Tax Justice and the Civil Economy
It has been a long time since the question of fairness has played so prominent a role in political discussion. The phenomenal rise of the Occupy Movement globally has – despite all odds – succeeded in placing the question of inequality and class privilege on the front pages of our newspapers – something that has not been seen in a generation. At the same time, the question of inequality and the growing disparity between haves and have-nots at a global level has been the principle theme of numerous studies and best sellers that document the social and political costs of an economic system whose inequality and injustice grow by the day.
In the United States, the question of income inequality has taken centre stage in what promises to be the most polarized and acrimonious presidential election in living memory. Everyone finally understands that the question of fairness, of social justice, of who is entitled to what from our economic system, is at the heart of what shapes America and the larger global economy. Everything is at stake, since to deal with fairness and inequality is to confront the one question that defines our economic system, its underlying ideology, and the politics that perpetuate it. This is the background against which a discussion of tax justice takes place. To ignore it, or to constrain the question of tax fairness to particular policies or systems without addressing the deeper issue of systemic inequity is to cede victory to those forces that protect and perpetuate this inequity. One measure of this fact is the central place that taxes – more precisely, the sustained attack on tax fairness – play in the continuing assault on political and economic equality.
Tax policy today is a potent symbol of the underlying war of values and world views that is shaping global society. The discussion that follows is framed around two basic ideas. The first is that any discussion of tax justice has to begin from the premise that taxation is a social good. Which is to say that the legitimacy of tax systems is based on fundamental social and moral rationales. Otherwise the question of tax justice or tax fairness – whether applied to tax systems as a whole or to individual tax policies – has little meaning. To concede that justice should be an attribute of tax policy is to acknowledge a moral basis for taxation. The question then, is not whether a tax system should be just but rather, what is just and how does tax policy promote it or undermine it? The second point is that the fairness of a tax system cannot be isolated from the question of the fairness of the economic system within which it operates.
An unfair economic system, that is to say, an economic system that is based on exploiting the majority for the benefit of the few, will always produce tax policies that reflect and reinforce this underlying unfairness. The broader question then, is how might a tax system help to redress the institutional injustice of the economic system itself? Tax policy is never only about taxes. It’s always ultimately about politics. It is for these reasons that I approach the question of tax justice from the standpoint of economic democracy and the use of market forces for the pursuit of social ends.
Here again, I concentrate on two questions: first, how does tax policy promote the expansion of democracy in the economy, particularly through the use of co-operative models? And second, how does tax policy catalyze the expansion and maturation of the broader civil, or social economy through the creation of a social market (see S. Zamagni, 2010)? The first question pertaining to co-operative enterprises is rather more straightforward than the second. There has been quite extensive experience in the use of tax systems to support the development of co-operatives and the promotion of economic democracy. But the use of tax policy, or even the application of economic theory, to the question of a social market that corresponds to the distinctive operations of the social economy is far less developed and consequently more problematic.
My own reflections on this question are admittedly tentative and exploratory, and reflect what is still my emerging understanding of this area. My hope here is to throw some light on some of the theoretical issues entailed in this work and to present some ideas for practical application.
The case of co-operatives is an instructive example that illustrates how tax policy intersects with political, economic and social issues within the broader context of fairness.
Co-operatives represent a unique instance in which an enterprise embodies both social and commercial purposes as defining elements in its structure. A co-operative is any enterprise that is collectively owned and democratically controlled by its members for their mutual benefit. Co-operatives may operate either as commercial, for profit entities, or as enterprises devoted primarily to social and non-profit aims. In either case, co-operatives are distinguished from both conventional non-profit societies and from capitalist enterprises by their collective form of ownership and their democratic structure, which confers equal rights to all members regardless of their capital investment. Most importantly however, co-operatives are driven equally by social as by economic ends – unlike capitalist firms whose primary purpose is to maximize profits to investors.
It is this characteristic – the central importance of the social bonds of membership – that defines co-ops primarily as associations of people with a mutual purpose as opposed to mere collections of capital. In short, co-operatives mobilize capital in the service of social ends – whether they are defined as the collective aims of the membership or, as in the case of social or community service co-ops, the production of goods and services for a broader community purpose (health care, affordable housing, recreational services, etc.). And whereas a capitalist firm may allocate a portion of its commercial profits to social ends (charitable donations, corporate support of community events, etc.), these social aims are always subordinate to the profit motive. If a company were to terminate its corporate social aims, it would not in the least affect the primary character or purpose of the enterprise. If a co-operative were to do so, it would cease for all intents and purposes, to be a co-op.
This distinction concerning the purposes to which capital is put (and not, as some suppose, the generation of profit per se) is ultimately the basis for a tax treatment of co-operatives that is different than that of conventional capitalist enterprises. And as I will argue shortly, it also forms the basis for an entirely different approach to the taxing of other enterprises and organizations that collectively constitute what we call the social economy. What all these organizations have in common, whether or not they seek to generate a profit, is the utilization of capital for the realization of social benefit.
However, despite these distinctions in purpose and structure, co-operatives have generally been afforded relatively few concessions with respect to how they are treated by tax systems. With only a few exceptions, co-operatives are treated primarily as a class of profit-earning enterprises with little or no consideration given to their essential social character, or to the social purposes to which their capital is put. It is only in the case of co-operatives that are structured similarly to non-profit societies that this social dimension is recognized for tax purposes.
