private debt collectors, who would receive a share of the proceeds.

It’s an awful idea. Privatizing tax collection will cost far more than hiring additional I.R.S. agents, raise less revenue and pose obvious risks of abuse. But what’s really amazing is the extent to which this plan is a retreat from modern principles of government. I used to say that conservatives want to take us back to the 1920’s, but the Bush administration seemingly wants to go back to the 16th century.

And privatized tax collection is only part of the great march backward. In the bad old days, ...[t]here was no bureaucracy to collect taxes, so the king subcontracted the job to private “tax farmers,” who often engaged in extortion. There was no regular army, so the king hired mercenaries, who tended to wander off and pillage the nearest village. There was no regular system of administration, so the king assigned the task to favored courtiers, who tended to be corrupt, incompetent or both.

Modern governments solved these problems by creating a professional revenue department to collect taxes, a professional officer corps to enforce military discipline, and a professional civil service. But President Bush apparently doesn’t like these innovations, preferring to govern as if he were King Louis XII.

So the tax farmers are coming back, and the mercenaries already have. There are about 20,000 armed “security contractors” in Iraq, and they have been assigned critical tasks, from guarding top officials to training the Iraqi Army.

Like the mercenaries of old, today’s corporate mercenaries have discipline problems. “They shoot people, and someone else has to deal with the aftermath,” declared a U.S. officer... And armed men operating outside the military chain of command have caused at least one catastrophe. ...

To whom are such contractors accountable? Last week a judge threw out a jury’s $10 million verdict against Custer Battles, ... a symbol of the mix of cronyism, corruption and sheer amateurishness that doomed the Iraq adventure — and the judge didn’t challenge the jury’s finding that the company engaged in blatant fraud.

But he ruled that the civil fraud suit ... lacked a legal basis, because ... the Coalition Provisional Authority  ... wasn’t “an instrumentality of the U.S. government.” It wasn’t created by an act of Congress; it wasn’t a branch of ... any ... established agency.

So what was it? Any premodern monarch would have recognized the arrangement: in effect, the authority was a personal fief run by a viceroy answering only to the ruler. And since the fief operated outside all the usual rules of government, the viceroy was free to hire a staff of political loyalists lacking any relevant qualifications for their jobs, and to hand out duffel bags filled with $100 bills to contractors with the right connections.

Tax farmers, mercenaries and viceroys: why does the Bush administration want to run a modern superpower as if it were a 16th-century monarchy? Maybe people who’ve spent their political careers denouncing government as the root of all evil can’t grasp the idea of governing well. Or maybe it’s cynical politics: privatization provides both an opportunity to evade accountability and a vast source of patronage.

But the price is enormous. This administration has thrown away centuries of lessons about how to make government work. No wonder it has failed at everything except fearmongering.

_________________________
Previous (8/18) column: Paul Krugman: Wages, Wealth and Politics
Next(8/25) column: Paul Krugman: Housing Gets Ugly

Comments

[James]

"In the bad old days, ...[t]here was no bureaucracy to collect taxes, so the king subcontracted the job to private “tax farmers,” who often engaged in extortion."

And under this extortionary system, was the average rate higher or lower than it is today? Because I'd prefer extortionary taxes of 5% of national income than nice, honest, government bureaucrat collected taxes of 30% of national income.

[cm]

James: Don't forget what medieval tax payers got in return from their government. I don't think they had Social Security, public sanitation and infrastructure, public colleges, etc. back then. Extrapolating from current trends, we may well be on the way back there. All those things will continue to be there, but in increasingly degraded form.

And if you indeed pay an effective, not marginal, 30% (federal+payroll+state as applicable) tax rate, you are probably making good money.

[Winslow R.]

"Because I'd prefer extortionary taxes of 5% of national income than nice, honest, government bureaucrat collected taxes of 30% of national income."

There are plenty of places on earth left for those uninterested in paying government taxes. None of them are anything close to the utopia fantasy conservatives rave about (think the peak of Mt. Everest or perhaps the Congo rainforest).

http://en.wikipedia.org/wiki/Second_Congo_War

These days citizens are at least given representation in exchange for 'extorted' taxes, though the ability to vote seems to hold little 'value' for far too many.

