Development 99 attempts at regulation were directed against insider trading. In 1789, for example, Congress passed a bill banning treasury officials from speculating in securities; in introducing such legislation it was ahead of even the UK. Although the federal government made periodic threats to introduce securities regulation, such regulation was left to the individual states throughout the nineteenth century. However, not all states had laws regulating securities transaction (the best example being Pennsylvania, economically one of the most important states of the time), and what laws did exist were weak in theory and even weaker in enforcement.[112]
Fraud in securities transactions, especially misrepresentation of information, was made a property fraud in the mid-nineteenth century, but full information disclosure was not made mandatory until the 1933 Federal Securities Act. In the early twentieth century, 20 states instituted ‘blue sky laws’, which required investment bankers to register securities with state authorities before selling them, and which penalized misrepresentation, but the laws were ineffective and there were many loopholes. The first effective federal securities regulation came with the 1933 Federal Securities Act, which gave the Federal Trade Commission the authority to regulate security transactions – an authority that was then transferred to the new Securities and Exchange Commission in 1934.[113]
Continuing fiscal crisis in many developing countries has been a great obstacle to development since the 1970s at least. The IDPE believes that the nature of the fiscal problem in these countries stems from their profligacy, but in most cases there is a deeper problem, namely the incapacity to tax.[114] This argument is also supported by the fact that budgetary outlays in developing countries are proportionally much smaller than in developed countries, whose governments are able to spend – and tax – far more.
The ability to tax requires, at the deepest level, the ability to command political legitimacy , both for the government itself and for the particular taxes concerned. For example, the Community Charge (‘Poll Tax’) that Margaret Thatcher tried to introduce in the UK failed because most British taxpayers thought it was an ‘unfair’ (and thus illegitimate) tax, rather than because they thought they were being taxed at too high a rate, or because they thought her government was illegitimate.
However, ensuring the political legitimacy of a regime and of individual taxes is not enough to increase tax collection capability. It also requires the development of the requisite institutions, such as new taxes and administrative mechanisms for better tax collection. How then did the NDCs manage this process?
In the early days of their development, the NDCs suffered from very limited fiscal capabilities; in this regard they probably suffered even more than most developing countries suffer these days. Their power to tax was so limited that tax farming was widely accepted as a cost-effective means of raising government revenue in the seventeenth and eighteenth centuries. Many contemporaries justified it as a way of saving administrative costs, stabilizing revenue, and reducing corruption in tax collection; these were probably not unreasonable arguments, given how poorly developed public finance institutions were in these countries at the time.[115]
Overall, in many NDCs government finance – particularly local government finance – was in a mess during most of the period in question. A very telling example is that of the defaults by a number of US state governments on British loans in 1842. After these defaults, British financiers put pressure on the US federal government to assume the liabilities (which reminds us of the events in Brazil following the default of the state of Minas Gerais in 1999). When this pressure came to naught, The Times poured scorn on the US federal government’s attempt to raise a new loan later in the year by arguing that ‘[t]he people of the United States may be fully persuaded that there is a certain class of securities to which no abundance of money, however great, can give value; and that in this class their own securities stand pre-eminent’ .[116]
What especially exacerbated the problems in the public finance of the time was the combination of frequent wars, which required substantial extra public financing, and the inability to collect direct taxes, especially income tax.[117] The absence of income tax (some countries had had property tax and/or wealth tax from relatively early on) in part reflected the political under-representation of the poorer classes, but also the limited administrative capability of the bureaucracy. This restricted bureaucratic capacity was indeed one reason why tariffs (the easiest taxes to collect), were so important as a source of revenue in the NDCs in earlier times, and also for many of today’s poorest developing countries.
Income tax was initially only used as an emergency tax intended for war financing. Britain introduced graduated income tax in 1799 to finance the war with France, but scrapped it with the end of the war in 1816. Denmark used income tax for emergency finance during the 1789 Revolutionary War and the 1809 Napoleonic War. The USA introduced a temporary income tax during the Civil War but repealed it soon after the war ended in 1872.[118]
In 1842 Britain became the first country to make income tax permanent. However, the tax was widely opposed as an unequal and intrusive measure; John McCulloch, one of the most influential economists of the time, argued that income taxes ‘require a constant interference with, and inquiry into the affairs of individuals, so that, independent of their inequality, they keep up a perpetual feeling of irritation’. [119] As late as 1874, the abolition of income tax was a major plank of Gladstone’s election platform, although he lost the election.[120]
Denmark introduced a permanent progressive income tax in 1903. In the USA, the income-tax law of 1894 was overturned as ‘unconstitutional’ by the Supreme Court. A subsequent bill was defeated in 1898, and the Sixteenth Amendment allowing federal income tax was only adopted in 1913. However, the tax rate was only one per cent for taxable net income above $3,000, rising to seven per cent on incomes above $500,000. In Belgium, income tax was introduced in 1919, while in Portugal, it was introduced in 1922, but abolished in 1928, and only reinstated in 1933. Despite being known later for its willingness to impose high rates of income tax, Sweden introduced it as late as 1932. In Spain; the first attempt to introduce income tax by the Finance Minister Calvo Sotelo in 1926 was thwarted by a campaign against it, ‘led by the aristocracy of the banking world’.[121]
3.2.6. Social welfare and labour institutions
With the progress in liberalization and deregulation that can bring about a large-scale economic dislocation, as well as the increasing frequency of economic crises, there is a greater concern with providing livelihoods for those worst affected by these processes in developing countries. Even the IMF and the World Bank, which used to be against the introduction into developing countries of what they regarded as ‘premature’ social welfare institutions (especially given their preoccupation with budget deficits), are now talking about the need to provide a ‘safety net’. So, while the standards demanded tend to be quite low, there is now pressure on the developing countries to adopt some minimal social welfare institutions – although this pressure is much weaker than for most of the other items on the ‘good governance’ agenda.
Social welfare institutions are, however, much more than ‘safety nets’; if carefully designed and implemented they can enhance efficiency and productivity growth.[122] Cost-effective public provision of health and education can bring about improvements in labour force quality that can, in turn, raise efficiency and accelerate productivity growth. Social welfare institutions reduce social tensions and enhance the legitimacy of the political system, thus providing a more stable environment for long-term investments. Inter-temporal smoothing of consumption through devices like unemployment benefit can even contribute to dampening the business cycle. And so on.
All these potential benefits of social welfare institutions have to be set against their potential costs. First, there are the potentially corrosive effects of social welfare institutions on the work ethic and the sense of self-worth felt by the recipients of benefits. Second, apparently technical issues can significantly determine the effectiveness and legitimacy of these institutions. These include assessing whether benefit and contribution levels