In those jurisdictions that recognize non-profit co-ops (as for example community service co-ops in BC, or solidarity co-ops in Quebec), they are subject to the same controls that apply to other non-profits. And as with the the tax treatment of non-profits, the refusal to recognize a wholly different basis for understanding the nature and purpose of co-operatives is in itself the reflection of a broader bias that distorts perceptions of what constitutes enterprises, markets, and the operations of the economy as a whole.
It will come as no surprise that the tax treatment of co-operatives in all but a handful of jurisdictions, is the expression of a political and institutional bias that favours and promotes the primacy of capitalist firms and the neo-liberal conception of the free market as the standard against which all enterprises and economic practices are measured. Typically, the only area in which co-ops receive special consideration is in the treatment of patronage refunds to members. Patronage refunds are provided to a member on the basis of how much business the member does with the co-op. This is among the very oldest co-op practices, established in the earliest consumer co-ops to repay the loyalty of members by offering discounts on the price of the goods they purchased. It has remained a staple of co-op practice since the 1800s.
At a time when access to capital was among the chief obstacles to the operation of co-ops – an obstacle that remains to this day – a second distinctive feature of co-ops was the issuance of equity interests instead of cash as a form of patronage payment. In both cases, whether in the form of a cash refund or as an equity share, patronage refunds are considered the property and income of the member, not the co-op, and therefore not taxable as income to the co-op but to the member. The tax exemption is based wholly on an interpretation of who owns the patronage dividend, not the purposes to which the surplus of the co-op is applied. The question of purpose however, should be fundamental to any consideration of how a tax system should treat the income of an enterprise. And it is precisely in those jurisdictions that recognize the broader social benefits that come from co-ops that co-operatives receive a distinctive treatment that extends beyond narrow questions of personal income.
Three cases in particular are instructive – Italy, where co-operatives represent a social form of enterprise that is constitutionally protected; Spain, where the Mondragon co-operatives have attained a scale and significance that is universally recognized for both its economic and social benefits; and Quebec, which has the largest and most advanced co-operative sector in North America. Taken together, they represent an approach to tax policy that recognizes, and rewards, social forms of capital that are distinct and play a different role in society from that of private capital and also of conventional non-profits. They are a good starting point for exploring the larger ramifications of tax policy not only for the social economy, but for civil society and the growing contradiction between prevailing public policy and the public good.
Italy’s co-operative movement represents the largest concentration of co-operatives in the Western World. There are more than 70,000 co-operatives in Italy, 16,000 of which are producer co-ops. With over 5 million members, Italy’s consumer co-op movement is second in size only to Japan’s and the country’s social co-ops now account for over 60% of Italy’s home and health-care services. In addition to this sectoral strength, Italian co-ops are now among the largest and most successful of Italy’s large firms. Over the last twenty years, at a time when the Italian corporate sector was cutting its workforce, the largest of Italy’s co-ops were growing in size and reach and outpacing their competitors in the number of jobs they created and in market share (V. Zamagni, 2008). Moreover, in the retail sector the co-op system has sustained nearly15 per cent growth while keeping retail prices 5 per cent lower than most supermarkets, and 2 to 3 per cent lower than those of their ﬁercest competitors (Lotti et al. 2006, 8).
Despite the remarkable commercial success of the Italian co-op movement, Italy’s tax regime recognizes and promotes co-operatives as a form of enterprise that socializes markets. And as stated by Flavio del Bono, the former finance minister of Emilia Romagna, the massive presence of co-operatives is not only a stabilizing factor in the Emilian regional economy, protecting jobs and promoting economic development, but also a key factor in the region's economic equity. Along with its leading economic performance, the region has the lowest levels of income disparity in Italy and the highest percentage of women in the workforce. This is turn, is made possible by the region’s pro-active support of home and childcare support for families. Protecting this social purpose of co-operatives is an explicit aim of Italy’s tax law.
Italy has created a number of innovative and preferential taxation mechanisms for co-operatives. A key support is the Basevi Law of 1947 that provided co-operatives with a tax exemption on their indivisible reserves in order to encourage self-capitalization. Considering Italy’s current corporation income tax rate of 33 per cent for privately owned businesses, this is significant. In 2003, the exemption was reduced to 70 per cent for co-ops that do more than half of their business with members and 30 percent for those that do less (Logue 2006). Indivisible reserves are capital pools that belong to the co-op as a whole and may not be distributed to individual members. According to Italian law a specified portion of a co-op’s surplus has to be placed in this reserve. The indivisible reserve is considered a social asset to be used for the sustenance of the co-op and as a source of employment and wealth creation for the community as a whole, not just existing co-op members. This asset is communal and intergenerational and passed on as a patrimony from one generation of co-op members to the next. In its purest sense the indivisible reserve is a form of social capital generated by the social logic of collective ownership. It is on the basis of its social function that the exemption is justified. In the event that a co-op dissolves, the reserve goes to a charity. And as will be shown below, the concept of the indivisible reserve has important applications to our consideration of a new role for non-profits and other social purpose organizations.
In 1985, the Italian government passed the Marcora Act, which represented another step toward the promotion of worker-owned co-operatives as a source of employment. The Act created a fund to assist the development of new co-operatives, particularly those created by workers facing job loss through business bankruptcies, sale and relocation of business, owner retirement, or other reasons for closure (Logue 2006). In 1992, law n. 59 required that co-ops contribute 3 per cent of their surplus to mutual funds managed by the co-op federation to which they belong. The purpose of these funds is to support the start-up and development of new co-operatives, or the expansion of existing ones. Like contributions to indivisible reserves, these contributions are tax-exempt. Today, these funds account for in direct investments to co-op development and are a major source of the capital that fuels co-op growth and innovation.
