Corruption and its Cures

There are three main categories of corruption: political coruption, accepted small corruption, and individual corruption. Each can be mitigated.

It seems like a nice courtesy to define clearly and explicitly what it is you are writing about, as words are so slippery and full of alternate meanings. When a reader comes upon something that appears interesting, he/she may be carrying some baggage in experience, so that the meanings of the words, especially the topic words, may have different nuances or even serious differences in meaning from what the author intended. This means there is wasted time on both the author’s and the reader’s part, and we all despise wasting time.

By corruption I mean an individual with a hierarchical job to do, a job in a hierarchy, where he/she has a specific task to accomplish, altering his behavior so that some personal benefit will accrue to him/her or some one or some group that he/she favors. Consider some examples:

Example 1: A politician has input into tax laws and can insert a special clause favoring some tiny subset of people if he chooses, and it will most likely pass due to the methods by which laws are checked before being passed. The politician, in return for a contribution to his favorite charitable foundation, will insert a tax clause as requested.

Example 2: A judge in criminal cases has to choose amounts for fines for guilty parties involved with financial crimes. The amount could be equal to the amount gained or more, or with the right inducement, somewhat less, leaving a surplus for the benefit of the convicted criminal or his family, partners, friends, or whoever else was the recipient of the largess of the criminal before he was caught.

Example 3: A bureaucrat is responsible for completing forms for the public, relating to some function, like driver’s licenses, or registering a deed, or any of the hundreds of things a citizen might have to do. The bureaucrat ordinarily finishes his task within a month, or within a day if there is a gift included, such as a box of candy or a bottle of vodka.

Example 4: A building inspector has a long list of technical points that can be used to hold up construction projects, some for a long time and some expensive to change. For a bit of work on the inspector’s friends’ property, or some materials for such work, these technical points might be waived as insignificant or not safety-related or discretionary.

Example 5: A mid-level manager in a supply department of a large corporation has a selection of which supplier to use for some large purchases, but they are comparable. With the provision of an arrangement for a free dinner for the manager’s family in a top-level restaurant, the choice becomes straightforward.

Example 6: A professor is on the board set up to review new students’ applications, and for many students, a favorable choice by him/her will make all the difference needed between acceptance and rejection. Instead of sticking to academic or other university-related issues, the professor tilts his/her rating based on personal biases.

Example 7: A professional athlete manages to miss some key shots in a championship game, losing the match, which is much to the delight of a gambling syndicate. The syndicate is very generous in their expressions of gratitude.

Example 8: A fireman, finding a shoebox-sized metal container filled with currency, manages to get it away from the scene of the fire while the building burns down. The contents are not returned to the building owner.

These examples are only a few of the hundreds of possibilities for what might be included under the label of corruption. In the process of trying to find a viable new socio-economic theory which has more elements of fairness while not losing the positive aspects of older theories, what should be done about corruption? Which types of corruption should the system be designed to minimize? How should this be done, and what might be the cost to the system of having anti-corruption measures installed within it?

The first level, in the first example, might be referred to as political corruption. The quid pro quo by which a politician might be influenced can range over a tremendous domain, involving third parties in a variety of ways. All would be legal in the absence of a specific agreement to take some political action in return for some other action. Specific laws might be written to control some particular one type of action, but since there are literally hundreds of options, these laws can easily be outflanked. Only by going to the common core can they be controlled as a body. There must be laws of just deserts which control the common core, which is excess inequity of wealth and income, which makes possible political corruption. If wealth of any household is no greater than, say, five or ten times the average, there is no surplus available for corruption. If the income of any household is no greater than a similar ratio from the average, there is no opportunity for the products of corruption to be realized by a household that is a beneficiary of some potential corrupt political act. If these two measures do not exist, then corruption will find a way around any existing structures to make the inequality greater, and the feedback effect will take over and lead to great inequality.

The solution, in fact the only solution, to political corruption is the same as the regulations or laws or what-have-you that relate to income outside of corruption. With investment following a Churchillian directive, and unearned profits being taxed and used for the good of those whose work earned the benefits, and human labor being recognized as impossible to vary in value by more than a factor of five or ten, then corruption would be intrinsically controlled.

