10. 09 .2024
The impact of freeriding on social responsibility institutions
Free Riders and Solidarity
The term “free riding” refers to the violation of norms when using socially owned assets held in undivided common ownership. In academic literature, this is often called the "tragedy of the commons." Free riding undermines social responsibility, which is based on brotherly love and solidarity. There are visible, everyday forms of free-riding norm violations, from littering in public spaces to dodging public transport fares or illegally overtaking cars waiting patiently in traffic jams. The negative impact on adherence to norms is easily recognized through the multiplying effect of rule-breaking, where compliance gives way to widespread rule violations.
Just as exhaust fumes from idling engines in traffic jams are an obvious surface-level phenomenon, the real problem is the wasted time and its associated societal costs. Similarly, free riding has both surface-level manifestations that are easy to recognize and combat, and less obvious effects that erode the main societal systems on which civil democracies are built. Unfortunately, free riding also destroys the operational model of the most important institutions of civil democracies—the "six killer apps of Western civilization" as identified by Niall Ferguson.
In the following, I aim to briefly address three complex forms of free riding that bypass the most important economic subsystems based on social responsibility and solidarity. These are difficult for the average citizen to detect but cause significant communal damage.
Public Burden Sharing – Taxation
Warren Buffet, one of the most modest and responsible billionaires, is usually right. The average corporate tax rate for the largest U.S. companies around the turn of the millennium was 22%, but it has now fallen below 11%—halved in just 20 years. Buffet argues that if every U.S. company paid the same 21% effective corporate tax that Berkshire Hathaway does, the U.S. budget deficit would disappear. In Hungary, the statutory corporate tax rate is 9%, but companies typically pay an average of only 5% effective tax. According to economist Thomas Piketty, over the last 50 years, capital income growth has far outpaced labor income growth, exacerbating income and wealth inequality. Inequality, in turn, undermines overall social growth potential. In a globalized world, corporate social responsibility (CSR) and environmental, social, and governance (ESG) practices extend to everything—except fair taxation.
One of the most outrageous examples of this is the zero contribution of Apple, Google, Amazon, and Meta to the EU budget, even though they dominate media, advertising, and digital marketplaces across the EU. The EU cannot afford this at a time when a consensus-based tax system is meant to cover social costs and regenerate social wealth. If international corporations—considered the winners of globalization—paid effective tax rates at half or a third of what local small and medium enterprises (SMEs) pay, national debt would decrease, and local-regional companies would be less disadvantaged. The local SME sector would recover and strengthen.
Free services cannot compete with price. In the EU, a company must pay VAT on promotional products, yet Google, Meta, and Amazon avoid doing so, while using "free" services to prevent the rise of EU competitors. The data acquired through free services is successfully sold to third parties. It is often said that if you don’t have to pay for a useful product (like Google Search or Meta services), your choice becomes the product itself. However, this doesn’t change the fact that these companies should pay VAT to national budgets, and cost calculations exist to determine how much a Google search costs in € cents.
Collecting VAT from these service providers at the EU level, as is done with imported goods, would change the entire digital space, putting the EU tech sector in a competitive position instead of its current vulnerability. Furthermore, the concept of "dumping" in pricing—intended to penalize pricing strategies aimed at eliminating competitors—already exists for some East Asian companies but is never applied to American companies offering free services. This explains the absence of EU-based data storage, IT development, chip manufacturing, etc. Yet in chip lithography and laser optics, Europe excels. TSMC cannot move without Dutch ASML and German Zeiss. Without TSMC, ASML, and Zeiss, neither Tesla, Apple, Samsung, nor Microsoft could innovate.
I propose working with companies specializing in tax optimization to create transparent tax laws that can only be changed every 10 years. Simplifying the tax system to the point where tax authorities' computers can automatically prepare annual tax returns for every individual and SME would be a step forward. Different rules should apply to international corporations, with value creation remaining in the production-service sector for local-regional companies, not in tax avoidance. If everyone pays their taxes, the rate can be low. The broader the tax base, the lower the rate can be. Tax avoidance and optimization should become more expensive than paying a clean, low tax. Eventually, the tax optimization profession would disappear, norms would be strengthened, and free riders would be despised (as we currently look down on individuals with tax-dodging foreign license plates).