Finally, by passing law n. 381 in 1991, Italy established the foundations for the emergence of social co-ops as a means to create a wide range of social services to Italians. But unlike conventional co-ops whose purpose is primarily to provide services to their own members, the law stipulates that social co-ops have as their purpose “to pursue the general community interest in promoting human concerns and the integration of citizens.” Social co-operatives are recognized as having goals that promote benefits to the community and its citizens, not solely to co-op members. Moreover, Italian legislation acknowledges the affinity between public bodies and social co-ops in the promotion of public welfare, and emphasizes the desirability of collaboration between them. For this reason, many social co-ops receive public funding in the form of operating subsidies that offset labour costs. They also enjoy greater flexibility than other forms of enterprise in the application of labour legislation.
There are two types of social co-ops:
• Type A, which provide the delivery of social, health, educational, and recreational services, and
• Type B, which provide for the gainful employment of the disadvantaged through training in the agricultural, industrial, business, or service sectors.
Type B social co-ops must have at least 30 per cent of their employees drawn from marginalized and disadvantaged groups which include the handicapped, the elderly, youth, people with intellectual handicaps, and such excluded groups as ex prisoners, minors at risk, and drug addicts. All these groups are clearly recognized in the social co-op legislation.
Italian legislation allows Type B social co-ops to be exempted from paying mandatory payroll costs as the state picks up this cost as an incentive to promote the hiring of people with employment barriers. A further development in the treatment of social co-operatives has to do with membership.
Italian law provides that the ownership structure of social co-ops may be comprised of several categories of members (workers, users, volunteers, investors, and public bodies), all of which have an interest in the production of the service. This multi-stakeholder aspect has figured prominently in the evolution of social co-ops to pursue more public and less mutualistic aims. It also reflects the expanding focus on community service as opposed to the traditional co-op focus on member benefit. Compared with traditional non-profits, these new organizations rely far more on the broader representation of stakeholder interests and on participative and democratic management than they do on the traditional constraint on the distribution of profit.
The experience of social co-operatives in Italy has led to a radical rethinking of how the public interest might best be served by entities other than the state and today, social co-ops account for approximately 20 per cent of Italy’s spending on social services. In the city of Bologna, over 87 per cent of that city’s social care services are delivered through service agreements with social co-ops.
The tax treatments of co-ops in Italy represents an unusually enlightened policy with respect to recognition of the social benefits implicit in co-operative forms of enterprise. But they are also a product of a particular political philosophy that was deeply influenced by co-operative and socialist principles. All this started to change with the ascent of Berlusconi in 2003.
Recognizing that the co-op movement represented a bastion of resistance to his policies, Berlusconi, with the support of Italy’s corporate sector, attempted to break the power of the co-operatives by attacking the tax exemptions applied to both indivisible reserves and the rate of corporate income tax. The result was a mass uprising in 2005 when over a million people converged on Rome to protest the changes. It was the largest mass gathering in Italy since the end of the Second World War. In the end, a compromise was reached with indivisible reserves subject to a tax of if more than 50 per cent of a co-op’s business is with non-members. The principle that capital with a social purpose should be treated differently than private capital was however, never questioned.
As in Italy, co-operatives in Spain receive a substantial corporate tax advantage compared to privately owned ﬁrms. The corporate income tax rate for co-operatives is 10 per cent of proﬁt compared to 28 per cent for private corporations. This represents a major beneﬁt and a key policy that enabled Spain’s co-op sector to grow to the point of strength, capacity, and autonomy it enjoys today. In Spain’s Basque region, the co-operatives of Mondragon have created a dense network of sophisticated co-op institutions and services, including a social security system, ﬁnancial institutions like the Caja Laboral co-operative bank, training and research centres, and Mondragon University, among others.
Taken together, this co-operative system represents one of the world’s best-known and most successful co-operative economies and leads Spain in the production and export of manufactured products to a global market. Like the co-operatives of Emilia Romagna, Mondragon’s co-ops have also attained a scale and reach that is global. The cultivation of co-operative social values is woven into the country’s tax code and Spanish law requires that each co-op establish a social fund, to which it must allocate 10 per cent of its surplus. The law also stipulates how the funds may be used — e.g., training for members, managers, and board directors of the co-op as well as contributions to community and environmental initiatives and organizations (MacLeod 1997; Lutz 1997).
As in Italy, another Spanish law promotes the long-term stability and financial strength of co-operative assets by requiring co-ops to place 20 per cent of their annual net surplus into their indivisible reserve. The reserve is also supported by contributions from individual members. When joining a co-op a new member must also contribute a “threshold payment” that is deposited into an Individualized Capital Account (ICA). The account is adjusted upwards for inﬂation each year and its value increases by an interest rate of about 6 per cent (Lutz 1997, 5). Fifteen to twenty ﬁve per cent of the threshold payment is a nonrefundable contribution to the co-operative’s indivisible reserve. For new members who cannot afford the cost up front, the payment can be made through salary deductions over a three-year period (Lutz 1997, 5).
As well as being invested in a co-op’s reserve, a signiﬁcant portion of the co-op’s net surplus each year is also allocated to the members’ ICA account in proportion to each member’s hours of work. The ICA remains in the co-operative until the member retires or leaves the business. This system of member equity contribution is similar to that used by many worker co-ops of Italy. The model not only ensures a substantial, and autonomous, source of working capital for the co-op – it also serves as a de facto retirement plan for members once they leave. On this function alone, Spain’s co-ops contribute an enormous source of social welfare to citizens.