Judicial corruption, as illustrated in the second example, is almost eliminated by the same cure as political corruption. When no party to any lawsuit has excess wealth or income to use for corruption, and no defendant in a criminal case has excess wealth or income for use like this, there is little opportunity for corruption to exist. A related question concerns corruption involving corporations. Would the legal counsels for a corporation have motivation to do judicial corruption? Perhaps if their income might be diminished by a factor of two if they did not, they would. A corruption corporation might arrange to have a judge get a delayed promotion in return for a favorable or slanted verdict, so the possibility does not disappear, but only diminishes in range.

Transparency is often described as a mitigation for corporate corruption, including that which occurs around a court case, but just as individual corruption in a world where extreme inequality exists can find clever ways to occur, so might clever ways to disguise payoffs be found. Having independent watchdog agencies to monitor corporate finances and behavior is often touted as another means of curing corporate corruption, but the response to this is to corrupt first the process of monitoring as well as influence the regulations for transparency, thus enabling further corruption to go forward. Perhaps layers upon layers of watchdog organizations, which monitor transparency as well as behavior, might be necessary.

The remaining six examples are simply illustrations of individuals doing small-scale corruption of differing varieties. No high-level formulation of a socio-economic system is going to eliminate the possibilities that exist here, but there is one essential and very important difference. Examples 3 through 6 can exist in small numbers, as exceptions to the general way that people in these positions behave, or they can be the more-or-less accepted way of behavior, that no one quibbles with but just lives with and works around. To have a society that operates efficiently, and in which people are supposed to receive benefits according to the effort they expend and the talent they accumulate, then the routine acceptance of corrupt behavior on a small scale cannot be accepted. This means that not only will there have to be laws regulating it, there needs to be public awareness that such behavior is not accepted. There has to be methods by which it can be reported, and there must be organizations that are held to high standards that investigate it and work to diminish the amount of it until it only exists by exception, not by routine. Once this is done, the socio-economic system will be largely free from corruption.

It is much more important that political corruption be ended, by instituting just deserts taxation of excess capital gains and income, including all devices used to hide it. This type of corruption, once it becomes well-known, is like a poison in society, and would be used to justify all other types of corruption. The role of high-level examples in society can be great, and if there was transparency in this area, so that all political figures were known to be operating with no corrupt payoffs, neither to themselves or to those they favor, then low-level corruption would be easier to have reported and ended. So, from a top-down fashion, corruption is at least viewable as a curable disease, as long as the just deserts medicine can be made to be tolerable.

Unearned Income and Winston Churchill

Churchill wanted to put a tax on land sale profits, in a specific way, as he felt some were unearned and therefore more deserving to be taxed away. This concept is intriguing, but regrettably not the Rosetta Stone to a new system.

The term “unearned income” became famous with economists David Ricardo and Henry James, who used it to denote the appreciated value of property which was not from development of itself, but of the surroundings. The idea was that this was done without any significant contribution by the owner, yet he or she reaped the lion’s share of this appreciation. A very famous speech by Winston Churchill in 1909 is often quoted to define the problem, if there is assumed to be one, with a landowner making possibly huge profits on land without having exerted any effort whatsoever to receive them. Instead, Churchill spoke about the profit arising because of the labor and expense of the general community surrounding the property, near and far, who improved the potential utility of the land without any development of it having been done. Churchill favored that the unearned profits from the sale of such land be taxed by the state and used for the good of the community, whose efforts produced it.

The general principle of taxing unearned income more than earned income has received support from many quarters, and seems to be an acceptable principle upon which to base a taxation system. However, there has been no end of controversy and change in what is considered unearned income. This blog has as a goal, a better way of defining it, and a better way of taxing or otherwise regulating it.

It is a natural way of human existence to avoid tax, and tax avoidance mechanisms are as ubiquitous as tax plans and almost as prevalent as tax payers. Even more prevalent are the paid experts who promote the income and wealth of their sponsors as earned, or whatever label receives less opprobrium. The same experts are at the ready to explain or rather excuse any tax avoidance scheme in terms relating to personal choice or corporate advantage or professional practices or some other rationale for its use, other than stating it to be exactly what it is. In contrast, there are a few individuals who simply label tax avoidance schemes for what they are, and state they are proud to have located and made use of them. All this obfuscation makes it somewhat difficult to exactly define what is ‘unearned income’, if there is anything like this, and what should be done to tax or regulate it. To deal with this murky situation, some basic principles need to be enunciated.

