Nria Moral Punset Public Finance Thomas Marmefelt Spring 2011 How will social justice and fiscal

neutrality be maintained when the political enterprise of tax incentives to young innovative companies emerges within the legislative assembly as part of the aggregate budget under coexistence of genetically modified crops with conventional farming? INTRODUCTION Biotechnology can be an excellent tool to respond to the challenges that agriculture face, for example to protect crops against insects, weed or disease, or to withstand the inclemency of weather. However since its introduction the use of biotechnology has created a fiery debate, which has crystallised in the controversy of the coexistence of genetically modified and non-genetically modified crops (GM and non-GM crops). The European Commission with a double aim introduced this idea in 2002, on the one hand, it sorted out the problems resulting from the mixture of the different crops, since there is an international agreement with organic farmers against the use of GM crops. Furthermore, it should facilitate the introduction of new GM crops. Thus, the concept of coexistence should allow through the establishment of technical measures, to cultivate GM and non-GM crops. Following the formulated question there are two types of enterprises, the young innovative biotech companies, which will have tax incentive, and the conventional farming companies, which will not receive this kind of financial facilities. The difference in treatment regarding these two types of companies illustrates the difficulties of maintaining social justice and fiscal neutrality in the given framework. The term social justice it could describe as how the good and bad things in life should be distributed equally among the members of a human society (Miller 1999, 1). More concretely, it is said that some policy or some state affair as socially unjust, it denotes that a person or a group of persons enjoy more advantages than the rest of the society. Fiscal neutrality seeks the laudable aim of raising tax revenue in a non-discriminatory manner (Hockley 1992, 83). A government fiscal action is normally considered to be neutral if it does not interfere with the consumer or business decisions in the market sector of the economy (Blinder 1974, 38). Giving tax incentives to biotechnology industries specialised in GM crops will bring more investors to this type of companies than the rest creating differences, fiscal neutrality would 1

not happen. Thereby, social justice and fiscal neutrality within this given framework could only be maintained without tax incentives. How can tax incentive prevent social justice and fiscal neutrality? It is hard to believe that a decision made by a democratic organ such as a legislative assembly could be unfair, not socially just. The term democracy refers very generally to a form of government characterized by a kind of equality among the participants at an essential stage of collective decision-making. It may involve direct participation of the members of a society in deciding on the laws and policies of the society or it may involve the participation of those members in selecting representatives to make the decisions (Stanford). In western democracies it could be identified the second case, the representative that citizens have voted are the ones, which lead the decisionmaking process. The manner in which contributions are collected by the state is one of the key elements of government economy. Buchanan and Congleton, two important public choice scholars try to explain the meaning of generality in taxation within the boundaries of a majoritarian democracy. They suggested that general taxation is more efficient than alternative tax-share schemes in a political regime broadly defined as majoritarian democracy because with generality taxation in a place as a constitutional constraint it will produce patterns of fiscal outcomes that will minimize the destruction of economic value(Buchanan and Congleton 1998, 86). This constitutional constraint of generality in taxation guarantees and equal treatment, it reflects the preferences of the median voter for the overall level of taxation and, by inference the size of the budget (Buchanan and Congleton 1998, 89). When no such constraints exists, majority voting will ensure that one part of the inclusive constituency is maximally exploited through the fiscal process while members of the dominating majority coalition secure substantially all of the benefits from collective action (Buchanan and Congleton 1998, 89). Moreover, it can be identified several sources of economic inefficiency directly associated with an absence of a generality constraint on the taxing authority government in majoritarian democracy: First, the incentives provided for wasteful rent seeking; second, the related costs of administration, both for government and taxpayers; and third, the additional excess burdens involved when discrimination is introduced(Buchanan and Congleton, 1998, 92). The generality requirement entails the imposition of the same rate on all sources of income, to all persons with no exceptions and for any reason (Buchanan and Congleton 1998, 93). The market inspires this idea; the generality requirement put collective goods in the same level with market exchange. In the market every person confronts the same set of prices for all partitionable goods and services. Politization of the supply of a good or service breaks the quantity 2