Do you bother to vote?

[anne]

http://delong.typepad.com/sdj/2006/08/the_primacy_of_.html#comments

August 20, 2006

By Dean Baker

Brad,

Anyone who wants to attribute the growth in pre-tax income inequality to the birds and the bees (i.e. the natural workings of the market) has a strong hurdle to overcome in explaining why Europe has not seen a similar growth in inequality. (It's productivity growth and EPOPs are not that different from the U.S., so don't try a "failed Europe" story.)

There are a large number of ways in which the government sets policy that determines whether income flows upward or downward. For example, Bill Gates is the richest man in the world because the Bush I-Clinton administrations allowed him to pursue blatant violations of anti-trust law in order to gain a near monopoly on the market for operating systems.

Of course, patent and copyright monopolies come from the government, not the market. The fact that the U.S. gives drug companies patent monopolies, and then lets them charge whatever they like for their drugs (unlike Europe, which has price controls), makes shareholders in drug companies and their top execs very rich, and everyone else somewhat poorer.

The rules of corporate governance are also set by the government. (Remember, corporations are creations of government, not nature.) In the U.S., top executives have abused their positions of power to write themselves huge paychecks. This has brought no response from the government to adjust the balance of power between top execs and other stakeholders.

Finally, the U.S. has quite consciously pursued a trade and immigration policy that is intended to put downward pressure on the wages of the bulk of the workforce, while protecting doctors,lawyers, and other highly paid professionals (including economists).

I think a very compelling case can be made that the upward redistribution of before tax income was the result of conscious policy, not an accident of nature.

[anne]

That we chose a "Viceroy" to govern Iraq, and that there was rarely a hint in the press of the colonial-classist lunacy of having an American viceroy tells me that domestic policy has continually and increaqsingly encouraged inequity in America.

[save_the_rustbelt]

The American left, which always claims the high ground on civil liberties, rarely criticizes the IRS, becaue the IRS feeds the government beast.

KRugman is correct on this issue however, handing this off to sleazeball collection agencies is even more incredibly abusive than normal IRS abuse.

Day in day out, the IRS violates more civil liberties than any government agency, with the blessing of Congress.

[Wimpy]

"Do you bother to vote?"

Good question Winslow, but let's not forget that Conservatives have now managed to outsource the voting process as well.

[Chris Mann]

"There are plenty of places on earth left for those uninterested in paying government taxes. None of them are anything close to the utopia fantasy conservatives rave about (think the peak of Mt. Everest or perhaps the Congo rainforest)."

Dubai is pretty nice.

[Kirk Spencer]

Dubai has some points, but lack of taxes isn't one of them. Oh, there are no personal income taxes, and for the most part no corporate income taxes, but tax-free? snicker.

Banks pay 55% tax on taxable income. Oil companies pay 20% on taxable income. Businesses pay a "municipal rent" (aka property tax) of 10% of rental value. Luxury goods have a 10% duty applied, except for alcohol (50%) and cigarettes (100%). There are some duty-free items -- gold and silver brought in as raw material for jewelry being an example.

As for being a nice place - only if you can afford it. If you're part of the classes providing service instead of receiving it, well, it's not so nice for the most part. Especially the lowest quintile - there are some horror stories surfacing about that class's treatment in Dubai.

[tom s.]

Krugman's piece reminds me why I fail to see the key distinction in modern societies as that between the state and markets. Of course, libertarians are always going on about how markets are fine, governments not; but I think economists in general have a tendency to claim that state/market is the basic dichotomy of the modern economy. In that picture, one of the defining features of the state is that it has a monopoly on coercion (see any Austrian web site for a quote) -- a claim that Krugman's article, among others, makes clear is false.

In the end, the state is more a resource to be struggled over than a thing that stands by itself. Viewing the world in terms of state vs. markets is a lost cause because it requires hopelessly oversimplified view of the state. Didn't someone say "the executive committee of the bourgeoisie"?

[Otto]

Dubai? Somalia has no income tax, no corporate tax and no gun laws (I'm rather sure the gun laws are nonexistant). They've gone totally free market, including the government itself. Conservative paradise, no?

