‘A hatchet job’ A response by the Institute for… – Daily Maverick

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Intellidex, a financial services research firm, recently entered the debate on the issue of a Basic Income Grant/Guarantee (BIG). Around half of its report Is a basic income grant sustainable? commissioned by Business Unity South Africa and Business Leadership South Africa is spent critiquing three existing BIG-related research reports.

These reports come from Deloitte (commissioned by Nedlac), DNA Economics (commissioned by the IEJ), and the Institute for Economic Justice (IEJ) the latter referring to a recent policy brief, Financing Options for a Universal Basic Income Guarantee. In this brief, the IEJ put forward 19 tax-related financing options for a BIG. The IEJ comes in for special consideration, receiving an Appendix all of its own, and sharp criticism from Intellidex.

In this article we respond to three aspects of those criticisms, showing how the Intellidex report misrepresents the work of the IEJ, contains mistakes of its own, and fails to live up to the standard it sets for others.

Misrepresenting the IEJs work

Two of the most important criticisms, levelled repeatedly, are that the modelling by the IEJ fails to account for any interactions between the taxes proposed and that the economy-wide impacts of these taxes are not appropriately modelled. These omissions, it is argued, result in a lack of clarity on how the tax measures impact each other or the economy.

While both these elements may be absent from the IEJ brief, the brief neither seeks, nor claims, to undertake such modelling.

In any fair reading of the IEJ brief, this is immediately obvious.

Regarding the interaction between tax options, the brief makes clear its objective is to place on the table a series of financing options as appears in the title for further consideration. These are not exhaustive and are not presented as necessarily constituting a combined package; as the conclusion notes: the array presented is not necessarily a package, allowing for further consideration and subsequent selection. There are hundreds of ways in which these 19 options can be combined, and to expect the brief to have explored the interaction between the taxes in each of these scenarios is manifestly unreasonable.

Similarly, the brief makes no claims to model the macroeconomic impact of these taxes. In fact, the conclusion notes that [a] further Policy Brief looking at the impact of a UBIG (Universal Basic Income Grant) on poverty, inequality, and macroeconomic indicators will be released by the IEJ. This further policy brief one of two under production draws from the already-published Fiscally Neutral Basic Income Grant Scenarios: Economic and Development Impacts by Applied Development Research Solutions (ADRS), a leading macroeconomic modeller of the South African economy. That Intellidex bemoans the lack of macroeconomic modelling and then studiously ignores the ADRS work is curious.

If it is reasonable for the IEJs brief to do some things and not others, is it not also fair for Intellidex to point out these missing elements?

Unfortunately, this is not what the Intellidex report does.

Rather, it incorrectly implies that the IEJ has undertaken modelling and that this modelling is poorly done. This is used to discredit the proposals.

As any economist will know, what the IEJ offers is a series of calculations, not a modelling exercise. Intellidex deliberately implies otherwise, referring throughout to the IEJ model and, at times, lumping the IEJs work together with the critique of Deloittes modelling their models, a flaw in the models used, the outcomes are entirely predictable but are not evidence in the modelling done by Deloitte, DNA Economics and IEJ, and so on.

If the IEJ had undertaken modelling, then failing to consider the interaction between tax options would be a serious oversight, rather than simply being beyond the scope of a particular output.

Similarly, Intellidex implies that the IEJ is making claims as to the macroeconomic effects of its funding proposals something explicitly not done and that these claims are poorly substantiated. On this fallacious basis, the work is rejected, summed up clearly here:

As described in some detail in Section Two, the evidence presented by Deloitte, the IEJ and DNA Economics about the macroeconomic effects of a BIG is unpersuasive. Their models are not designed to test the effect of a large rise in tax rates on a range of critical macroeconomic variables which are assumed by those models to be fixed. No reliance can be placed on the conclusions proffered in those reports, which we believe should be discounted.

The IEJ presents no such evidence and offers no such model, fixed or otherwise.

One might be tempted to read this as one giant misunderstanding. And, arguably, a fair criticism could be that the IEJ should have done more to expressly state the limitations of that particular brief we had assumed this was obvious.

However, we find it hard to consider the above as a genuine misunderstanding, given that the Intellidex report is filled with other distortions that can only be read as intended to discredit the IEJ. For example, the report implies the IEJ takes a maximalist position, citing a grant of R3,500 at a cost of R1.4-trillion a scenario expressly included in the IEJs work as illustrative, given its appearance in the public domain, and considered by the IEJ, at the outset, as unaffordable.

Mistakes of its own

The third central criticism levelled is that the IEJs work contains mistakes and misstatements.

On some issues, Intellidex offers some useful critiques. We are in agreement that the broad category of irregular expenditure is a poor way of judging wasteful and unnecessary expenditure, and concede that our estimate of VAT recouped from the spending of the BIG may be overstated to the extent to which it is financed from lowering the expenditure of higher-income earners on VATable items. (It is, however, obvious that, contrary to Intellidex, the net receipts will increase somewhat as some taxes particularly on wealth are levied on pools of funds that wouldnt otherwise enter the real economy.)