adjustment process and for instance the generality principle (Buchanan and Congleton 1998, 93). The same will happen if some biotech companies are beneficiaries of political enterprises such as tax incentives and other conventional farming companies not. The market allocation will be based on the information and not on consumers. The investors will put his capital in the young innovative companies creating differences between the GM crops and non-GM crops. The generality principle clearly moves away from tax incentives because it exacerbates the distributional conflict within the market. While Buchanan and Congleton emphasise the political efficiency gains associated with a constitutionally-embedded generality constraint (Roth 2002,86) another author, Roth following the same path focus on the discriminatory treatment of morally equivalent persons. He argues, the moral equivalence of persons implies an institutional imperatives (Roth 2002,86). According to his view, persons must be awarded the greatest possible equal liberty under and by constitutional and statuary law (Roth 2002,86). Granting this, the institutional imperative is agreement on a constitutional generality or impartiality constraint (Roth 2002,87). In conformity with Roths special exclusions, exemptions, deductions, credits, deferrals, and differential tax rates applied to disparate tax bases violate the generality or impartiality standard. This author inspired by Rawls proposes that those in authority must seek first to pass just legislation (Roth 2002,87). The action of government is not the solution of market imperfections, instead government interventions in external markets must be understood to be the result of intendedly discriminatory rent seeking activity (Roth 2002,100). Generality and impartiality are two interrelated crucial ideas within the context of the moral equivalence of persons. Giving tax incentives to young innovative biotechnology industries it represents discrimination to conventional crops, which will produce no social cooperation. Furthermore, tax incentives cause outcome of rent seeking. Hayek an important scholar of the Austrian school suggests that an economy in the strict sense of the word in which a household, a farm, or an enterprise can be called, consist of a complex of activities by which a given set of means is allocated in accordance with a unitary plan among the competing ends according to their relative importance (Hayek 1982, 107). The market order is a system of numerous interrelated economies (Hayek 1982,108). Hayek uses the term catallaxy to describe the order brought about by the mutual adjustment of many individual economies in a market (Hayek 1982, 109). The central idea is it lacks hierarchy and particular ends. In catallaxy people are induced to contribute to the needs of others without caring or even knowing about them, the great merit is the individual freedom. Tax incentives within Hayeks devised framework would prevent social justice and fiscal neutrality because the order would be distorted. The 3

implementation of such fiscal facilities would assume that a central authority as the government would know the information required to rationally plan and direct the use of resources in a society. Hayek argued that knowledge is impossible to reach for a single mind, because it emerges from the often inconsistent and even conflicting views of different people. But, to fight against this uncertain prospective Hayek propose a system of rules the so-called rules of just conduct that consist of norms or rules of social interaction that have been applied by communities over the long run. Hayek opposition to use government power to secure particular social ends or to serve the interest of particular group would induce him to avoid tax incentives. The main goal of policies and indeed of government would be to increase equally the chances for any unknown member of society of pursuing with success his equally unknown purposes and, to restrict the use of coercion (apart from raising taxes) and to improve everyones opportunities. Hence, tax incentives would distort market allocation resources structure to the benefit of some. Following Hayek view taxes should be uniform across different economic activities. Not only these three previous authors think that tax incentive will prevent social justice and fiscal neutrality but Anthony Jasay too. He thinks that it is possible a society without state, because in real life we are more likely to have repeated interactions with the same people. He also thinks that public goods are not inherently public, the costs of exclusion are often lower than is commonly assumed. Jasay want to change the organisation of the welfare system, he proposes the fiscally neutral investment credit. He want to create a market for public goods, consumers received vouchers to buy welfare goods and services. Tax incentives for all companies will produce that they could decide where to invest, they would have more freedom. Even if someone could argued that young biotech companies produce positive externalities for the society and hence they have to receive this fiscal facilities. Jasay would argue that those who create positive externalities presumably find it worth their while to do so, despite knowing that they cannot expect to be compensated by the third-party beneficiaries of those externalities. Hence, those creators have already been compensated, and asking third parties to pay additional compensation is unwarranted.