It is easy to see why the state recognizes and treats co-operatives as a social asset. Tax support for indivisible reserves helps to secure the co-operatives’ long-term future and to maintain the employment and broader economic benefits they offer to the citizens of Spain. This collective social benefit is both recognized and rewarded. In combination, between the lower tax rate and the retention of surplus in indivisible reserves and the ICAs, Spain’s co-operatives retain 80 percent of their annual surplus as a continuing asset, which significantly enhances their strength and viability when compared to other corporate models (Lutz 1997; Whyte and Whyte 1991). Quebec Over the last twenty years, the co-op sector in Quebec has far outpaced the rest of Canada in the strength, diversity, and dynamism of new co-op development. This impressive growth is due in part to legislative changes that created two new variations on the traditional co-op model — the solidarity co-operative and the worker-shareholder co-operative (Côté 2007).
Based on the social co-ops of Italy, solidarity co-ops are a multi-stakeholder model that allows three types of membership in one co-operative: consumers, workers, and solidarity members (usually local organizations). The worker-shareholder co-op model allows workers to use a co-op to collectively purchase shares in the company they work for. Through the co-op, workers acquire stock voting rights according to the co-op’s share of ownership. The co-op’s votes in the private company are determined by the number of participating workers and based on a one member, one vote formula (Labelle, 2007). The worker-shareholder co-op acquires a portion of corporate proﬁts and takes part in the company’s decision making. In addition to the benefits it provides to workers the model also enables the company to acquire expansion capital, to promote innovation and positive corporate restructuring, and to enhance the performance, loyalty and retention of workers.
In 1985, the Government of Quebec established the Régime d’investissement Coopératif (Co-operative Investment Tax Incentive), which supports the growth of co-ops by giving members and workers a personal income tax deduction of up to 150 per cent of any capital invested in the co-op. The policy was further enhanced when the Government of Quebec created Investment Quebec, a government corporation that established a $140 million fund to provide loans to co-operatives. Finally, the Quebec government has supported the use of co-ops for the retention and creation of jobs by investing in Regional Development Co-operatives (RDCs).
Regional Development Co-operatives are local networks of co-ops and credit unions that jointly run programs whose staff work directly with co-op development projects. They are funded on a formula based on the number of jobs created or saved through the co-op program. Today, the success of the RDCs as an employment generation model exceeds the job creation rates of both government and private models. This, combined with the survival rate of co-ops being nearly double that of private firms (Survival Rate of Co-ops in Quebec, 2009), is another reason the Government of Quebec continues its support of the sector. But another reason has to do with the growing influence and organization of the social economy in the province. And while the co-operative sector represents a key element within the broader social economy, the extension of social capital philosophy as outlined in the case of co-ops, to the social economy as a whole, has the potential to radically shift the paradigm that governs power relations and roles between the state, the private sector and the social economy itself.
A great deal has been written recently on the subject of the social economy. Over the last decade in particular, this interest among both academics and policy makers has coincided with the acceleration of two trends: the growing criticism levelled against conventional free market theories of economics, and the retreat of governments from their role as providers of public goods. The combination of these two factors has thrown a spotlight on the operations and potential of a sector that until now has been consigned to the shadows of economic thinking.
The recent “discovery” of the social economy has in itself been a feature of the broader rediscovery of civil society itself, which began with the collapse of the Soviet model and the efforts to salvage from that wreckage a progressive conception of society and economics that relied neither on the failed dogmas of state socialism associated with the Soviet Bloc, nor on the neo-liberal dogmas promoted by advocates of the free market. The recent resurrection of the civil society tradition has recast the terms of political and economic debate within a frame of political economy that was literally abandoned after the turn of the 19th century. And it is these inconvenient questions of fairness, of political and economic justice, and of social good versus neo liberal economism that have now returned with a vengeance as our economic system further erodes the notion of economics as a body of theory and practice that serves the public interest.
In its broadest and most accepted sense, civil society is the social impulse to free and democratic association, to the creation of community, and to the operations of social life, which includes politics. This is the sense of civil society that is used by writers such as Vaclav Havel. Modern conceptions of civil society also distinguish it from the state and from the operations of the private sector. Some writers also stress a distinction from the family as well.
For Havel and a long line of writers extending back to Aristotle, civil society remains the elementary fact of human existence. It is what makes human life possible. For Aristotle it was both the means and the end of human association as the pursuit of the good life, which is in essence a social life. And in this sense, it is the institutions that arise from civil society (the schools, the voluntary associations, the trade unions, the courts, the political parties, etc.) that provide the individual with the means to realize their own humanity and by so doing to perfect the whole of society in the process. The state is an outgrowth of this impulse.
Within civil society, a huge portion of civic activities are carried out by organizations created to provide goods and services through collaboration, by people acting together to realize mutual aims. They constitute that sector which is composed of non-profit and voluntary organizations, service groups, cultural organizations such as choral societies, charities, trade unions, and co-operatives. This economic aspect within civil society has also been described as the third sector or the social economy.
The value of the economic activity generated by the social economy in the western democracies is huge - and growing. As a percentage of total economic force for example, Canada’s non-profit workforce is the world’s second largest. With an estimated economic turnover of $75.8 billion, Canadian non-profits account for 8.5 per cent of the country’s GDP (including the economic value of volunteer effort). Canadian non-profits account for 2,073 million full time equivalent employees, nearly matching the total of 2,294 million employees reported in Canada’s manufacturing sector. If we include the economic worth of co-operatives, credit unions, and social enterprises, the value is far higher.