[anne]

Dubai :)

http://select.nytimes.com/2006/03/31/opinion/31krugman.html

March 31, 2006

The Road to Dubai
By PAUL KRUGMAN

Imagine, for a moment, a future in which America becomes like Kuwait or Dubai, a country where a large fraction of the work force consists of illegal immigrants or foreigners on temporary visas — and neither group has the right to vote. Surely this would be a betrayal of our democratic ideals, of government of the people, by the people. Moreover, a political system in which many workers don't count is likely to ignore workers' interests: it's likely to have a weak social safety net and to spend too little on services like health care and education.

This isn't idle speculation. Countries with high immigration tend, other things equal, to have less generous welfare states than those with low immigration. U.S. cities with ethnically diverse populations — often the result of immigration — tend to have worse public services than those with more homogeneous populations.

Of course, America isn't Dubai. But we're moving in that direction. As of 2002, according to the Urban Institute, 14 percent of U.S. workers, and 20 percent of low-wage workers, were immigrants. Only a third of these immigrant workers were naturalized citizens. So we already have a large disenfranchised work force, and it's growing rapidly. The goal of immigration reform should be to reverse that trend....

[James]

cm: I'd gladly accept 16th century levels of government spending in exchange for the tax rates of the 16th century.

Otto: If you want to look at worst cases, great, but do it the right way and compare the worst case of big government with the worst case of no government, i.e. Mao's Cultural Revolution vs. Somalia.

[Otto]

James,
I've found it! Worst case of big government: Sweden. Talk about nasty tax rates. A veritable hell on earth. I'll take 16th century government services any day. I'm guessing Somalia has tax rates and government spending on par with 10000 BCE. Even better than those darned 16th century socialists. I'd gladly accept 10000 BCE government spending in exchange for the tax rates of 10000 BCE.

[jamzo]

i am consistently surprised by the reluctance to talk of the extraordinary level of of government franchises being sold to profit-making entities

this is not new

the republican party has been selling cash cows to their supporters since the regan era

they call it "privitization"

politics has a long history of corruption it is certainly not limited to any one political party or nation

but the "californication" of political relationships is spectacular

i use the "californification" because of my experience in the 1970s when i moved from the east coast to the west coast and one of the "better" things about california was that it was "progessive" - it did not have the corrupt political culture of the east

i was astounded that the numerous people who told me this could not see the california corruption

just as i amastrounded that the business community is not complaining about the largesse that the bushies have been handing out to their cronies

[Blissex]

«just as i amastrounded that the business community is not complaining about the largesse that the bushies have been handing out to their cronies»

Some coherent conservatives like Bartlett have been protesting, and they have not been treated that well as a result. The others know which side their bread is buttered on.

[Blissex]

Krugman writes:

«So the tax farmers are coming back, and the mercenaries already have. There are about 20,000 armed “security contractors” in Iraq, and they have been assigned critical tasks, from guarding top officials to training the Iraqi Army.»

It is not just security contractors or consultants as in bodyguards or ''advisors''... But people doing military tasks in the field it appears:

http://WWW.NYTimes.com/2006/08/20/magazine/20iraq.html?pagewanted=2

«Nor are significant numbers of non-American coalition troops available for duty in Anbar. The only international forces I saw there were a small contingent from Azerbaijan manning checkpoints at the massive Haditha dam, where Colonel Cooling’s battalion is headquartered, and a collection of extremely diligent Ugandans, who were hired as contractors and were pulling guard duty inside the wire at Camp Falluja.»

Because of the political impossibility of the draft the Army is also making up numbers by attracting non-citizens with the prospect of faster citizenship:

http://in.rediff.com/news/2005/aug/29kathiria.htm

Which is quite amusing, because instead of USA citizens having the duty to serve in the army, it is serving in the army that gives the right to be a USA citizen... Reminds me of the roman empire. Or of Startship Troopers.

