Trust, business and taxes


Trust is the oil of commerce. Imagine popping out to buy some milk in a trustless world:

“…the refrigerator is locked. When you’ve persuaded the shopkeeper to retrieve the milk, you then end up arguing over whether you’re going to hand the money over first, or whether he is going to hand over the milk. Finally you manage to arrange an elaborate simultaneous exchange. A little taste of life in a world without trust – now imagine trying to arrange a mortgage.”. (Tim Harford)

Without trust, trade and division of labour are so difficult that they mostly don’t happen, and so wealth creation plummets. That’s why poor countries generally have low trust, and vice versa.

But, unlike the oil we get from the ground, trust doesn’t start to run out when we use it lots. The less trusting people are of one another, the more likely they are to behave in untrustworthy ways. Going back to Tim’s milk example, if you think the shopkeeper’s dastardly plan is to take your money and then not hand over the milk, you might just steal the milk from him first. On the other hand, the more trusting people are, the better they behave, and the more reason they then have to trust each other – a beautiful fertile circle of trusty-ness.

Which is why I worry about things like the HSBC tax evasion scandal being all over the news. Whilst we might be shocked by how bad so many (particularly rich) people are about paying taxes, economists are puzzled by how good we are: given the (low) level of enforcement, and the fact that people generally prefer to keep their money, if humans were purely rational they would evade tax far more often than they do. Evidently, the fertile circle of trust in government, and trust in each other to pay our dues, is working its magic. Trust may be lower since the MP’s expenses scandal, the bankers’ bailouts, etc. and yet we have so much further to fall before becoming Sudan. If we dwell too much on the evil ways of HSBC and their rich clients then we might get the mistaken impression than everyone’s at it, and give in to cynicism by joining them, and so begin a spiral of disintegration.

In opposition to that dark scenario, I want to celebrate my friend John Kirby, who makes beautiful wooden kitchens. (He also helped us set up the prison workshops for Bridget). John’s customers sometimes ask him for a discount for cash. He tells me that in his early days he once accepted, and then, mortified with guilt, gave all the money away to charity. He now has a blanket no cash discount policy, and says that he has never lost a sale because of it. Perhaps that’s because people realise that if their kitchen cabinet maker can be trusted to pay his taxes, then he can also be trusted to build decent kitchens.

tex-evasion-cartoon