On some other issues, we are not at loggerheads on the substance. For example, it is common cause that a wealth tax is a complex instrument, with wealth being difficult to value and hard to estimate. This does not, contrary to Intelledixs implication, make it unreasonable to pursue. In fact, Intellidixs contention that this tax is undesirable, as it would fall so disproportionately on the extremely small number of major wealth holders in South Africa, can easily be read as an argument in its favour that it would tackle extreme wealth concentration.

But there are other instances where the Intellidix report is simply wrong.

Most glaring of these is with regards to a Resource Rent Tax. The IEJ and DNA consider a resource rent as windfall profits made by resource firms, most commonly on the back of commodity price booms. Using a World Bank study, we calculate a 25% tax on rents worth R154-billion. Intellidex contends the World Bank methods means this R154-billion is not a rent at all, but that some of these are funds that must be distributed as wages and taxes. However, the World Bank reports source document shows this is false, and the R154-billion is arrived at after already taking into account the cost of both harvesting and extracting the resource including paying taxes and wages. Supplementary available explanations imply it also excludes normal returns.

Others include basic errors, like misstating that the IEJ projects over R350bn can be raised by 2023/24 to fund a BIG when the IEJs options total R270-billion for that year, and sleight-of-hand distortions of what the IEJ brief actually says. That Intellidex makes a fuss about purported IEJ errors and then makes basic errors like this is notable.

Failing to live up to its own standards

Perhaps most bizarrely, Intellidex appears to feel no compulsion to hold itself to the same standard as it holds others.

According to Intellidex, the inexcusable flaw, discussed above, of DNA and the IEJs work is that they present policy options in the absence of adequately modelling the macroeconomic impact of the BIG and associated tax measures.

Intellidex, however, does little to provide any evidence modelling or otherwise for its extremely strong, and repeated, macroeconomic claims. Intellidex, the report notes, strongly believes that the macroeconomic consequences of implementing a BIG would lead to deepening poverty, rather than its alleviation. It goes so far as to say that a BIG represents an existential threat to SAs macroeconomic stability. Strongly believing something to be the case just doesnt cut it in policy debate.

These claims are substantiated only on the basis of recounting the sort of macroeconomic theoretical assumptions that one would find in orthodox undergraduate economics textbooks that higher taxes lead to a fall in consumption expenditure, a drop in savings, a reduction in investment, and various growth-retarding behavioural changes.

We should view these assertions with extreme caution, both theoretically and empirically.

Theoretically, the world in which investment is a function of savings, for example, is, as the Bank of England pointed out, a fiction. Investment is, in large part, driven by bank lending, itself not constrained by some pre-established pot of prior savings.

Empirically, we must consider the South African context in the concrete. Is the extraordinary wealth held by a tiny elite in South Africa being invested in productive job-creating enterprises, or in speculative financial assets seeking capital gains? Where are pension funds investing? What percentage of investment by non-JSE-listed non-financial enterprises in sectors most likely to create jobs is financed via bank credit versus bonds and equity? What goods and services do the wealthy and poor buy and what is the relative weight of domestic goods versus imports in these? And so on.

This is not the place to attempt to answer these questions, but the answers will play a critical role in determining the macroeconomic impact of taxing in order to finance a BIG. To our knowledge, the most detailed modelling, ignored by Intellidex, where these relationships are estimated based on historical data, is that by the ADRS referred to above. In that modelling, the macroeconomic impacts of a BIG are positive.

The alternatives

Intellidex places on the table a few alternatives to the BIG. These are not very detailed but, presumably, this was not the focus of their report. Some of the issues raised for instance on eligibility, or the interaction with public employment schemes are covered in the IEJs forthcoming work. Others bear further debate. It is clear, for example, that Intellidexs public employment proposal is far more expensive when a similar number of beneficiaries is targeted.

Intellidexs presumption, however, is clear South Africa cannot afford an ambitious poverty-alleviating social transfer programme such as a BIG.

This is an unhelpful starting point and one we hope the business associations that commissioned the report will reject.

The presumption that not a cent more can be raised through increased taxes or borrowing is patently absurd.

The IEJs work and presumably that of Deloitte and DNA Economics is neither perfect nor comprehensive. But what the country needs is a coming together of stakeholders, including researchers, driven by the question of how do we design and fund the most ambitious programme to address our deep crisis? Having been forced to set the record straight through this op-ed, this is the question that the IEJ would rather participate in answering. DM

Dr Gilad Isaacs is Director at the Institute for Economic Justice. He is also an economist at Wits University, where he coordinates the National Minimum Wage Research Initiative and lectures.

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'A hatchet job' A response by the Institute for... - Daily Maverick