In the National Basketball Association (NBA) in the US, there is a period of free agency that takes place after the conclusion of the NBA Finals and the NBA Draft. During free agency, NBA teams make pitches to players, attempting to woo them to join the teams. It may not sound like much, but it is one of the most exciting times on the NBA calendar. Imagine if some of the most high-profile people in Malaysia were to, say, change jobs at the end of every year in an extremely public fashion, how abuzz would Malaysians be?
Grant Williams, an NBA player who had played for the Boston Celtics for four years, signed a US$54 million contract to play with the Dallas Mavericks for four years. A big reason he chose the Mavericks is the state tax. Texas does not impose a state tax, whereas Massachusetts has a “millionaire” tax of 9% on annual earnings above US$1 million. Williams himself said, “In Boston, it’s really like US$48 million with the millionaire’s tax, so US$54 million in Dallas is really like US$58 million in Boston and US$63 million in [Los Angeles].”
It is not exactly news that people respond negatively to higher taxes, even (or perhaps especially) the wealthy. But they are sometimes absolutely necessary. Whether it is to fund new public goods and services or as a means of ensuring a more equal distribution of income and wealth, it should not be controversial that taxes, used well, are important to a given country. Malaysia is no exception. And while it is important for us to address public expenditure issues such as the reform of subsidies, leakages and wastages, or public pensions, it is just as important, if not more so, for the fiscal health of the nation that we undertake a thorough reform of our public revenues and, therefore, taxation.
However, as we know with the introduction of the Goods and Services Tax (GST) in April 2015, new taxes are tremendously unpopular. But if we have to do it for the sake of our long-term fiscal sustainability, a good question to ask might be: Under what political and social circumstances would a new tax be supported by the general public, or even the political class? And under what circumstances would it not? The populist reasons are evident, but those reasons are the same under any circumstances. What could explain some potentially different circumstances?
In “The rise and fall of Imperial China: The social origins of state development”, Harvard professor of government (political science) Yuhua Wang puts forward a really unique argument as to why the two-tax reform in China’s Tang Dynasty in the late eighth century received broad support — despite an increase in taxation, especially for the wealthy — from the major Chinese officials.
The two-tax reform proposed to replace the existing flat tax regime based on public land tenure into a progressive tax regime. Specifically, the government introduced a household levy based on the size and property of every household, as well as a land levy, collected in summer and autumn on the basis of all land under cultivation in 779. The reform was successful. In 780, more tax revenue was collected from the new system than from all sources in the previous year. Furthermore, in terms of elite support, according to Wang’s research, only three major officials out of 141 publicly expressed opposition to the reform.
Thus, a tax reform that raised taxes in a more progressive manner managed to receive broad support from the elites. How was this possible? According to Wang, it had a lot to do with the relationship between the state, the elites and the rest of society. He calls this the “elite social terrain” — the ways in which central elites connect local social groups and link to each other.
Wang describes three types of elite social terrains. For the purposes of this article, I will describe just two. When elites are in geographically wide areas with greater density and interconnectedness in their networks, they prefer a strong state capable of protecting their broad interests, and their cohesiveness therefore constrains the ruler’s (in this case, the Emperor’s) power. This is what Wang calls the “Star” terrain. However, when elites rely on very local bases of power and they are not tightly connected at the central level, they will instead look to hollow out the central state from within and provide order and public goods and services locally. Wang calls this the “Bowtie” terrain.
The intuition is as follows. In the Star terrain, each central elite is connected to social groups in a wide spread of geographic areas and, in most cases, they also link together different social groups. To provide services to such a broad stakeholder group, centralisation is key. By pooling resources (taxes!) to be redistributed from the centre to groups that everyone cares about, these central elites could fulfil their objectives at the lowest cost.
However, in a Bowtie network, central elites are only connected to social groups in a specific geographic area and thus, are extremely locally focused. Instead of a power base that comes from a wide geography, these elites gain legitimacy from the provision of goods and services at a very local level. As such, they are less likely to support the centralisation of power as they have less control of how that power might be used and redistributed. In this instance, the preference of these elites is to ensure that power remains concentrated at local levels.
The two-tax reform was introduced at a time when, according to Wang, China’s elite social terrain was very much in a Star terrain. Central elites cared about stakeholders and constituents far beyond their local bases and thus, support for a new tax system that increased taxes and made them far more progressive was far easier to attain. On the other hand, had the elite social terrain been a Bowtie, where the power base was far more local, new taxes would have faced greater resistance.
Of course, there are other reasons beyond the elite social terrain why taxes may be supported or otherwise. But from a sociological perspective, Wang’s persuasive argument (I encourage everyone to read the book, though it may be a little bit on the academic side) that elite social terrains can impact the support for new taxes is worth considering. And if we think of Malaysia’s elite social terrain where members of parliament sometimes have to double hat as welfare officers, do we have a terrain where central elites tend to care more about the whole (a Star terrain) or more about their local bases (a Bowtie terrain)?
If indeed Wang’s hypothesis holds — that a Star terrain can make taxes more supportable — then we should consider what we might do to inculcate an elite social terrain that is more Star-like than Bowtie-like. The imperative is clear. More and more populist measures in favour of local bases, versus greater fiscal responsibility, can have large long-term consequences for the nation. A recent paper by economists with the Kiel Institute of the World Economy and the University of Bonn quantifies the economic costs of populism. Studying 51 populist presidents and prime ministers from 1900 to 2020, they found that after 15 years of populism, GDP per capita was 10% lower than what it might have been due to economic disintegration, decreasing macroeconomic stability and the erosion of institutions. It isn’t just our national finances that can ill-afford such populist measures, it is our entire development path. Can we come together to better understand our elite social terrain, and make moves towards a more sustainable future?