July 20, 2007

Role confusion

Quico says: So within the last 48 hours, we've found out that
Watch this space for more announcements from the super secret Sixth Motor of the Revolution. Next week, they'll tell us the Agriculture Ministry gets to run monetary policy and the Central Bank is going to be in charge of the army, after that the Defense Ministry will take over the schools while the Education Ministry organizes elections and CNE runs TVES.

Oh, and who'll pump out the oil? Avepane, of course...hey, you gotta have some continuity.

Verily I marvel at their strategic vision, at this fiendishly clever plan to confuse the hell out of the Marines when they invade. When the gringos go to snatch PDVSA, all they'll find is people making sneakers. When they storm into the National Assembly, they'll find a massive Vertical Chicken Coop instead. And when they try to take over the Supreme Tribunal they'll find it turned into a sprawling whorehouse.

Think I'm kidding? Think again: those last two bits are already in place...

July 18, 2007

The Petroleum Tax Credit

Quico says: Over the last two posts (here and here), I've explained why I think the Venezuelan state should distribute all of its oil income (yes, all of it) to the population and finance itself like any normal government would: through tax.

(This is an idea that reader Torres first put in my mind, but I'm going to stop calling it the Torres plan, because I don't think he would agree with the ideas in this post.)

The big question is: how could you make an oil rent distribution system progressive, efficient and fiscally feasible?

Simple: by making the payouts in the form of a tax credit.

The pitch is pretty straightforward. Citizenship is about rights, but it's also about responsibilities. All citizens have the right to an equal share of the nation's oil revenue, but they also have a responsibility to pay their taxes: this plan works by marrying that basic right with that basic responsibility.

As I envision it, the form you would use to declare your taxes is the same form that would entitle you to receive the Petroleum Tax Credit. If you don't file, you get nothing. And why should you? You've failed to hold up your end of the bargain.

So how does the system work, precisely?

Lets say Person A is unemployed and earns nothing at all. She still has to go down to her local Seniat office and sign a tax form that says "last year, I earned nothing at all." For her trouble, she gets her Petroleum Tax Credit: lets say Bs.50. (Remember, from next year the bolivar will be "fuerte!")

Person B is a buhonero earning Bs.100. To claim his tax credit, he has to pay tax on the money he's earned. Lets say the tax rate is 25%. He keeps the Bs.50 Petroleum Tax Credit, plus Bs.75 out of the Bs.100 he's earned. His after-tax income is Bs.125. As a result of the plan, he ends up Bs.25 better off: effectively, the plan works as a wage subsidy for people on low-incomes. (In practice, half of his Tax Credit would be withheld.)

How about Person C, a clerk who earns Bs.200? Just like anyone else, she gets the Bs.50 Petroleum Tax Credit, but she also has to pay Bs.50 in tax. So Person C is at the break even point - her after tax income is the same as her pre-tax income.

Person D is a lawyer, and he's doing great: he earns Bs.1,000. Even though he's relatively well off, he still gets his Bs.50 Petroleum Tax Credit: everyone does. But he has to pay a 25% tax on his earnings. That's Bs.250. So his net contribution to the state is Bs.200 - in his case, the entire Tax Credit has been "clawed back," and then some...

Not progressive enough for you? Lets add some higher income tax brackets.

Person E is a fat cat banker earning Bs.2000. But after the first Bs.1000 in income, the marginal tax rate jumps to 50%. Because he is a citizen of this country, Person E still gets his Petroleum Tax Credit. But he has to pay 25% tax on the first Bs.1,000 he's earned, (Bs.250) and 50% on the second Bs.1000 (Bs.500.) So he gets Bs.50, but pays Bs.750 in tax. His contribution is Bs.700.

