I have been running courses for senior Chinese managers for nearly twenty years now, mainly in Australia, but sometimes on the mainland. Outside of the classroom, one topic that often comes up for discussion is the rule of law in the West. As it is explained to me, countries like Australia and the US are “law abiding” nations, where compliance is part of our culture, (by implication, that is not so evidently the case in the People’s Republic of China). After the observation has been made, the next question is always: why?
When replying to my questioners, I usually fall back on safe answers. Laws, rules and doing what is required is almost seamlessly built into our way of life. It starts with young children, who quickly learn that there are rules, and they have to be followed. That lesson is amplified once they begin to take part in some kind of sport. Soon, the consequences of breaking the rules also become apparent: whether it is taking examinations or learning to drive a car, we see and absorb the other side to being law-abiding: break the rules, and there are penalties.
Each time I explain all this, I wonder if one of my listeners will decide to quote Lao Tzu:
131 Govern the state by being straightforward; wage war by being crafty; but win the empire by not being meddlesome.
131 How do I know that it is like that? by means of this.
132 The more taboos there are in the empire
The poorer the people;
The more sharpened tools the people have
The more benighted the state;
The more skills the people have
The further novelties multiply;
The better known the laws and edicts
The more thieves and robbers there are.[1]
Lao Tzu might have been writing 2,500 years ago, but he was right. Lots of laws provide the opportunity (and for some people the incentive) to find a way round the rules. Indeed, away from my superficial commentary on law-abiding behaviour in Australia and America, a more careful examination of our behaviour is not so positive. I could imagine a quite different discussion with those Chinese executives if I decided to get into details.
We could go back to sport. To play, you have to know the rules: true. However, youngsters quickly learn advantage comes from pushing right up to the boundaries of the rules, stepping over them if they can. Team managers are complicit in this: “good try, Jenkins”, or “careful, son”. Driving a car? A significant proportion of drivers see the rules of the road as things to be ignored. Creeping over the speed limit, failing to stop at a stop sign, or, in North Carolina, failing to indicate a lane change or turn. What’s the phrase: ‘rules are honoured in the breach’!
As adults, it continues. Board directors looking after their own interests, happily ignoring their legal obligations to the company they serve. Politicians and salesmen are indistinguishable from one another, cheerfully telling one lie after another as they promote what they want you to buy.
However, if I wanted to choose the best example of law and how it is subverted and avoided, all I have to do is to turn to taxation. Helped by an army of accountants and other financial experts, finding ways around the law to minimise taxable income is a major past-time. I should add many who do this do not see themselves as law breakers; they are just ‘managing’ their finances.
This last example has been on my mind recently, as the US Congress is in the throes of seeking to bring about a radical change in the tax law of the USA. If I was going to be a little more honest in explaining to Chinese visitors the limited extent to which we are law-abiding today, the debate in Congress over major tax reform is particularly enlightening. You are probably drowning in commentaries and opinions on this topic, but there are some issues I could highlight if I was about to offer a better presentation on the rule of law to a group of visitors.
First, why is a new tax law is being considered? It is said the key issue is simplification, and the current government’s desire to reduce the burden of rules and regulations. For many years a favourite whipping boy for the Republicans has been the US Federal Government’s ‘Internal Revenue Code’ (the tax law).[2]
Critics are prone to observe the code is over 70,000 pages long. Here’s our first problem: fake news! This claim is a nonsense: the actual income tax regulations amount to around 2,600 pages.[3] That’s long enough, but what about all those other, often quoted pages? Those 70,000 comprise explanatory materials, summaries of court cases, and all the other material much loved by tax specialists trying to find loopholes, legal or not, for their (usually rich) clients.
Simplification would be a good idea. I’m with Lao Tzu on this. Less rules and regulations, less likelihood that there will be people trying to work out how to get around what is required. I would love a system where there are tax breaks and no deductions for individuals. No tax up to $40,000 a year, and then two or three levels of increasing taxation as incomes increase. The only variations: slightly higher cut-in points for couples, and higher again for couples with dependent children. That’s it. Simplification. I haven’t got around to developing the Sheldrake Tax Code for Companies yet, but I’ll have the STCC ready next week!