[cm]

James: Observe in which role you participate in the economy, and consider whether this role exists in 16th-century settings, or what purchasing power the income in that role would give you. Also consider how many businesses are directly or indirectly dependent on government handouts. For example "defense", "aerospace", agriculture, the industries serving them, and the local economies where all those activities are taking place. It's not just all welfare queens.

[cm]

I forgot, automotive. Who has built and continues to build all those roads?

[Otto]

The roads got built during the Cultural Revolution. I guess big government isn't all bad.

[ilsm]

The US outsourced its military arsenals to private companies starting with aircraft in the twneties and after WW II almost everything else.

The idea: industry would be faster, better and more innovative.

All we get now is more cost.

The congress capped the dollars to spend on producing F-22's.

So now we get 188 of them instead of the 880 envisoned before it took fiftenn years too long in development.

One day the Air Force, Marines and Navy will have to share the one super aircraft we can afford and it will be broken on Saturday and Sunday as well as many days when it should be flown.

The pilots may have to play rock, paper scissors to see who flies it the days it is working.

I have to say I heard that prediction from Norm Augustine former Chairman of Martin Corp a large defense contractor, more than 10 years ago.

We need a sense of humor.

[James]

cm,

I'm not sure what you are trying to say. Your last comment looks like either an attempt at an ad hominem circumstantial or an argument to the effect that if government spending were a smaller fraction of national income, that the world would be just like it is now, except that government spending would just be lower. I can't think of any other interpretation, but neither seems a very charitable reading of your words so I'm hesitant to respond.

Otto,

You can't extrapolate anything meaningful from comparing the one of the best cases of big government and one of the worst cases of small government. Suppose I had argued that less government is better than more government by comparing small government Hong Kong with big government North Korea. Now do you see the problem?

Winslow,

I voted in the '04 election, although I'm not sure how my personal behavior is relevant to the discussion here.

[DJM]

I voted too....I am just no longer confident that my vote was counted.

[Andrew Campanelli]

The Custer Battles case is a hot topic on blogs everywhere, especially those critical of our judicial system. But fortunately, the bad guys don't always get away. The average citizen would be amazed to know two things. First, under a unique federal law, if they know someone is defrauding the federal government, they can personally file an action to recover triple the amount of money defrauded, and they may get to keep up to 30% as a reward. Second, most of America's largest companies ranging from Shell Oil to Walmart have been sued by private persons, and forced to settle for sums as high as $900 Million. To read about every major case in the past 19 years, and to learn about how the law works, people can go to www.FederalFraud.com

[cm]

James: No ad hominem, the welfare queens was probably a bit of putting words in your mouth. What I meant by the latter is that you and everybody have been getting tangible social and economic infrastructure out of (at least past) government spending, which people often take for granted to just exist (because of "prosperity" I figure), but which had to be purposely created, from government funds. in the 16th century, much of infrastructure-style spending was mostly for the exclusive benefit of the kings and local rulers themselves.

The former part of your role in the economy was just meant factually -- your role or way of participation may not existed without government spending, i.e. you may be more dependent on government spending than you think. Even if you serve a business that serves another business, at some point the "defense" industry or some other tax-sponsored sector will be a good size part of the customer base. if not that, then consumers in regions where local incomes are derived from government spending.

Another way of looking at it is that many things that the government does it does because private actors *won't* do them, e.g. creating public infrastructure, or public R&D. Why do you think industry gets R&D tax credits shoved to them? To give them financial "incentives" to do what they otherwise wouldn't, or wouldn't at that time.

I have worked on several useful private-industry R&D projects in my career, and arguably my jobs were only created, because the respective companies wanted to grab some R&D grants. For the most part, they made good profit out of it, but wouldn't have started the R&D on their own, or only later.

[anne]

Custer Battles:

http://www.nytimes.com/2006/08/19/world/middleeast/19reconstruct.html?ex=1313640000&en=3c24152a8feb0b33&ei=5090&partner=rssuserland&emc=rss

August 19, 2006

On Technical Grounds, Judge Sets Aside Verdict of Billing Fraud in Iraq Rebuilding
By ERIK ECKHOLM

A federal judge has set aside a verdict of corporate fraud in Iraq on disputed technical grounds, raising questions about the ability of whistleblowers and the United States government to pursue companies that profited illegally in Iraq during the chaotic year after the invasion.