But while there is a growing body of research that seeks to measure the size and economic value of the social economy, virtually all of this measuring is based on principles and concepts that are derived from the capitalist economy – i.e. the valuing of goods and services on the basis of the exchange values that characterize commercial transactions in the private sector. These values are based on the concept of the exchange of equivalents. Put simply, the exchange of equivalents means the exchange of one thing for another on the basis of an agreed upon value.
But while appropriate for the measure of commercial exchange, the determination of value solely on the basis of commercial principles is wholly inadequate to the character and needs of the social economy. This is because the social economy is not primarily about exchanging things of equivalent monetary value in pursuit of private ends, but rather of creating and utilizing social relations for the pursuit of social ends. A market for the first is clearly not the same as a market for the second. The attempt to measure value and to develop social and economic policy for the social economy on the basis of commercial principles alone, only serves to marginalize and misrepresent the social economy yet further. As in the case of co-operatives, the basis for extending tax supports to social economy organizations such as non-profits and charities is that they create social benefits that are worth supporting and are in the public interest.
In Canada, and across the industrialized West, the principle of tax exemption to non-profits is well established. It carries back to the very origins of legislation governing societies, which in turn was a reflection of attitudes toward charitable giving. As far back as the middle ages charitable organizations –associated primarily with the church – were exempted from paying income tax, as were churches. The work of these societies was conceived as relieving a burden that would otherwise be borne by the state for such things as providing relief to the poor, running hospitals, caring for widows and orphans, etc. In return for these services, the state compensated societies through an exemption on tax. But it was also a condition of the exemption that no profits could be retained by the society nor distributed to its governors or members. This is the constraint on the distribution of profits that today defines non-profits under society legislation.
But in an age where the sophistication and complexity of social economy organizations extends far beyond simple charity models, and where hybrid models such as social enterprises and community benefit companies employ market mechanisms to pursue social goals, the old tax exemptions based on constraints to the distribution of profit are wholly inadequate. They fail to capture both the reality and the potential of the social economy as a sector deserving equal treatment, on its own terms, to that granted the private and public sectors. They also perpetuate the false notion that the generation of profit is incompatible with the pursuit of social benefit. The reason for this is that profit is still conceived strictly in capitalist terms, which is to say as a private good.
But what of profit that is a social good, a collective asset, as in the case of co-operatives? The real question is not the issue of profit but rather the purposes for which profit is created and utilized. Recognition of profit as a social asset has game changing implications – not only for the social economy, but also for how the public interest is defined, developed and defended. What are needed are social and economic policies, and a tax structure, that recognize the social and mutual foundations of the social economy as a distinct sphere with its own requirements and with institutions that can support a true social market corresponding to the operations of a social economy. On what basis could such a policy, and such a market, operate? The answer lies in the economic principle that lies at the heart of social economy organizations and of the social economy as a whole – reciprocity.
For both conceptions – civil society and social economy – the notion of reciprocity is fundamental. Reciprocity is the social mechanism that makes associational life possible. It is the foundation of social life and of social capital - the predisposition of people in a society to work together around mutual goals.
In its elements, reciprocity is a system of voluntary exchange between individuals based on the understanding that the giving of a favour by an individual will in future be reciprocated either to the giver or to someone else. It’s instructive to consider how reciprocity relates to the logic and purpose of taxation itself. If taxation is primarily a means of extracting money from a population in order to benefit an elite (whether a monarch or an aristocracy or our own 1%) reciprocity is non-existent; what we have is a system of legitimized looting. But if taxation is a means whereby everyone contributes a fair portion, the result of which will be the sharing of public goods that benefit everyone, reciprocity is a defining attribute.
There is a correlation between reciprocity and the fairness of a tax system. In turn, the character of a tax system is an important index to the character of a society. Do people pay their taxes, or do they cheat? Do people think of taxes as a public good or as a private burden? The answer to these questions is related to the degree to which taxes embody this principle of reciprocity, and also to the strength of social capital in a community.
High levels of social capital – of generalized trust – prompt people to pay their taxes because they believe others pay their taxes also. The opposite is true in societies with low levels of generalized trust. People avoid paying taxes if they feel either that the tax system is unfair, or that others are not paying their share. The comparison of tax systems thus goes a long way to illuminating not only essential differences between one society and another, but also what shifts in tax policy tell us about a given society over time. What governments do in this area has a profound impact not only on the capacity of the state to care for the common good, but also on the public attitudes that form the basis for healthy communities and social cohesion.
What then, does it say about a society such as ours where the ideal promoted by our current crop of leaders – and increasingly embraced by Canadians – is to pay as little tax as possible? Or where growing portions of the tax burden are shifted away from the wealthy and toward those less able to pay? The answer is not comforting. And the effect will be to further erode the sense of shared values and solidarity that underpins the social contract between government and the citizenry to support, or even to recognize, the public good. A brief look to the south of our border where the very idea of the public is collapsing, indicates where this leads.
Reciprocity animates a vast range of economic activities that rest on the sharing and reinforcement of attitudes and values that are interpersonal and constitute essential bonds between the individual and the human community. At an individual level, what is exchanged in reciprocal transactions are not merely particular goods, services and favours, but more fundamentally the expression of good will and the assurance that one is prepared to help others. It is the foundation of trust. It is also the means by which a society's stock of social capital is built up. Consequently, the practice of reciprocity has profound social ramifications and entails a clear moral element.
The degree to which tax systems embody and reinforce this value in society has far-reaching effects. Reciprocity is a key for understanding how the institutions of society work. But it is also an economic principle with wholly distinct characteristics that embody social as opposed to merely commercial attributes. When reciprocity finds economic expression in the exchange of goods and services among people and communities it is the social economy that results. Examples range from the provision of burial services through the creation of friendly societies in the 1800s to the promotion of safety through organizations like Neighbourhood Watch today.