Since there may be a challenge in getting my proposals into law, it might be time to move on to a second, and reasonably straightforward topic, on who has the responsibility to make and to review the law. In the US, Congress passes laws, of course. The President can trumpet on about what he wants, but his role is to sign legislation passed by Congress (or not, of course).
Today, the rules are very clear to everyone – with the possible exception of the current President. With a majority in both the House and Senate, the Republicans are in the position to repeal the old code, and introduce a new one. If doing so is proving difficult (here as in many other areas), it is the internal squabbles among the Republicans delaying or stymying action.
Once approved, laws are implemented by one or more government departments. Those in charge of putting the law into practice can, and do, develop all sorts of rules and regulations to ensure what has been agreed is executed. Having worked for the Australian Government for a few years, I know departments have ways to ‘massage’ laws. They find techniques to delay those parts of law they prefer not put in to practice, and can create nice operational complications to ensure that action is hard to implement. Sounds bad? On the whole, it is positive: the inertia of government departments can ensure radical changes are slowly and carefully introduced.
However, more to the point, under the tri-partite system of government, anyone can take the government to court on the grounds proposed legislation or regulations are unconstitutional, discriminatory, or simply wrong. When I have explained this feature of our system of government, my Chinese listeners are very interested. Can legislation be blocked? Yes, it can, and has been. In doing so an important test is: “is this law fair?” On this topic, we could turn to Martin Luther King, and his comments on ‘just laws’ in his ‘Letter from Birmingham City Jail’. [4]
“One may well ask, “How can you advocate breaking some laws and obeying others?” The answer is found in the fact that there are two types of laws: there are just and there are unjust laws. I would agree with Saint Augustine that “An unjust law is no law at all.” Now what is the difference between the two? How does one determine when a law is just or unjust? A just law is a man‑made code that squares with the moral law or the law of God. An unjust law is a code that is out of harmony with the moral law. … Let us turn to a more concrete example of just and unjust laws. An unjust law is a code that a majority inflicts on a minority that is not binding on itself. This is difference made legal. On the other hand, a just law is a code that a majority compels a minority to follow that it is willing to follow itself. This is sameness made legal. Let me give another explanation. An unjust law is a code inflicted upon a minority which that minority had no part in enacting or creating because they did not have the unhampered right to vote.”[5]
He then goes on to respond to his critics:
“These are just a few examples of unjust and just laws. There are some instances when a law is just on its face and unjust in its application. For instance, I was arrested Friday on a charge of parading without a permit. Now there is nothing wrong with an ordinance which requires a permit for a parade, but when the ordinance is used to preserve segregation and to deny citizens the First Amendment privilege of peaceful assembly and peaceful protest, then it becomes unjust. I hope you can see the distinction I am trying to point out. In no sense do I advocate evading of defying the law as the rabid segregationist would do. This would lead to anarchy. One who breaks an unjust law must do it openly, lovingly (not hatefully as the white mothers did in New Orleans when they were seen on television screaming “nigger, nigger, nigger”), and with a willingness to accept the penalty. I submit that an individual who breaks a law that conscience tells him is unjust, and willingly accepts the penalty by staying in jail to arouse the conscience of the community over its injustice, is in reality expressing the very highest respect for law.”[6]
Characteristically incisive, Martin Luther King makes it clear. You can protest about an unjust law. You can do so by writing to your member of Congress. You can write articles. You can march. But, if you choose to break what you see as an unjust law, it is still the law, and you have to accept the punishment that applies. And that applies today. The Republicans are intending to use their majority in Congress to change the tax law, the Internal Revenue Code. They have that right. If we think the proposed new tax law is unjust or unfair, we shouldn’t try to cheat, because we will be fined (or worse), but we can go to court and have the law reviewed. Sounds good!
Oops, I forgot something. This tripartite system I keep mentioning assumes that judges are neutral, wise people. Right now, the Republicans are busy filling courts with ‘their people’, which means we are seeing an increasing proportion of judges who are either biased or incompetent (or both). In other words, they are making sure they can get their way by bending the rules, just as they hope to do with redistricting (gerrymandering) and so many other changes.
