Edward Hadas

The tax system could well be the most idiotic, hypocritical and unnecessarily complicated part of modern industrial economies. The system needs to be rebuilt.

In developed economies, as governments have expanded, taxes have increasingly been used as a tool of economic and social policy. The rich are taxed more than the poor for the sake of a vision of social justice: from each according his ability. Depending on the jurisdiction, some good cause or another is favoured: house ownership, marriage, children, charitable contributions, savings. For companies, an almost endless series of exemptions, deductions and definitions are supposed to encourage investment, employment or some other desirable end.

Each tax wrinkle produces its own complex set of rules. Taxpayers’ continuous efforts to minimise payments lead to yet more rules. Each tax jurisdiction has its own system, a diversity which both increases the intricacies of international business and creates opportunities for individuals and companies to place income where it is less highly taxed.

The complexity has created a lucrative business in tax advice, but it is hard to see how the overall system promotes either economic efficiency or social justice. The complexity does have one clear effect; it alienates people from their governments. The tax law evokes frustration and a righteous indignation which is often undercut by the fervent desire to hold onto particular tax advantages.

The recent moves against tax havens and some corporate tax shifting are a welcome exception – a few parts of the tax system are actually becoming less unjust. Foreign governments used mostly to ignore the practices of banks in Switzerland and other havens, but an international campaign against some of their practices has been effective. A more recent campaign against egregious corporate income-shifting seems to be gathering momentum.

The populations of many countries are declining in a time of peace and prosperity. That unprecedented and basic change in society must indicate something, but what? The experience of Japan, where the trend is most advanced, provides some hints.

Until about 1950, Japan followed the once universal pattern of population increasing along with incomes. Then the birth rate began to decline. By around 1970, the birth dearth began; from then on there have been too few babies to keep the population constant. For the past two decades, roughly 140 children have been born to every 100 women. At that rate, each generation is about a third smaller than the last, although lengthening life expectancies kept the total Japanese population from falling until 2011.

One effect of this demographic transition is undeniable. It has sharply reduced the size of the dynamic core of the economy: the people who are starting their adult life. They bring ambition, flexibility and a strong desire for new housing and amenities. In Japan, this group, the people between 20 and 25 years old, is a quarter smaller now than in 2000, and is set to decline by another 15 percent over the next two decades. Demographic factors are not the only reason Japan’s GDP growth has been slow – 0.6 percent annual rate over the last decade – but they have played a major role.

What is the right size for pensions? That question can be approached in two ways: “then” and “now”. Pensions, and other economic arrangements to support elderly people, may be considered repayments for what they did back then, when they were young. Alternatively, these payments may be considered as a share of output right now. In rich countries, the two approaches are in conflict. The “then” logic, which is based on promises made long ago, supports higher pension payments than the “now” logic, which is mindful of rapidly ageing populations. Politicians struggle to find acceptable compromises between the two approaches.

Until 60 or 70 years ago, politicians did not have to worry much because governments played a minimal role in supporting the few people who lived long enough to be unable to earn their keep. The elderly mostly relied on their own families for support. Moralists provided a “then” justification for this obligation: children had a duty to the parents who gave life, the young owed the old more than could ever be repaid for the provision of nurture and wisdom.

Philosophers and religious teachers often claimed that the duty of children to parents was as natural as that of parents to their children. However, many people must have remained unpersuaded. Otherwise, the injunction would not have been repeated so often in such solemn tones.

The Islamic approach to finance was once the most advanced in the world. The period of pre-eminence ended six or seven centuries ago, but the religion’s fundamental insights into the field could help form a financial system suitable for the 21st century.

From the beginning, Muslim teaching took a religious view of commercial relations and responsibilities. There are a few injunctions in the Koran and far more in the teachings traditionally attributed to Mohammad. I am not an expert, but the basic ideas seem clear enough: merchants should be fair, risks should be moderate and understood, and God condemns all rapacious financial practices.

During the first centuries of Islam, Muslims became great traders, providing an economic bridge between Asia and Europe. Europeans adopted and then further developed the Islamic techniques of providing credit and of sharing responsibilities, risks and rewards. Christian thinkers continued the Islamic debate over what was fair and just, and church authorities copied the Islamic teachers’ practices, ruling on the legitimacy of transactions, and exhorting merchants and investors to restrain their greed.

When I was a boy I was fascinated by my parent’s copy of “The Family of Man”. The book, taken from a 1955 photography exhibition at the Museum of Modern Art in New York, was like a window into the big world. The beautiful images of people from many countries showed that the human condition was essentially the same everywhere: we all went through the same noble story of birth, love, struggle, religion and death. Much later I learned that the photographer Edward Steichen, who designed the show, wished to inspire exactly such sentiments. In the words of Carl Sandburg, taken from the book’s prologue, the human race was “one big family hugging close to the ball of Earth for its life and being”.

My enthusiasm was typical. The exhibit was extraordinarily popular around the world, as was the book based on it. Tens of millions of people, from sophisticated New Yorkers to Guatemalan peasants, must have felt that the pictures – the French couple kissing, the circle of rapt South Africans listening to a teller of tales – expressed something fundamental and hopeful about the human condition.

Were we right? Was this an accurate representation of the unity and nobility of the human condition? The dawn of a new year is a good time to look back at this one-time cultural icon. The book’s depiction of work – about 10 percent of the 503 pictures, including a Pakistani construction site with elephants, an Iranian shepherd and Americans wearing suits in a boardroom – provides a good test-case.