Алистер Смит - The Dictator's Handbook - Why Bad Behavior is Almost Always Good Politics

Money is essential for anyone who wants to run any organization. Without their share of the state’s rewards, hardly anyone will stick with an incumbent for long. Liberia’s Prince Johnson knew this when he tortured Samuel Doe, demanding the number of the bank accounts where the state’s treasure had been hidden. Without getting his question answered, Johnson would not be able to secure power for himself. In fact, neither he nor rival insurgent Charles Taylor could secure state revenue enough to buy control of Liberia’s government immediately after Doe was overthrown. The upshot: Samuel Doe died under Prince Johnson’s torture without answering the question, and Liberia degenerated into civil war. Each faction was able to extract enough resources to buy support in a small region, but no one could control the state as a whole.

The succession process in the Ottoman Empire is another illustration of the same point. Upon the death of their father, the Ottoman princes rushed from their provinces to secure the treasury, buy the loyalty of the army and have all their potential rivals (also known as brothers) strangled. Whoever first secured control over the money was likely to win. If no one son triumphed, cleanly wresting the treasury out of his siblings’ control, then no one could summon up the necessary revenues to pay his backers. The common result, as in Liberia, was civil war.

“Knowing where the money is” is particularly important in autocracies—and particularly difficult. Such systems are shrouded in secrecy. Supporters must be paid but there are no accurate accounts detailing stocks and flows of wealth. Of course, this lack of transparency is by design.1 Thus does chaotic bookkeeping become a kind of insurance policy: it becomes vastly more difficult for a rival to promise to pay supporters if he cannot match existing bribes, or, for that matter, put his hands on the money. Indeed, secrecy not only provides insurance against rivals, it also keeps supporters in the dark about what other supporters are getting. Anyone who has tried to read the annual reports of publicly traded firms will quickly realize that this is a practice induced by dependence on a small winning coalition. In the corporate setting opacity occurs despite having to satisfy strict regulations and accounting standards. Secrecy ensures that everyone gets the deal they can negotiate, not knowing how much it might cost to replace them. Thus every supporter’s price is kept as low as possible, and woe to any supporter who is discovered trying to coordinate with his fellow coalition members to raise their price.

As we saw at the end of the last chapter, it is very difficult for autocrats to survive their early months in office. Good governance is a luxury they cannot afford at a time when they must scramble to find revenues. Little surprise, then, that we so often see looting, confiscations, extraction, and fire sales during political transitions, or conversely, and perhaps ironically, temporary liberal reforms by would-be dictators who are mindful that it is easier for a public goods–producing democrat than an autocrat to survive the first months in office. Thus it is that in the immediate aftermath of a leadership transition we see a few new leaders acting as if they care about the people and many new leaders seizing the people’s wealth and property. Such confiscations of property might well damage long-run revenue, but if a leader does not find money in the short term then the long run is someone else’s problem.

Democrats are generally fortunate enough to know where most of the money is. When David Cameron became prime minister of Britain or Barack Obama became president of the United States, neither needed to torture their predecessor to find the money. Because democracies have well-organized and relatively transparent treasuries, their flow of funds is left undisturbed by leader turnover. There are two reasons for this transparency. First, as we are about to explore, democratic leaders best promote their survival through policies of open government. Second, a larger proportion of revenue in democracies than in autocracies tends to be from the taxation of people at work. Such taxes need to be levied in a clear and transparent way, because just as surely as leaders need money, their constituents want to avoid taxes.

Taxation

We all hate taxes and are impressively inventive in looking for ways to avoid them. Leaders, however, are rather fond of taxes—as long as they don’t have to pay them. Being a dictator can be a terrific job, but it also can be terribly stressful, especially if money is in short supply. Taxes are one of the great antidotes to stress for heads of governments. Taxes, after all, generate much-needed revenue, which can then reward supporters. As a general principle leaders always want to increase taxes. That gives them more resources with which to reward their backers and, not to be forgotten, themselves. Nevertheless, they will find it difficult to raise taxes with impunity.

Leaders face three constraints on how much money they can skim from their subjects. First, taxes diminish how hard people work. Second, some of the tax burden inevitably will fall upon the essential backers of the leader. (In general, the first constraint limits taxes in autocracies and the second constraint sets the boundary on taxes in democracies.) The third consideration is that tax collection requires both expertise and resources. The costs associated with collecting taxes limit what leaders can extract and shapes the choice of taxation methods.

The first and most common complaint about taxes is that they discourage hard work, enterprise, and investment. This is true. People are unlikely to work as hard to put money in government coffers as they do to put money in their own pocket. Economists often like to express taxation and economic activity in terms of pies—when taxes are low, they say, the people work hard to enlarge the pie, but the government only gets a thin slice of the pie. As the government increases taxes, its share of the pie increases but people begin to do less work so the overall size of the pie shrinks. If the government sets tax rates to be extremely low or extremely high, its take will approach zero. In the first case it gets very little of a large pie; in the latter case there is hardly any pie because hardly anyone works. Somewhere between these extremes there is an ideal tax rate that produces the most revenue the state can get from taxation. What that ideal rate is depends on the precise size of the winning coalition. That, in fact, is one of many reasons that it is more helpful to talk about organizations in terms of how many essentials they depend on than to talk about imprecise notions such as autocracy or democracy. The general rule is that the larger the group of essentials, the lower the tax rate. Having said that, we return to the less precise vocabulary of autocracy and democracy, but always mindful that we really mean smaller or bigger coalitions.

Autocrats aim for the rate that maximizes revenue. They want as much money as possible for themselves and their cronies. In contrast, good governance dictates that taxes should only be taken to pay for things that the market is poor at providing, such as national defense and large infrastructure projects. Taking relatively little in taxes therefore encourages the people to lead more productive lives, creating a bigger pie. Democrats are closer to this good governance ideal than autocrats, but they too overtax. The centerpiece of Reaganomics, the economic plan of US president Ronald Reagan (1981–1989), was that US taxes were actually higher than this revenue maximizing level. By reducing taxes, he argued, people would do so much extra work that government revenue would actually go up. That is, a smaller share of a bigger pie would be larger than the bigger share of a smaller pie. Such a win-win policy proved popular, which is why similar appeals are again in vogue. Of course, it did not quite work out this way in fact.