The difference between compulsions: Tax and forced savings

Just having a look at the speech from Labour on savings.  One bit that has caught my eye so far is:

The Government collected tax, which is compulsory, and saved it for the future.

Now this is true, tax is compulsory.  And one way of looking at “compulsory savings” is as an increase in the tax rate.  But I think there is a more fundamental difference that makes compulsory savings a bit more ridiculous.

We pay tax as part of redistributive policy – tax is used to reallocate resources effectively.  We justify this morally by saying a couple of things:

  1. Land and other forms of endowed capital are fundamentally communally owned – but we need private ownership to ensure an efficient allocation of resources.  As a result, tax acts as a form of social rent – as part of the social contract.
  2. If we looked at society objectively – without knowing whether we would be born into poverty or wealth – we would say that some level of redistribution is desirable (Rawlsian justification).

So we have compulsory redistribution, which is justified by the “social contract” and the belief that the democratic process enforces this implicit contract.

Compulsory savings doesn’t have this justification.  We are taking someones wealth away from them, and then giving it back to them later – like when a kid in the playground takes another kids ball and plays with it, giving it back to them at the end of the lunch break.

The only “social contract” argument you could make here is that individual in society WANT to save, but lack discipline (time inconsistency).  But forced regulation is not the best solution if this is the case – providing institutions and incentives that help to solve the time inconsistency issue, while still allowing choice, is the way to go.

As a result, justifying compulsory savings on the basis that “tax is compulsory” is a slippery slope.

I will get back to reading the speech tonight I guess – I’ve sort of paused there 😀

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