No lantern-rub for Gini: Policy tradeoffs in crises

One of the most interesting discussions in the last couple of weeks, is about how Program countries are experiencing a deterioration on income equality. Papers, presentations, conference series and articles are appearing, calling attention to a stark reality in the European south: As bailout deals are being implemented, Gini coefficients are deteriorating.

There’s much to be said for this- first, it certainly feels true, and all indications are that the more you employ austerity, the more unequal society becomes. Then again, there’s no literature (at least as far as I know) telling us that this is a characteristic of IMF and Troika programs, rather than a natural result of a sovereign crisis or a banking crisis. Second, this is probably attributable to some degree to state layoffs and a counter argument, one that I admit to have made, is that some of these employees shouldn’t have enjoyed the income they enjoyed for years, as they were unnecessary state employees, hired for the sake of clientelistic politics, not because the state needed them to begin with.

But there’s another rub- there are always tradeoffs in policy decisions, and more so under “extreme” conditions like the ones we are finding ourselves in, in PIGS and other dirty neighbors.

How (not) to rub the Gini(e)

How (not) to rub the Gini(e)

One good example is Cyprus. A new land tax is being employed, with virtually complete approval- from the government, from the Parliament, from the Troika and from the people of the country. Few, if any, are raising voices against it, except some not-so-convincing real estate developers who, naturally, will be hit the hardest from the land tax.

As a progressive tax, ostensibly employed so the state could draw revenues, it drew nothing but smiles from the Troika. And, as a means by which the rich are being forced to pay more than the less fortunate, it is being hailed as an excellent example of how Programs can impose, “despite what everyone is saying”, a sort of burden sharing in society that appears to be equitable.

I wouldn’t argue for it or against it, except to note that, in this particular example, and because of the dismal state of the Land Registry Department, revenues are nowhere near expectations: The state sends pay slips, but doesn’t really know who owns what, leading to horrific delays. Again, there’s much to say about that, and about reforms, but that’s another point.

The main point is that all policy decisions have tradeoffs. The land tax, while equitable, is also more complicated than it looks. First, it will push land prices down, rather than up, which is what politicians are otherwise trying to do. Some would say that this is a good thing after a bubble, and I agree, but it doesn’t do what they say it does.

Second, and more importantly, because of the progressive nature of the tax, something else is happening. Middle-income households, who hold at least some land (mostly inherited) are finding that the new land tax is increasing the cost of holding land beyond what is bearable. Note that the new tax comes on top of a series of other taxes on land (sewage fees, local taxes, municipal development fees, and so on). This also affects low income households, who also frequently hold some bits of land. They pay less per hectare, but more as a percentage of their revenues.

So, yes, this pushes land prices down. But then again, it increases the overall cost of holding land. The result is clear pressure for people to start stripping their household from this asset. If they can, of course, since a lot of it is tied up as collateral in banks.

But the only ones who can buy it, are people who can draw revenues from the land, quick or people who can afford the cost (ahem, more Russians?). Real Estate developers, largely a root cause of the crisis, are the only other clear group of people capable of bearing the cost of owning land at this point, partly because they can hope to draw revenues from it. While their own dismal asset declines don’t allow them to start buying en masse, this will start happening as the largest (and most indebted) ones are being weeded out and the healthier ones stay on.

So over time, this new, more equitable tax, is actually worsening off wealth distribution. It may not show in Gini coefficients for some years, as it’s wealth, not income, but the final result will be the same nonetheless: More real estate to fewer hands and asset stripping for middle and lower income households. In other words, as a politician would say, a “less fair society”.

This is not to say that the land tax should not have been adopted. But, it’s important to remember that there’s a reason why there’s no such thing as a free lunch- someone always has to pay. And, in the case of policy decisions, and especially taxes, it matters only a little whom the burden is placed on. In the end, this “fair” tax will have “unfair” outcomes.

This is something that we should bear in mind when discussing tax burdens, equitable crisis policies, making the rich pay and so on. Whatever the final decision may be, it should be considered throughout, not just on its face. And, perhaps more importantly, “fair” policies may make good headlines, but they often can –and do- make very unfair politics.

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