Finally, in the moment it is exercised reciprocity is egalitarian – it presupposes a direct relationship of equality between the individuals involved. It is very different from altruism where the giver may have no relation to the receiver and where there is a clear asymmetry of power, as is the case with charity.
Like their co-operative antecedents, social economy organizations are those that pursue their goals, whether economic or social, on the basis that individuals’ contributions will be reciprocated and the benefits shared. Reciprocity is the economic principle that defines both the activities and the aims of these organizations - whether they are co-operatives, volunteer organizations, or conventional non-profits. Their primary purpose is the promotion of collective benefit. Their product is not just the particular goods or services that they produce, but human solidarity and social capital. And, as opposed to the capitalist principle of capital control over labour, reciprocity is the means by which a social interest - whether it takes the form of labour, or citizen groups, or consumers – can exercise control over capital. As a sub division of civil society, the use of reciprocity for economic purposes is what distinguishes the social economy from the private and public sectors.
There are of course, many ways tax policy can support the development and expansion of social economy organizations that provide a collective benefit, using the same rationale as that used to support co-operatives in the examples cited above. The first is to extend tax exemptions and benefits to investments in social economy organizations. These are already provided to groups that have acquired a charitable status.
But there is a strong case for extending these exemptions to contributions made by supporters – whether association members or other community supporters – to any organization whose primary purpose is the provision of a social good. Conventional non-profits and a wide range of social enterprises should be able to generate capital for their services through tax-exempt contributions sourced from within civil society itself. Not only would the dependence of social economy organizations on the state be mitigated, the perennial rationing of capital due to the social economy’s dependence on state funding could also be lessened. But for this to happen, the notion of non-profits as organizations whose goals are incompatible with the generation and utilization of capital (profit) has to be left behind. It is a relic of a false understanding of profit as only a private good, and associated with an equally outmoded understanding of markets as exclusively capitalist.
A social economy understanding of the market, and of profit – as in the case of co-operatives – makes it possible to rethink society legislation in such a manner as to allow non-profits to issue shares to raise capital, to accumulate capital in the form of undistributed reserves for the pursuit of social goods, and to invest in other social economy organizations and institutions that have the same purpose. The development of the kinds of social purpose capital that are now possible in the case of co-operatives should be extended to the whole of the social economy, with the proviso that their use be transparent and democratically accountable to contributors and service users.
This is essential. Without such accountability, there is the risk that capital accumulated by an organization for social purposes may ultimately be used to pursue private interests, as is the case with some non-profits today that have no structure for accountability to stakeholders. What is central in protecting the pursuit of social ends is not the conventional prohibition on the accumulation and distribution of profit, but rather the social constraint imposed by democratic accountability for the use of that capital. It is exactly the same principle that serves to protect the public interest when applied to the taxing and spending practices of the state.
Renewed interest in civil society and the social economy is challenging the old market paradigm of society as composed of two sectors - the private and the public. But from the start, the notion of civil economy (as it was then called) was a reaction against the narrow reading of economics as a specialized field of practice divorced from society. This is the larger frame in which the social economy has its original meaning. Current efforts to highlight civil society and the social economy as countervailing forces to the market view are a continuation of the historical struggle to reclaim the social dimension of economics.
What then, does this mean in the context of tax justice and the larger question of unfairness and inequality in our economic system? One way to approach this question is to use tax policy to support economic models and institutions that distribute economic and social power more equitably – the support of co-operative enterprises and institutions is but one example. A second approach is to consider how the practice of reciprocity itself is enhanced, particularly with respect to social welfare and the production of social and relational goods. This touches on the key questions of social care, on the role of government and the private sector, and most importantly, on the prospective role of the social economy as a repository of progressive values.
To make any headway on this front, the dependence of civil society institutions on government has to be confronted. Civil society, despite its formal distinctions from the state, remains a dependent sector – in many ways a client sector of the state. Legions of non-profits, NGOs, and the leadership they employ are kept in operation solely by government funding. For example, more than 50% of the cost for services provided by voluntary non- profit social welfare agencies in the United States is funded through government purchase-of-service arrangements. Government funds account for 65% of the Catholic Charities budget, over 60% of Save the Children and 96% of the funding for Volunteers of America. The same is true in Canada. This absence of autonomy has undermined these organizations’ capacity to represent, and fight for, the interests of civil society as a sector with its own interests apart from those of the state.
At a time when government has all but erased the distinctions between the private and public sectors, this continuing dependence is a fatal weakness that allows capital interests to continue their domination of public policy and to perpetuate an economic system that is subservient to their interests. Never has this been more evident.
In Canada, it is obvious in the dismantling of all constraints on capital as evidenced by the gutting of environmental protections and of national regulatory powers with respect to the conduct of industry, in the promotion of corporate interests internationally under the guise of foreign aid (the corruption of CIDA), in the blocking of international progress on addressing climate change, and in the undermining of the bargaining rights of labour. The one sector of society that has the potential to defend the public interest and to push for progressive change is effectively neutered by the state through this dependency. Because the Tides Foundation opposed the Conservative government’s policy on the proposed Enbridge pipeline, it is now threatened with the removal of its charitable status.
This impulse to silence criticism and to eradicate opposition is now being institutionalized through the government’s “review” of the political activity of charitable associations and their receipt of international funding. In the government’s view the granting of charitable status is a de facto relinquishing of an organization’s civic rights. But the key area where the institutions and organizations of civil society need to reflect upon and articulate civic solutions is in the protection of social goods in our age of rampant privatization.