Graphically, the system would look like this:
So, what's good about this plan?
  1. It's progressive: the richer you are the more you pay.
  2. It codifies the state's relationship with the individual. No more political manipulation of oil handouts. The money you get is a right, not a favor.
  3. It formalizes the informal economy. It gives poor people a powerful incentive to "go formal" and start declaring tax.
  4. It fights poverty. The basic Petroleum Tax Credit acts as a minimum income guarantee for everyone. Low wage earners get their wages boosted.
  5. It makes waste and corruption more politically visible: since the government has no alternative source of income, people realize that the money the government spends is money they gave it.
And what are the challenges?
  1. Tax administration: everyone has to be assessed. Seniat would need to step up its game immensely, and that will be expensive.
  2. Attempts at tax evasion are certain: People would have an incentive to file their taxes (to get the tax credit) but also to under report their income in the declaration. Seniat will have to develop its investigative capabilities substantially.
  3. Work disincentives: low wage earners would get to keep only 75% of what they earn, instead of 100% as is the case in the informal economy. They'll still file, for the credit, but their marginal propensity to work may fall.
Now, this is just a brief conceptual sketch. It would take substantial, detailed work to arrive at a full proposal that sets the tax credit, the marginal tax rates and the tax bracket thresholds at fiscally sensible levels.

And much qualification and refinement could be added: do children get part of their tax-credit in the form of education vouchers? Do you force adults to save part of it in pensions accounts? Lots and lots of detail would have to be worked out. It's a task I'm in no way qualified to undertake. But the system, at heart, would look something like this.

Torres for dummies

Quico says: Yesterday's post was probably too long and convoluted, so today I'll make it as simple as I can. Everybody loves a PowerPoint, right?

Here, in barest outline, is how distributing natural resource rents directly to people would change the way money and power flows through Venezuelan society.

(Solid arrows represent money flows:)

Petrostate clientelism works by reversing the dependence relationship between the state and the individual. Instead of the state depending on people for its livelihood, people depend on the state for theirs. This is a structural feature of the Venezuelan state, driven by the incentives inherent to state control over vast mineral wealth.

How can I be sure it's structural? Because, in a variety of guises, petrostate clientelism has survived all kinds of political shocks over the last 90 years. Rulers of vastly differing ideology, personality and personal probity have all wound up replicating it. Gómez may have had nothing in common with Caldera, CAP may have been the polar opposite of Pérez Jiménez, Chávez is as different as one could be from López Contreras. Yet the incentives for petrostate clientelism proved so strong that all of them ended up reproducing some version of it.

The only way to end petrostate clientelism is to get the state's hands out of the oil revenue cookie-jar. That is what's at stake here.

July 17, 2007

Torres in Bethlehem

Quico says: Everybody knows Jesus of Nazareth wasn't from Nazareth at all: he was born in a barn in Bethlehem. But what on earth was Mary doing gallivanting around Galilee nine-months pregnant? Luke's gospel explains the Romans had ordered everyone back to their hometown for a census, so Joseph had to go back to Bethlehem to register.

It's a detail I've always found extraordinary: a census in the ancient world? Can you imagine the logistical challenge? Why on earth would they go to all that trouble?

The answer, when you think about it, is not at all surprising: for tax, of course!

The Roman empire ran on tax. The Romans understood that if you're going to tax people, you need to know who lives where and how much money you can take from whom. There was no way to keep track of all that information without writing it all down. So the ancient census was really more like a huge tax assesment drive - a technological solution to a pressing political and administrative problem.

And it wasn't just Rome: all over the ancient world, empires came to realize that if they were going to levy taxes, they would need records of people and their property. The Persians held a tax census as far back as 500 BC, the ancient Indians starting from 288 BC, and the Chinese from at least 140 AD. Japan had its first tax census in 670 AD; England's Norman conquerors set about raising a census almost as soon as they'd defeated the natives in 1066. I guess it seemed obvious that if you're going to call yourself a conqueror, this is one of the first things you have to do.

The tax census was, in that sense, one of the fundamental institutions of civilization.

Through the census, relationships of subjection and tribute that had always lived "out in the open air of the spoken word" came to be embodied in paper, set down formally for the first time. In this way the written word came to mediate that most basic sphere of the individual's relationship with the state: his monetary obligation to it.