Last March, based on evidence provided by two company whistleblowers, a federal jury in Virginia found that the contractor Custer Battles L.L.C. had filed grossly inflated invoices to the Coalition Provisional Authority. In the civil suit, the first Iraq-related case to be brought under the False Claims Act, the company was declared liable for more than $10 million in damages and penalties.

The case was expected to be the first of dozens to be filed under the act, a crucial tool against government fraud that allows company insiders to sue and share any damages awarded to the government. Numerous such cases from Iraq have been filed and are under seal while the Justice Department completes its initial investigations, lawyers and federal officials say.

But an underlying issue, raised by Custer Battles during its trial and on appeal, was whether bills submitted to the Coalition Provisional Authority could be regarded as bills presented to the United States government. The coalition authority was an entity created and largely financed by the United States to run Iraq, and largely staffed by American officials, but with an ambiguous legal status.

The Justice Department in an advisory opinion, and the jury in the Custer Battles case, said that some of the Custer Battles invoices were indeed claims against the American treasury and that the False Claims Act applied.

But in an opinion issued Wednesday and posted yesterday, Judge T. S. Ellis III, of the Federal District Court in Alexandria, Va., said the plaintiffs had "failed to prove that the claims were presented to the United States." ...

[Cyrille]

I find it hard to believe that it can be anything but a troll...
Where to start? Well, one thing is that to get 5% taxes in the 16th century, you'd have to get most of your income illegally. But let's forget that.
With 16th century government, we should also talk 50 years life expectancy (or less). A lot of crime. Next to no infrastructure indeed, but that's been mentioned. Absolutely no social protection so if you lose your job you should consider being a beggar or a criminal, in turn meaning that if YOU don't lose your job, there will however be an endless supply of criminals.
Every now and then, riots if not revolutions. For people don't like famine -remember the 30s in the States? For that matter, remember how strikes were sometimes broken by shooting at the workers.

So, if that's what you want, it is rather sad.

[James]

cm: Government spending has benefits and costs. You are right to point out that if spending were reduced, I'd do without the benefits. What you neglect is that the costs would also be returned back to me. I would rather have those costs returned so that I might use them to generate benefits of my own choosing, because I notice that when I spend my own money I get more satisfaction than when other people spend my money.

Cyrille: I didn't say that I wanted to go back to the 16th century level of everything, only that I'd prefer the 16th century level of taxation and government spending. Too much of your post looks like an exercise in attributing all positive developments since the 16th century to government spending just based on correlation.

You do mention one event that seems curious in the context of your other remarks. My age prevents me from personally recalling the 1930s famine in the US, but if I recall, there were people suffering from hunger and the government responded by paying farmers to destroy crops out of fear that falling prices would be harmful. This is probably not the argument you want to make.

both of you: My preferences are what they are, strange as you may find them. I find yours odd as well, but I'd certainly never force you to devote some share of your income toward the fulfillment of my preferences. You seem awfully cavalier about an arrangement in which I'm forced to devote a share of my income toward the fulfillment of yours.

[cm]

James: My point was that more likely than not, you will not have the "extra" income that you imagine to save from taxation, or you will spend it to get a small fraction of what you are now getting in public benefits.

[cm]

And more likely than not you will not be whatever is your profession today, but somebody's serf or day laborer.

[AWBrown]

To all of those above wishing for 16th Century tax rates, beware. Without a government, your tax rate is likely going to be way north of 70%, to be collected by someone much, much, nastier than an IRS bureaucrat. Try your local Somali warlord, or the Norman lords who just moved in to your former City Hall.
As it says in the Declaration of Independence; 'the legislative powers, incapable of annihilation, have returned to the people at large'. This, by the way, was a complaint against King George's rule, NOT a desirable condition.
'Incapable of annihilation' is a phrase not often remembered from the DOI, but like many of the phrases in that document, illuminates a very large and eternal truth - SOMEBODY is going to tax you. At least these days, you get to choose who.

[cm]

AWBrown: With the caveat of "only little people pay taxes", which excludes "me", by some descriptions.