Social economy organizations must face up to the contradiction between their service to society and the betrayal of the public interest by governments. This entails the liberation of the social economy from its subsidiary status to the state, the maturation of the sector as an independent social and political force, and the creation of a true social market for social and relational goods – a social market suited to the unique role of the social economy as a primary provider of these goods. Only in this way might the overwhelming power and influence of the capitalist market be brought into balance with civic values.
An autonomous social economy based on reciprocity and civic values makes possible also the political power necessary to negotiate a new social contract for a new reality. How might such a system work? An experiment in Bologna helps to illustrate how a social market might be established without compromising the obligations and prerogatives of government while at the same time tapping into the social economics of reciprocity. Even more, it points to ways in which principles of democratic control and personal empowerment are fundamental to real reform in social care systems.
In 2002, a foundation called the Fondazione del Monte di Bologna e Ravenna started to experiment with new ways of funding social care to seniors. Previously, like most foundations, the foundation had provided grants to a variety of social service groups that then delivered care to seniors and their families across the city. The service organizations retained full control of the funds while the users of these services had little or no role in influencing the content or quality of the care they received. Nor was it easy for consumers to seek more appropriate care elsewhere if they were unhappy. The funded groups were established organizations, secure in their funding, and had little incentive to change so long as power remained exclusively in their hands. Accountability flowed to their funders, not to the people they were meant to serve.
Moreover, the model incorporated one of the worst attributes of privatized services in the pubic sector, the isolation of third party contractors from the funder on the one hand and users on the other. Under third-party contracts, the buyer (in this case a private foundation) does not consume the services acquired, the consumer does not pay for the services received, and the contractor stands in the highly advantageous position of dealing with a buyer who rarely sees what is purchased and a consumer who never bears the expense. This is a recipe for low accountability, which affects service quality, and for the absence of consumer influence on prices, which provides no controls over cost.
This is the classic charity model of care that has now become universal among non-profits. The problem was that in many cases, seniors and their families were unhappy with the care they received. But, having no control rights in the organizations nor any say over the funds that paid for the services, they were powerless to do anything without jeopardizing the care they depended on. As with government delivery models these non-profits, despite their best intentions, shared the common faults of paternalism, inflexibility and lack of transparency that flowed from the absence of accountability to users.
All this changed when the foundation decided to bypass the organizations and provide funding directly to seniors in the form of social vouchers. Instead of funding the supply side of social care, they would fund the demand side. Three hundred and seventy six seniors and their families were involved in the program. Each voucher covered the costs for a specified package of services. There were different packages depending on the type of services that individuals needed and also on their respective ability to pay for a portion of the costs. Those that were less able to cover the full costs were subsidized by the foundation and contributions of those that could pay more. Finally, the social vouchers could be redeemed at any of a group of pre authorized service organizations, whether co-op, or state-operated, or privately run.
Overnight, the balance of power between service provider and service user was reversed. Now, seniors or their families were able to select those service organizations that were best able to provide for their needs. The social vouchers looked identical, were the universal currency for services, and the portion of private contribution to social subsidy was known only to the foundation, so there was no stigma or discrimination attached to their use. Nor was it possible to compete on the basis of cost since the vouchers covered all costs equally. Competition arose solely on the basis of quality. In the course of three years, the quality of senior care improved, costs dropped and the organizations that flourished were those that focused on service quality, innovation, and flexibility. Social co-ops that included seniors and their families in their membership did best.
What are the lessons from this experience? First, it indicates that supply side funding for social care can have a profound effect on the quality of care received. This should come as no surprise. Competition will inevitably arise. But not in the familiar manner of government contracts where low cost (or cronyism) is often the deciding factor, but rather in a manner favourable to service users. Nor should it be surprising if the organizations that received charitable and government funding should resist such a change. Ultimately however, social care isn’t about the providers – it’s about those who depend on their services.
The second lesson is that the social market that was created for senior care in this example is replicable on a much larger scale. A social market for a wide range of social goods and services can be created that involves a different set of relationships and incentives among service users, service providers, and funders – whether public, or private. The use of vouchers is just one mechanism for empowering citizens. The deeper issue concerns the distribution of economic and political leverage to those who depend on these services.
There is no reason why vouchers or other mechanisms for placing market power in the hands of citizens should be associated exclusively with the political right – as it is. The use of market power for social care is just as amenable for socially progressive purposes if the market in question is structured around civic principles. Markets are not necessarily commercial, or capitalist, and the sooner social reformers and progressives understand this, the sooner we can start resolving the contradiction between social goods and chronically under funded and antisocial delivery systems.
Civil society must grapple with how economics can be made to work for civic purposes through the creation of social markets. Innovative tax policy is central to this. What we are talking about here is the creation of an institutional social market through the formal valuation of social goods and the capitalization of these goods directly by citizens as well as the state. This entails two things: allowing social economy organizations to raise capital directly through the issuance of social capital shares; and the development of a social market exchange that functions as a parallel institution to the stock market for capital, except for the social economy.
What would such a social market exchange look like? There are currently a number of social stock exchanges in operation, and they all share a common feature: the ability to invest in a social enterprise through the purchase of shares that yield a limited return to investors. This is one approach. But even a limited return to investors monetizes support for social benefit in a way that moves away from reciprocity and toward a capitalist conception of social investment. I am proposing something that values both contribution and return in terms of reciprocity. This is the reason I use the term contributor as opposed to investor.