International companies, as the winners of globalization, should be taxed globally at a higher rate than SMEs. We don’t need lofty CSR and ESG principles, but rather tax fairness—companies should pay their fair share of public burdens. Economies of scale already give globalized companies an advantage, so it’s the responsibility of states or the union of states (the EU) to support the SME sector in competing, as they are the true sources of new ideas, competition, and innovation.
From my corporate philosophy perspective, a customer who doesn’t pay is not a customer, but a debtor. A debtor is a different matter than a customer, who, as the saying goes, is king. From the perspective of the state or the EU, a global company that does not participate in the fair sharing of public burdens is a free rider. It benefits from legal security, infrastructure, and a well-educated workforce, enjoys the advantages of a regulated market, but without paying taxes, it does not contribute to maintaining the costly infrastructure. This is unfair and amounts to cheating. The state’s role is to enforce fair rules for all participants in the game, regardless of their lobbying power, just as water polo rules apply equally to everyone in the pool. Without this, there’s no point in jumping into the pool. The Z generation, feeling the hacked nature of societal rules, doesn’t want to participate in the game—they’ve become passive and neither want nor accept responsibility. Of course, there are exceptions.
Health Insurance
The national wealth includes not only economic infrastructure and production tools but also the health of the nation’s citizens. Health is also maintained by a solidarity-based system organized on a state-nation basis.
Health insurance, as a national solidarity community, is also vulnerable to free riding. The solidarity community forms a risk pool, meaning that individual contributors bear the health risks of other participants. This includes smokers, alcoholics, extreme sports enthusiasts, and even disaster responders, although there are ongoing changes regarding the latter. Every citizen is required to participate in the health insurance risk pool. The health insurance coverage of individuals under 18, those in full-time education, and pensioners is funded by workers aged 18-65 as a generational, familial transfer. The assumption is that these individuals will later enter the workforce and contribute to covering the next generation’s health insurance.
But this raises many questions regarding free riders:
- Is a young person who uses free health services during their domestic education but later works abroad and pays health insurance elsewhere a free rider?
- Is someone who leads an unhealthy lifestyle—consciously taking on significant health risks through obesity, smoking, lack of exercise, alcohol or drug use—a free rider for generating extreme treatment costs?
- Are extreme sports enthusiasts who take on significant risks free riders when it comes to health insurance coverage for their injuries?
- Is a top executive who accepts high stress for high earnings a free rider when the health consequences are paid by the risk pool?
- Are those who engage in the most dangerous jobs (military, police, disaster response, etc.) free riders for taking on risks that far exceed the average, even though they do so in the interest of the community?
- Is a smoker battling cancer, who continues smoking during costly chemotherapy, increasing communal costs a free rider?
- Are addicts who regularly require publicly funded rehabilitation free riders?
- Are urban cyclists or motorcyclists without protective gear free riders?
Would regular health screenings that flag higher health risks—such as obesity, smoking, alcohol or drug use—lead to higher monthly contributions? Similar to the bonus-malus system in car insurance, where drivers who regularly cause accidents pay higher premiums, would this approach reduce free riding in health care?
The system easily filters out non-payers, and those without payments can only receive emergency care and life-saving services, not regular treatments or healthcare. Addressing the issue of "free riders," such as extreme athletes whose accidents and medical treatments entail high costs, is still in the experimental stage and faces significant societal resistance. The focus tends to start with athletes who rarely use basic health services.
COVID-19 has highlighted the high infection risks faced by healthcare workers, i.e., health risks. Beyond COVID, industries like construction, transportation, mining, and agriculture also involve activities with significantly above-average health risks.
Following Charlie Munger’s principle of "incentives determine outcomes," feedback mechanisms can be integrated into the healthcare insurance system to promote awareness and stakeholder involvement, guiding society toward desired outcomes. These outcomes include increasing health wealth and reducing healthcare costs. For example, regular health assessments could be tied to a personal bonus-malus system: excellent lab results from regular exercise would lead to lower monthly premiums, while higher risks from smoking, drug use, or alcohol would lead to higher contributions. Regular screenings could also identify individuals involved in drug use but not yet seriously addicted. Early intervention is more effective and can save lives and families for the future.
