Land of opportunity, land of the free?

Can more freedom make us less free? It seems like an odd question. But an editorial in the New York Times provides an interesting answer. It looks at the effects of unfettered markets.

When questioned about the enormous income inequality in the United States, the cheerleaders of America’s unfettered markets counter that everybody has a shot at becoming rich here. The poor, we are told, can use their own bootstraps. Unfortunately, the American dream is not that broadly accessible.

Why might they say that? Read on.

Recent research surveyed by the Organization for Economic Cooperation and Development, a governmental think tank for the rich nations, found that mobility in the United States is lower than in other industrial countries. One study found that mobility between generations — people doing better or worse than their parents — is weaker in America than in Denmark, Austria, Norway, Finland, Canada, Sweden, Germany, Spain and France. In America, there is more than a 40 percent chance that if a father is in the bottom fifth of the earnings’ distribution, his son will end up there, too. In Denmark, the equivalent odds are under 25 percent, and they are less than 30 percent in Britain.

America’s sluggish mobility is ultimately unsurprising. Wealthy parents not only pass on that wealth in inheritances, they can pay for better education, nutrition and health care for their children. The poor cannot afford this investment in their children’s development — and the government doesn’t provide nearly enough help.

Tax, of course, pays for education, nutrition and health care for children, and thus provides people with a route to more social mobility and more freedom to move up the rungs of the income ladder. The mood in America and other parts of the English-speaking world seems to be swinging away from the demonisation of tax, on all sides of the political spectrum. Globalisation is one reason why people worry: take, for example, the words of Matthew Slaughter, one of President George W. Bush’s former economic advisors, or of Murilo Portugal, an IMF deputy managing director. Or look at the debate over the distorted tax treatment of private equity that has been raging on both sides of the Atlantic. (Read more about it in these July 2007 stories in the New York Times, the Financial Times, and Newsweek; TJN has submitted evidence to the UK House of Commons' Treasury Select Committee examining private equity. Read about it here.)

The more level the playing field on tax, the more freedom people will have to prosper. And, while we're on the subject of freedom, better international tax co-operation and exchange of tax information between countries would also provide democratically elected governments with more freedom to set their own tax policies without having to succumb to the pressures exerted from crime-addled tax havens and other jurisdictions. We will be turning to this tax competition shortly . . . .