If you accept the image of state making as organized crime - the idea that the mafia don is the best contemporary analogy for the earliest stages of state building - then the tax census marks a step-change in the nature of the State. Because writing down a tax obligation, implicitly or explicitly, builds a safeguard into the individual's relationship with authority. Once Joseph's property had been registered in Bethlehem, once he'd "done his taxes," it became much harder to come back and try to charge him more arbitrarily. His obligations had, after all, been set down, affixed for posterity through writing, that artificial expansion of memory.

Census taking, though designed to extract money from people, had deeply subversive implications for the way a state and its subjects would henceforth interact. The tax census ensnared the state and the individual in ties of mutual obligation that couldn't have existed in an earlier era stage, when tribute was set by people rather than paper, and looked more like protection money than tax.

That citizen-state relationship would come to be dominated more and more thoroughly by the written word, the odd embodiment of authority in shards of dried tree pulp. As Briceño Guerrero puts it, that relationship would grow exponentionally, coming to envelop more and more aspects of each citizen's life until, by the twentieth century, it had metastasized into a tangle of:
ID cards, contracts, property titles, diplomas, protocols, mortgages, appointments, wills, dismissals, permissions, receipts, bills, decrees, resolutions, authorizations, sentences, letters, safe-conducts, credentials, resumes, work records, court briefs, payrolls, black lists, bank cards, credit cards, military cards, hanging folders, memos, forms, applications, notices, citations, agreements, bulletin boards, orders (of payment, arrest, eviction) certificates (of birth, marriage, death.)
At the root of it all, though, was the tax nexus: that primordial point of contact between power and the individual, as codified in the tax census: that original blueprint for all subsequent mechanisms of routinized bureaucratic control.

Nothing fascinates and mystifies me more than the gaping chasm we see in Venezuela between the laws as written and the society they are supposed to regulate. My documentary, Law of the Land was really an extended meditation on the subject, as is much of what I've written over the years.

It's a feeling that's both hard to explain and impossible to miss if you spend any length of time in the country. We have layers and layers of laws and regulation, and then we have reality - never the twain shall meet. I've been asking myself why that is for a long long time.

More and more, I think it has to do with the tax nexus. Or, rather, with the way oil distorts it, and along with it, the whole principle of authority-embodied-in-text.

See, for the ancient Romans and Indians, for the Chinese and the Normans, making written authority work was a necessity. They didn't make a census out of sociological curiosity: they saw it as a pragmatic solution to a pressing problem. They had to do it if their empires were to operate at all - that's where the money came from!

The written word had to have authority - not on some abstract level, but in the nitty-gritty business of regulating each individual's obligation to the state. It wasn't enough for power to flow through paper notionally - making the system work was a fiscal necessity.

Fast forward a couple of thousand years to Venezuela's contemporary history and you realize that making sure power flows through paper has never been a necessity here. Not counting the rump statelet we had in the 19th century (which was rarely able to extend authority effectively beyond Caracas itself) the rise of the Venezuelan state coincides quite precisely with the onset of massive oil revenue. When we talk about the petrostate in the Venezuelan context, we're not talking about the transformation of a pre-existing state: we're really talking about the only state we've ever had.

For the last 90 years or so, for as long as we've had a state worthy of the name, we've had a state that didn't really have to tax us to sustain itself. Making authority flow through paper has never been a matter of state survival, codifying authority's relationship with individuals has always been an ideal fondly to be wished for, never a need. When politically expedient, the Venezuelan state has always been quite comfortable letting laws and realities drift happily apart.

Now, in a sense, there's nothing new about this argument: Terry Lynn Karl has spent a distinguished career discussing the way oil pries apart the taxation nexus in rentier economies and de-links the state from society. But I'm trying to get at something slightly different here. While Karl focuses on the macro-social, high-politics of the petrostate's alienation from society, what grips me is the microlevel, the way the petrostate patterns each Venezuelan's individual relationship with authority.

In a normal country, citizens are keenly aware that the wealth the state spends is wealth they created. The hackneyed gringo letter-to-the-editor writer's catchphrase, "as a tax-payer, I..." captures it nicely. Citizens feel they own the state for the same reason they feel they own their toothbrush: they paid for it.

