The alternative to the public school system is charter schools. These are learning establishments financed by the government but operated by independent entities. They receive a fixed payment per student. A good example is the Success Academy, which manages 45 schools in New York City districts. Their students academically outperform schools in the most expensive suburbs where the average income is up to six times higher than the families of students at the Success Academy. Their pupils place among the top 1% performers in math and English in the New York State ranking. (58)
Santiago Morgan, education specialist, commented on the matter: “Charter schools are on an upswing in many US states. They are frequently at the center of debates between unions, families, political parties, and the state. Very few people are indifferent over the advance of this model. Any politician running for office has an informed and public opinion on the matter. Basically, they work as privately run schools with state funding. They are not private schools because they don’t charge a fee and are open to the public. In fact, most of their students belong to low-income sectors. But they are not public either. They follow far fewer regulations, are not held accountable in the same way as their public counterparts, and most importantly, the employment relationships they establish with their teachers are a lot more flexible than in public schools (hence the trouble spot with the unions). Their success and growth are due to the excellent results they have been producing in recent years. They have demonstrated substantial improvements in these three areas: lower dropout rates, higher rates of university admission, and higher scores on standardized testing. They outrank almost all their public counterparts and, in some cases, even private ones.”
It is commendable for the state not to get involved in schools and universities because it eliminates the risk of political use and the intent to influence students’ thoughts. This is a very relevant issue mainly in countries that have experimented populist and authoritarian governments.
THE INVERTED CURVE – TAXES
The first country to introduce an income tax was the United Kingdom in 1798 as a means for financing its war against France. The United States incorporated a federal income tax in 1861 to help pay for the Civil War on a temporary basis. It was later repealed by the Supreme Court but then reintroduced in the sixteenth constitutional amendment, which authorized the federal government to collect it once again. Taxes and spending did not exceed 15%–17% of GDP in most countries until World War II. (59) By the end of the war, with the expansion of the welfare state, public spending started to grow, eventually reaching 35%–50% of GDP in most developed countries and a slightly lower level in developing countries.
In the current context of the pandemic and high rates of inequality, the discussion among many economists and politicians revolves around raising taxes on the rich, not just on income but on assets as well. NGO Tax Justice Network analyzed the effective income tax rate paid by different income groups in the United States –including income tax, consumer tax, healthcare tax and property tax– as well as the different proposals made by the main political figures. (60) Bernie Sanders proposed raising the total tax rate on the rich to 98.2%, Elizabeth Warren proposed 86.4%, Joe Biden, 30.6%, and Donald Trump argued to keep it at its current 23%. Sanders and Warren’s plans would generate a multi-million-dollar exodus, severely affecting the economy; while Biden’s proposal would be more balanced and Trump’s would simply perpetuate inequality even further.
Since the 1980s, tax systems have become increasingly less progressive. Today, an average American pays almost 27% of their income in taxes, a number that jumps to 40% when you consider healthcare payments made by their employer. In comparison, the top 1% pays 27% in taxes and the richest 400 families pay only 23%. This is because taxes on consumption, labor, and healthcare account for almost the entire tax burden of those who earn the least. In contrast, they represent a very low percentage among those with higher incomes.
Let us take a look at where these incomes come from. The maximum tax rate on personal income is 45% in most European countries, 37% in the United States (with certain states adding local taxes), 45% in China, and 32% on average in Latin America. (61) The consumption tax is around 8% in the largest US states, (62) whereas in Europe and most developing countries it is roughly 20%. Argentina is a peculiar case, reaching 34% once VAT, provincial taxes, and other distortive taxes are taken into account. On average, social security tax is 21% in the European Union, 12% in Latin America, and only 7.65% in the United States. (63) Although the tax rates of the richest people may seem high, in practice, there are several deductions and mechanisms to reduce the effective, real rate, while those who earn the least tend to spend a higher percentage on taxes due to the impact of labor and consumption taxes.
A progressive tax system should be simple, with few taxes and few exceptions. Some of its components should be low taxes on consumption and labor, a significant additional tax on second homes not currently being rented, income taxes with few deductions, taxes on share buybacks, carbon tax, and limits on the use of trusts and other tools for reducing tax payment. Exceptions and complexity not only benefit the rich but also add accounting, legal, and administrative expenses to the entire economy, increasing the prices of goods and services. Americans spend 8,900 million hours a year filling out tax returns, which represents 45 hours for every adult. This costs the economy $409 billion a year, (64) which is equal to 2% of GDP and would be enough to reduce the amount of income tax paid by Americans earning under $77,000 a year from 12% to 2%. (65) It is unfathomable that in the era of artificial intelligence and automation, it is so expensive and difficult to pay your taxes.
Now, in regard to the current tax rates for the richest sectors, both on labor and capital, I do not believe they should be increased. A rate higher than 40% discourages investment, risk-taking, innovation, and private initiative. The problem is that due to the complexity of the tax system and intricate legal structures, many people end up paying far lower rates and evading them altogether, generating a significant shortfall in tax collection. It is preferable to have a lower income tax than a higher one with a host of exceptions.
According to the IMF, tax evasion costs governments $3 trillion a year, and bribes cost them another $1.5–$2 trillion. Tax havens cost us between $500 billion and $600 billion a year in lost public revenue. (66) According to a 2019 paper published by Larry Summers, an American economist and former director of the National Economic Council for President Obama, tax evasion in the United States could reach $7.5 trillion in the next 10 years, of which $5 trillion will have been evaded by the richest 1%. (67) With that money you could cut taxes for the lowest income bracket, finance the “de-carbonization” of the global economy, and invest in science and infrastructure.
Offshore companies are at the center of the controversy around tax evasion. They are useful tools for carrying out international business deals or securing assets. In many cases, people who live in Russia, China, Argentina, Venezuela, and some African and Middle-Eastern countries chose to place their money offshore to keep their money safe from arbitrary government measures that tend to expropriate their citizens’ assets, not because they want to evade taxes. (68) But in the case of the citizens of developed countries, these instruments are frequently associated with tax evasion or tax deduction through mechanisms that may be technically legal but are highly questioned.
INEFFICIENT PUBLIC SPENDING
According to the IDB, inefficient public spending in Latin America and the Caribbean reaches up to 4.4% of GDP. Inefficiency includes “transfer leakage, deficient spending on public purchases, and deficient spending on employee compensation.” Values vary between 1.8% of GDP in Chile, 3.9% in Brazil and a rampant 7.2% in Argentina. According to this report, these inefficiencies add up to $220 billion annually, the equivalent of Peru’s total GDP. (69)
Argentina is the perfect example of inefficient public spending in Latin America. In 1962, GDP per capita in Argentina was higher than in Australia, Italy, and Japan,