- Termites of the State: Why Complexity Leads to Inequality by Vito Tanzi, and: Is Inequality in America Irreversible? by Chuck Collins
These two books, which are diverse in style and length, are the products of writers with vastly different backgrounds. But they have a common theme, and they reach some strikingly similar conclusions. They cite similar figures, from similar sources, to demonstrate that the United States, and indeed many countries in the world, are becoming more unequal, both as a result of an economic dynamic and a movement away from redistributive taxation. In other words, both pre- and post-tax inequality is rising. In this way, both books address what has become, in the wake of the global financial crisis, the most pressing political issue of the age. Both authors recommend higher rates of taxation, more aggressive approaches to tax evasion and tax avoidance, as well as—more surprisingly—a basic minimum income to be paid to all citizens.
Collins, the Director of the Institute for Policy Studies' Program on Inequality and the Common Good, is an engaged activist from a think tank created in the 1960s to promote systemic change by encouraging social movements. His is the more extensive set of measures—luxury consumption taxes, the repeal of mortgage and housing tax deductions for upper incomes, and universally funded childrens' savings accounts. The premise of his book, however, is precisely that of Tanzi—"that inequality is not the result of optimal and efficient market forces, but of a set of rules, shaped by those with power" (26). Collins contrasts his position with that of "most mainstream economists" who have a view of a "pristine free market allocating resources according to market principles" (26).
It is not clear that "most economists" conform to that stereotype any more. Tanzi, the former long-time head of the International Monetary Fund's (imf) Fiscal Affairs Division and later a senior government official in Italy, has long worried about governments becoming too big and claiming too large a share of resources. Although he might be thought a peculiar ally for Collins, he offers a deeply reasoned account of why and how Collins is right, also concerned to attack what he repeatedly terms "the religion of market fundamentalism" (79). For Tanzi, the story of inequality is only one-half the story about the advance of market fundamentalism propagated by the political right. He describes how "in academia, but less so in international institutions and in government circles, the pro-market thinking acquired many followers" in the late twentieth century (87). The right, and its push for lower taxes based on bad economic analysis (such as the abuse of the famous Laffer curve), is partly responsible for destructive and disruptive outcomes. Tanzi complains that the U.S. push for a universal adoption of performance-based pay on efficiency grounds was also advanced in the Bretton Woods institutions, the imf, and the World Bank (364). But the left was also [End Page 517] responsible, given the return of statist thinking after the collapse of communism. Tanzi explains how "the termites created by socialist thinking too refuge in the woodwork, waiting for a better time to reemerge" (74).
Tanzi draws deeply from public-finance theory, the work of Richard Musgrave, and the Italian tradition of Scienza delle Finanze to explain how the absence of good rules encourages crony capitalism.1 Good rules are simple rules; the more complex rules become, the more space they offer to "termites," who abuse the rules for specific interests. Tanzi uses both Italian and American history to illustrate the evolution of ever-greater complexity, obscurantism, and cronyism. According to Tanzi, the United States has 23,000 different governmental forms. But Tanzi is also aware of how regulations respond in many cases to real needs, as well as how they are gamed and abused. His reflections on the way in which even well-designed constitutions can be undermined and protections eroded echo...