The petrostate turns this symbolic nexus on its head. The state doesn't depend on the citizen for money; the citizen depends on the state for money. The state has no prod, no pressing need to formalize and codify its relationship with citizens: why go to all that trouble, when you can just pump cash out of the ground?

I think this fact explains much of the mystery of the gap between the world of "papel sellado" and real life in Venezuela. The citizen is perpetually placed in the role of supplicant, continually conscious that he needs the state much more than it needs him. Seen in this light, it's not at all surprising that the state comes to see written authority as superfluous. Why bother?

The question, then, is what can be done about it? And here is where having extremely persistent commenters comes in really handy: those of you who read the comments section know that Torres has been pushing the solution to this morass for ages.

His idea is disarmingly simple: Take all the oil revenue, divide it by 26 million, and hand it out to people. That's it. Torres sees this as a poverty-alleviation scheme, and there's no doubt that many, many Venezuelans would be lifted out of poverty if his idea was implemented.

Now the main objection to Torres's plan is also pretty straightforward: you can't just deprive the state of all that oil revenue because the state needs that money to pay teachers, and road builders, and everything else the state does. The fiscal hole you would create would be far too dire for any politician to seriously entertain the idea. Indeed, when Manuel Rosales proposed a version of the plan, he didn't dare promise to distribute more than 20% of our oil revenue. I mean, you'd have to be crazy to go any higher than that, right?

It seems like a knock-out blow, at first - but like most good ideas, the apparent simplicity of Torres's plan conceals layers of possibility.

Certainly, if his idea was implemented, the state would find itself seriously short of cash in the short run. One way or another, the state would have to make up the shortfall simply to guarantee the minimal level of service its constituents have grown used to: people wouldn't stand for mass hospital closures and the like.

But where could the state possibly find the money to make up a shortfall on that scale?

In the same place every normal state in the world finds it: in its citizens' pockets!

This, I think, is the concealed genius of Torres' idea.

Yes, the state would need to claw back much of the oil money it gives out in the form of new taxes. But that, to my mind, is not a drawback: just the opposite, it's the idea's biggest selling point.

Distributing the nation's oil money and then clawing back a portion of it in tax would completely reverse the direction of dependence in the state-individual relationship. It would turn Venezuela into a normal country.

Suddenly, you would see tax become what it has never been in Venezuela - a major political issue. People would become keenly aware that the money that funds the state is money that comes out of their pocket. In one fell swoop, individuals would be transformed from supplicants into citizens. Demands for accountability would soar. The idea would drive a wooden stake through the heart of the petrostate model.

In time, the proposal could help mend the traditional chasm between the world of official paper and real life that has marred Venezuelan public life for so long. Forced to get serious about codifying its relationship with its citizens once and for all, the cavalier attitude of the state elite towards the authority of the written word would have to yield.

I don't think the process would be fast or dramatic - cultural change never is - but within two or three generations the habits of mind of petrostate dependency could be substantially weakened and something like the rule of law could start to take hold for the first time ever in our country.

I sat on the fence on Torres's idea for a long time, but I can't really think of another way of achieving these kinds of results. No amount of speechifying, no system of education, no volume of grassroots activism could achieve a fundamental shift in the individual's attitude to the state (and the state's attitude to the individual) so long as money and power in our society continues to flow in pretty much the same pattern as they did in the Gómez era. The template for state-individual relationships needs a violent shake-up. And Torres's idea, well, it would certainly do that.

July 15, 2007

Caracas: De Informele Stad

Quico says: It's great to run into a film about Venezuela that sets the politics to one side and focuses on the way the society actually works.

Caracas: De informele stad (Caracas: The informal city) was made by VPRO, the Dutch public broadcasting corporation. It chronicles architects Alfredo Brillembourg and Hubert Klumpner as they show Caracas's slums, how they operate, and what might be done about them. Here's a little taster - like the film, it's mostly in English and Spanish with Dutch subtitles:

I think it's really worth watching the whole thing. To do so, click here.