The most common used window to examine the theory of public finance is to portray the government as an entity that intervenes into society to alter the equilibrium patter of marketgenerated outcomes (George Mason University 2007, 4). But there is also different window to study public finance. Social theorising, or rather, fiscal theorising explains, how orderly patterns of activity emerge when people relate to one another the particular form of collective property that constitutes a state (George Mason University 2007, 4). Through this alternative window, 4

government appears as one of several interrelated arenas within which people interact inside a society. Richard Wagner distinguishes between the public square and the market square. The former develop and maintain rules of just conduct, and the latter generate sustainable patterns of activity. Political enterprise of tax incentives to young innovative companies would generate a break between the two linked squares. Because the introduction of this political enterprise will produce a change in the total tax revenue, some other political enterprise such grants will disappear, there will be a transformation. Taxpayers that are force-induced investors will invest in a political enterprise that maybe they do not support. The political enterprise of tax incentives will create a distortion, between the spontaneous order of the market and the spontaneous order of the state, because the latter will interfere into the former. Moreover, taxpayers and consumers are the same in the market square and in the public square, so they would not support a tax-structure that it is not compatible with the two squares. The resolution will appear spontaneously, consumers would promote organic food, although it would become weaker, this situation would provoke a lot of taxpayers without not having results. After exposing the thoughts of different economic philosophers it could be said that clearly tax incentives will prevent social justice and fiscal neutrality. But, now the thing is, if these young innovative companies will deserve to have tax incentives. Why would young innovative companies deserve to have tax incentives? Business R&D (Research and Development) is generally speaking very profitable for society, the ability to innovate is however stronger that the actual level of innovation. The problem is that companies chose the R&D projects which are more profitable for them rather than for the society. In order to solve this market failure, some countries have implemented tax incentives. YICs are the key to the industrial future, they are more creative and flexible, they are platforms of knowledge, they create new jobs and the most important thing they develop new products, which are health beneficial. Economic growth and innovation are two ideas, which are interrelated. CONCLUSION If the goal is to maintain social justice and fiscal neutrality, there is no need to give fiscal facilities to young innovative companies, because following the ideas of the economist we have been studying the market itself will generate the optimal amount of R&D in the long term.

Moreover, it is important to clarify some facts about the coexistence of genetically modified crops with conventional farming. The European Commission understands that coexistence exists when there are a minor presence of 0.9% of GM crops and conventional or organic crops. But, in a strict sense the crops called conventional and organic are the ones with zero presence of GM crops. The introduction of 0.9% as the level below, which the presence of GM stops legally, does not change the fact that GMO are present. The European Commission guideline should be more consistent and restrict the procedures. In conclusion, even if YICs are really good companies for the growth of the economy of a country, tax incentive increase the differences between them creating distortion within the market economy. The spontaneous order of the market will generate the social justice and fiscal neutrality. BIBLIOGRAPHY Blinder, Alan S. The Economic of Public Finance Washington, D.C The Brookings institution, 1974. Buchanan, James, och Roger Congleton, Politics by Principle, Not Interest: Toward Nondiscriminatory Democracy, Cambridge: Cambridge University Press, 1998. Hayek, Friedrich von, Law, Legislation, and Liberty: A New Statement of the Liberal Principles of Justice and Political Economy, London: Routledge & Kegan Paul, 1982. Hockley, Graham C., Fiscal policy: an introduction London: Routledge,1992. Jasay, Anthony de, Justice and Its Surroundings, Indianapolis: Liberty Fund, 2002. Miller, David Principles of Social Justice Boston: Harvard University Press, 1999. Roth, Timothy, The Ethics and the Economics of Minimalist Government, Cheltenham: Edward Elgar, 2002. Roth, Timothy, Equality, Rights, and the Autonomous Self: Toward a Conservative Economics, Cheltenham: Edward Elgar, 2004.

Wagner, Richard E., Fiscal Sociology and the Theory of Public Finance, Cheltenham: Edward Elgar, 2007. EC, Recommendation on Guidelines for the Development of National Strategies and Best Practices to Ensure the Co-existence of Genetically Modified Crops with Conventional and Organic Farming, 2003, http://ec.europa.eu/agriculture/publi/reports/coexistence2/guide_en.pdf

EC (2007) Unin Europea: La biotecnologa como medio para reducir el impacto medioambiental de la agricultura, http://ec.europa.eu/environment/etap/inaction/showcases/eu/622_es.html George Mason University, Fiscal Sociology and the Theory of Public Finance: An Exploratory Essay, (2007) Edward Elgar Publishing, http://mason.gmu.edu/~rwagner/front+matter+PF+book.pdf Improved Conditions for Young Innovative Companies: Proposals for New Business Wide Tax Incentives, (2007), Presented by the Biotechnology Industries in Estonia, Finland, Norway, and Sweden, Report from a project supported by the European Commission, http://www.yicstatus.com/Documents/yic_rapportfinal20072308.pdf

Stanford Encyclopedia of Philosophy (2011), Stanford University http://plato.stanford.edu/