What does this entail? First, it would mean the extension of tax exemptions and benefits to contributions that support the creation and distribution of social goods. In this way, the provision of a tax benefit to social contributors acknowledges the key notion of a public benefit compensated by the tax system on the reciprocity principle. But in addition, there needs to be a re-alignment of powers with respect to control over the design and delivery of social care itself.
Four factors seem essential. The first requires shifting the production of many social care services from government to democratically structured civil institutions. Government would retain its role as a prime funder for these services. The first portion of this equation is already well underway. Governments have been unloading social services to private and non-profit providers for two decades. It is the second aspect, the need for user control and service accountability that is lacking (as too, is the funding). Social services that receive public funding and are not under the direct control of the state should be conveyed only to those organizations that provide control rights over the design and delivery of those services to users. This applies equally to non-profit and for-profit services.
Examples include organizations that provide elder care, family services, services to people with disabilities, or child care. Moreover, those services that remain under state control, and there are many, (social security, public pensions, public auto insurance, health care services, etc.), should be democratized. Everyone with a health card, with a social security number, with a driver’s license, should be entitled to membership rights in the institutions that control these services and to representation on the boards that direct these organizations.
Second, government funding should, at least in part, flow directly to social care recipients who would then select the services they need from accredited organizations of their choice. To qualify for receipt of public funds, these organizations must have provisions for user control in their operations. In addition, funds must be made available for the organization of independent consumer-run organizations to assist users and their families in the identification, evaluation, and contracting of services to their members. This is crucial, especially in the case of users that haven’t the means, or the capacity, to adequately select and contract services on their own.
Third, social care organizations must have the legal ability to raise capital from among users and from civil society more generally on the basis of social investing. Both users and community members would be able to purchase capital shares for the purpose of capitalizing the association. As a social investment, these shares would yield a limited return to investors and investor control within the association would also be limited to ensure democratic control by members. As social investments these capital assets would not be taxed.
Fourth, surpluses generated by these organizations should be considered, at least in part, as social assets. All social care organizations receiving public funds – whether in the form of vouchers or direct payments from government – would establish an indivisible reserve for the expansion and development of that organization and its services. A portion of operational surplus would also have to be used for the partial capitalization of a social market exchange through the purchase of shares in the exchange.
Social capitalization requires the creation of a social market exchange based on reciprocity. For example, individual contributors could purchase shares yielding a monetary value that is redeemed through the use of a social good or service provided by any one of the accredited organizations in the system, as in the example of the social vouchers used in Bologna. So for example, I would be able to purchase social capital shares to support the work of a childcare centre in my community. I could then redeem the value of those shares later, when perhaps I require the services of a home care organization. A mechanism for mediating the issuance of social vouchers on the one hand and their redemption on the other needs to be established to balance what some organizations receive in contributions and others redeem in services. The creation of a collective capital pool to help organizations pay for redeemed shares might be one way of managing this.
A social capital exchange of this type generates an independent source of credit and investment capital to social economy organizations, in addition to what they would receive from the state. Shares would be eligible for tax credits on the basis that such contributions have a clear and direct social benefit as would a capital pool.
Fifth, the primary role of government would be to continue to provide public funds for social care services and to fix the rules of the game. In partnership with service deliverers, caregivers, and users, the state would regulate and monitor service delivery, establish service standards, license service providers, enforce legal and regulatory provisions. Finally, the locus of service design and the designation of service needs would take place, as much as possible, at the community and regional level of delivery.
This requires the creation of civil and municipal associations of public and community stakeholders to ensure the accountability of services and the flow of information necessary for effective budgeting, service design and delivery. Most importantly, this decentralization of service delivery must include the democratization of decision-making through the sharing of control rights with service users and caregivers. This is precisely the system that is in place in cites like Bologna where social co-ops and their federations deal directly with municipalities to determine the service needs of communities and to manage their delivery.
These provisions are obviously not exhaustive. They do however outline a direction for the considered development of a market structure that is focused on the social and economic realities of the goods and services it is meant to facilitate. There is nothing here that is indefensible on theoretical, political, or pragmatic grounds. What is really at issue is whether key actors and organizations within civil society and the social economy are able to establish a consensus on the changed reality and the need for civil society to play a new role – to in effect grow up and take its place as an autonomous sector of society in proper balance with the state and the private market. Until this happens, the galloping colonization of social and public space by capital will continue.
The argument for promoting a renewed role for civil society in the production of social services does not mean the abandonment of the fundamental principle of collective responsibility for these services. Nor does it mean the abrogation of state responsibility in favour of private market solutions. It most certainly means the de linking of public goods from exclusive government control. Public funds would still flow to these services and they would remain universally accessible. But the organizational structures that provide them would become progressively civic.
Civil society is the repository of those values and social relations that are best suited to the provision of care in a manner that is humane, responsive, and founded on those principles of reciprocity and mutuality that are the hallmarks of caring relationships. What is lacking is the development of civil society institutions that are capable of applying these civic values on a scale, and in the context, of an economic and political reality that is daily undermining both their meaning and their relevance. Tax policy can be a key means of protecting and promoting these values. To do so, it must recognize and reward reciprocity as a primary social good, it must understand that capital is both a social and a private good, and it must nurture the emergence of social markets attuned to the needs of the social economy.
Taxation can be a powerful instrument that not only elevates the power and utility of civil society as a whole, but also strengthens those institutions and practices that, through the democratic distribution of power, can help to counteract the threat posed to social and economic justice by the domination of capital that we are witnessing in the present day.