Their agenda has always been a puzzle for me. On the one hand, Republicans rail against legislation and the role of government: laws are institutionalised coercion, limiting the freedom of the individual. Some laws are necessary, but liberty should be the aim. [7] On the other hand, they want to control the legislation so that they can pass laws that reinforce the dominance of the elite. Using democracy to limit democracy, more laws to keep control?
It seems we are stuck. In the ideal world, the checks and balances of the government system ensure that we are unlikely to see laws passed that are unfair, unjust. If ever the system was like this ideal, it certainly isn’t now. Give up? No! Back to Martin Luther King who demonstrated unremitting pressure through marches, protests, and even breaking the law can hold government to account, even if the only reason members of Congress listen is because they want to be re-elected!
There’s more to the comment a “just law is a man-made code that squares with the moral law”. We can reasonably ask: does the proposed tax legislation square with what is moral? Since what the Republicans are proposing seems to change by the day, it is hard to be clear, but we can examine some key elements of the broad framework being followed. [8]
For individual taxpayers, that framework calls for three tax brackets: 12%, 25%, and 35% (currently there are seven brackets, with the lowest one being 10% and the top one being 39.6%). Please note, this is still under debate. At the same time, the approach includes the repeal of various other taxes, consolidating the standard deduction and personal exemptions into a larger standard deduction and eliminating most itemized deductions. It certainly looks like simplification!
To date, it seems likely one central plank of taxation on individuals will remain: progressive taxation. This is an important concept, increasing the proportion of tax paid as income increases. That those who earn more should be taxed at a higher rate is seen as a socially appropriate approach. The law under discussion keeps to that principle.
There is an alternative approach, the so-called ‘flat tax’ system, which sets one tax level for everyone, irrespective of income. There are some who argue a flat tax system would be fair, because everyone is treated in the same way. However, most of us would argue a progressive tax is fair, because it reduces the tax burden for those on low incomes, where most of what they earn is needed to cover necessities. At least the Republicans are preserving this one element of ‘just’ taxation.
Hang on, there are principles and then there is practice. Applying the proposed approach will result in the burden of taxation being reduced to the largest extent for those on the highest incomes (the opposite of a progressive logic):
If it gives us nothing else positive, the Republican tax plan—and, in its Senate form, the health-care repeal—at least provides clarity. There is no debate. The middle class will, in the long run, pay more in taxes than under current law, and the rich will pay less. … The report [by the U.S. Congress Joint Committee on Taxation] shows that the rich benefit and the poor are hurt in every way that it measures. For example, the effective tax rate—meaning the percentage that people, on average, actually pay after they take all deductions—changes in a precisely regressive form. The poorer you are, the higher your effective rate will rise. By 2027, only those making a hundred thousand a year or more will see an actual cut in their effective tax rate. And, as could be expected by now, the more they make, the greater the cut in their effective rate. By 2025, there is a direct transfer of money from the poor to the rich and corporations.[9]
And there’s more! If the legislation passes, the government will collect around $1.5 trillion less over the next few years. This is over the same time period that millions of Americans will reach retirement age, increasing the demand on Social Security and Medicare. Just to be clear about what that means, in the current year, the government is running a deficit getting close to $500 billion. Keep government support provisions in place, and it is estimated that will increase to a deficit of at least $1.5 trillion by 2027. We are living on borrowed money, and the borrowing will increase! [10]
That problem can be solved, of course. Cut the services. Sadly, that will increase the burden on the poor and the elderly even further while the rich get richer, but something has to give, doesn’t it? Or there is another alternative. Keep racking up huge debts, and let the millennials sort out the mess!! In the meantime, what will the poor do? Suffer, or, increasingly turn to subsistence living or crime as the only alternatives. [11]
We know about this. To remind you of one of Thucydides’ observations:
[S]ince you know as well as we do that right, as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must. [12]
Is that fair? Is it time to be out on the streets? Writing to your representative in Congress?