The first point to be made is that unearned income does not exactly exist. All income is partially earned and partially unearned, and the difficulty is in deciding how much of it is one and how much is the other. The land value appreciation gain that Churchill spoke about is one of the easiest and simplest ones to describe as it is almost binary. In Churchill’s picture, the value gain is unearned if the landlord does not develop the property, but the development, if it appreciates, produces earned value. Things aren’t binary in economics, but quantitative. The landlord invests his money in a piece of property, and could have instead put the money into a CD or some other investment. The lack of interest paid for undeveloped land represents a loss, as compared to the interest from other investments. Annual tax, even if small, represents another cost of holding the property. Thus, taxing the gain of a piece of undeveloped property at 100% would eliminate all potential interest in such investments. However, a tax at 100% of the amount over some multiple of the average gain of investments, plus tax costs, would be a better approximation to the return of unearned income back to the community which created it. What multiple to use is debatable, but it should not be large, perhaps somewhere between one and a half and four.

Churchill also used the same speech to promote the annual tax on a piece of property, as distinct from tax on the appreciation recognized in a sale, as dependent on the potential value of the property, as opposed to its original value. Sometimes and in some places, the exact opposite is done; zoning is a tool for maintaining artificially low appraised values, and limits on tax appraisal changes annually is another. The taxation on an annual basis, as opposed to the tax on the sale profit, is simply a moving in time of the amount of the taxation, if the mathematics of tax rates is done correctly.

The label ‘monopolist’ was used in Churchill’s speech, and this again is because of the nearly binary nature of land. There is little land created on the planet’s surface, and only by reclaiming wetlands, dredging dirt for use in artificial islands, or using polders to force back the sea. One can claim that a particular piece of land is held as a monopoly, if it is in a particular location that cannot be bypassed, but otherwise, land is somewhat fungible. The owners of all the land in some particular location might be said to have a collective monopoly, but so could all the owners of a particular stock or anything else. Supply and demand slides into monopoly as the owners form a cartel to dissuade individuals from selling before some process increases the price substantially.

A real monopoly would exist if some individual or band of individuals obtain rights to all of some land, just as they would if they had obtained all the rights to some resource, like oil, or some invention that was patented or some drug which was likewise limited. These monopolies have not been similarly singled out for extra taxation, as Churchill did with land, but they could be with similar justification. The basic point of the singling out needs to be clearly stated. Churchill felt that there was little justice in allowing unearned income to be lightly or inconsequentially taxed, but he felt that justice was done better with a mere 20% tax on land profits. Others have written that societies need to harness the labor, capital, land, and resources they have available to them so that these four quantities could be put to the best use in increasing the living standards of the population, or at least some of them. The Churchill 20% tax would not do that.

In designing a new socio-economic system, or even trying to see if there are any better ones possible, it is necessary to be specific about the goals of the society. Should this goal of increasing the living standards of some subset of the population be one which shapes all the tax and regulation policy of the governance mechanisms? This one, as are most others, has some appeal to it, but like all goals, it is arbitrary as well as being poorly defined. Should a socio-economic system be defined by setting down a few goals and then building up the details of the system to accomplish them? Soviet communism had a simple slogan, something about changing the distribution of the products of society to be based on needs rather than productivity, past and present. Other systems have had slogans as well. The alternative is to be more Churchillian, and stick with what we have but modify it a small amount in the direction we think would improve it.

These are just two of the many ways to conduct planning for a society or for a project or anything else. One is to set a destination, which might be listed as a set of goals, and then try to get there. The other is to keep doing exactly what is currently being done, and just make small corrections. Both work well in many instances. The first one is more appealing if the general opinion of the existing socio-economic system is negative, and then a new plan or a new set of goals might be chosen to break away from it. The second one, obviously, has appeal in the inverse situation, where the general opinion is that things are not so bad, and can be corrected. The second one also arises in the instance where it is recognized that no one at all can figure out how to design a new socio-economic system from scratch, and that any system should have some experience with it before it is adopted. Since one cannot experiment with a whole society, it means that there is no way to make a new socio-economic system that is acceptable to the population. Theoretical justifications as to how a system would work are not likely to be correct, as there is no body of experience and no general theory of sociology and economics which would assist a team of designers in figuring out the details of the new system.

Are these latter opinions justified? Is it indeed impossible to come up with a whole new system, and the best that can be done are minor course corrections, perhaps a large amount of them in an never-ending stream. How exactly would we know if minor course corrections will take us in a desired direction or steer away from it or lead us into unknown territories, if there is no competency in sociology and economics? The lack of experience and the lack of theory seem to be an inhibition to small changes, as well as to large ones. So, let’s just keep trying.