I haven’t finished. For businesses, the framework calls for a reduction of the corporate tax rate from 35% to 20%. At the same time, it also addresses ‘pass-through’ income:
A key reason why the tax plan … is costly and heavily tilted to the wealthiest households is its special, much lower top rate for “pass-through” business income. This is income from businesses such as partnerships, S corporations, and sole proprietorships claimed on individual tax returns — that is, it “passes through” to the business owners and is taxed at the owners’ individual tax rates … These businesses already have the advantage of being exempt from the corporate tax on profits and taxes on dividends. Under the tax plan, pass-through income would be taxed at no more than 25 percent — far below the 39.6 percent top individual income tax rate that now applies to pass-through income, or the 35 percent top rate that would apply to individual income.[13]
This is getting very technical, but I hope the outcome is clear. The government is proposing a new tax law. It would achieve two critical outcomes. First, it would give more to the rich, through reduced individual tax and changes to business taxation. This will be achieved at a cost to the less well off. Second, it will reduce total government income, thereby increasing the future deficit, most likely requiring cuts to many social welfare and health programs.
The zealots behind all this have two clear principles. First, you are responsible for your own life, so make your own choices: if you work hard, you could become rich. It makes sense to the 1%, so it should to you, too. Second, all this can be justified by the illusory belief in a trickle-down theory: as taxes go down, increasingly rich businesses and individuals invest more.[14] Will they invest in businesses to create jobs, or in automation, digital technologies, offshore manufacturing and very expensive paintings? Ah, John Galt, if only you were with us today …
In commenting on the rule of law, I can’t help noticing my best commentators are Lao Tzu, his contemporary Thucydides, and Martin Luther King. Intelligent people who are all too easily forgotten or ignored; though I’ve met some Chinese business leaders who have read all three!
What can we conclude from all this? The rule of law, the tri-partite system, these are central to our version of democracy: ways to protect minorities from impositions by the majority. Today, principles and practice seem to be drifting further and further apart, those same institutions now imposing the will of the minority on the majority. If you’re a law-abiding person and want to live in America, the situation is quite clear. In a country increasingly controlled by free market extremists, who take individualism and personal liberty to the extreme, all you have to do is be rich, preferably very rich indeed!
[1] Lao Tzu, Tao Te Ching, Book 2
[2] You can source the current version here: < https://www.irs.gov/privacy-disclosure/tax-code-regulations-and-official-guidance#irc>
[3] You can go here for a succinct explanation: <http://www.slate.com/articles/news_and_politics/politics/2014/04/how_long_is_the_tax_code_it_is_far_shorter_than_70_000_pages.html>
[4] A letter in response to eight religious leaders arguing racial segregation should be addressed in court, not on the streets, 16 April 1963. Republished as part of his book, ‘Why We Can’t Wait’, Harper and Row 1964.
[5] Op cit, page 5
[6] Op cit, page 6
[7] Friedrich Hayek’s book, The Constitution of Liberty, University of Chicago Press, 1960 is seen as a key analysis of this – see page 222 on the importance of the state having the sole monopoly in coercion.
[8] See the Journal of Accountancy: News, 27 September 2107. The Brookings/Urban Institute Tax Policy Center confirms tax cuts would benefit high income earners, and lower income groups would lose over time.
[9] The Shocking Math of the Republican Tax Plan, Adam Davidson, 17 November 2017, The New Yorker
[10] Center for Budget and Policy Priorities, 2 November 2017 < https://www.cbpp.org/research/federal-tax/republican-leadership-tax-plans-pass-through-tax-break-would-provide-massive>
[11] See the devastating account of poor lives in Alice Goffman, On the run, University of Chicago Press, 2014
[12] This quote comes from early on in Thucydides’ History of the Peloponnesian War, when the Athenians are speaking to the Melians. This short section, often referred to as The Melian Conference, is a masterful and powerful analysis of confrontation. See Chapter XVII, page 661: I was using the Project Gutenberg eBook, Translation by Richard Crawley, 2009
[13] Center for Budget and Policy Priorities, 2 November 2017 < https://www.cbpp.org/research/federal-tax/republican-leadership-tax-plans-pass-through-tax-break-would-provide-massive>
[14] The largely discredited Laffer Curve: Jude Wanniski, “Taxes, Revenues, and the `Laffer Curve”, The Public Interest, Winter 1978. Investors today prefer businesses that leverage network effects and artificial intelligence (the Googles and Facebooks of this world), avoiding both high labour and fixed capital costs.