Rising risk — leading to higher payment obligations — could also apply to risks from workplace stress and leisure activities (like extreme sports). Increased awareness could guide the majority toward a healthier lifestyle. For extreme issues, tailored solutions could be created, such as supplemental insurance for extreme athletes or the general adoption of management insurance combined with healthcare screenings.
Regarding the boundary between tax evasion and tax optimization, we examined the "free riders" in public burden-sharing based on the actual tax rate. In health insurance, the issue doesn't lie on the payment side because you either have coverage or you don't. The focus should be on the justified or unjustified use of the available societal health solidarity fund. This classic "tragedy of the commons" problem is complicated by feelings of compassion, solidarity, and empathy triggered by need, vulnerability, or addiction.
Unfortunately, the community budget is limited, even if human love and compassion are not. Therefore, rules governing the use of shared funds, including health insurance funds, must incorporate feedback and incentive structures. Proper family health wealth management can be organized around the family doctor system.
The deliberate use of a family health fund (showing and monitoring payments and usage with the help of the family doctor) and integrating preventive measures and lifestyle change costs into the system, along with regular reviews, would be the first step. The second step would involve introducing a personal incentive system based on regular assessments, similar to the bonus-malus system used in CASCO/KFG insurance, where higher-risk classifications would be offset by higher payments. Naturally, this would also include lower payments for lower risks. Through these incentives, the majority could be guided toward healthier lifestyles. Tailored insurance coverage should be created for specific cases like extreme athletes, motorcyclists, or those working in extreme conditions.
Pension Insurance
The general perception is that current pension contributions in the pay-as-you-go system represent the future value of one's pension. Unfortunately, this belief is flawed. The reality is that future pensions are funded by future contributions made by today’s children. Our children are the source of our future pension security. What we pay today funds the pensions of current retirees.
The transfer between generations includes education, basic healthcare, meal programs, subsidized transportation, and more. The middle generation (parents) provides for both their children and their own parents (retirees), fulfilling obligations in both directions.
This is why "free rider" issues arise when one generation, for example, emigrates for work. On an individual level, higher foreign earnings may be advantageous. However, contributions paid abroad leave a gap in the domestic pension fund meant for the grandparents, a gap that must be filled by those who remain at home. This is because the pension system, like the tax and healthcare systems, is nationally organized. If those emigrating could also take responsibility for their grandparents' pensions, the free rider problem would disappear, but this is not the case. In post-socialist countries with pay-as-you-go pension systems, when contributors leave the country, the previous generation’s pension coverage is lost.
A similar issue arises with having children. If a generation skips the 3-step generational transfer, i.e., doesn’t have children, that family becomes a free rider from a societal perspective, as they aren’t producing the next generation to pay into their pension system. A lack of children results in a future lack of pension contributions for the next generation. This reduces the total pension fund, leading to inevitable poverty in old age. The decreasing number of contributors can only be compensated for by raising pension contributions to a limited extent, and even that compensation is temporary. The decline in birth rates further reduces the next generation's numbers, and this problem resurfaces every 20 years with even smaller populations. Eventually, the pension fund will empty for the final generation.
A pension system where children's contributions partially fund their grandparents' pensions could strengthen family ties across generations. For instance, if 2,500 or 5,000 HUF from a 10,000 HUF monthly contribution went directly to a grandmother's pension account, people would perceive this system differently. Instead of relying solely on full solidarity, it could shift to a solidarity system with 10-25-50% personal interest. Modern IT systems can easily accommodate the potential inclusion of a fourth generation in the pension system due to increasing life expectancies. In a direct parent-grandparent relationship, 50% of contributions could be based on a general solidarity fund, while the remaining 50% could be family-based.
A mother of four or six children, receiving 50% of their contributions, could live more comfortably than a woman without children, who might have spent all her extra income on travel or invested in real estate, benefiting from rental income later in life.
In industrialized societies, literature often describes children as a burden or a negative-return investment, explaining the drop in birth rates below replacement levels. While family taxation has had a positive effect on encouraging childbirth, the healthcare and pension systems should also incorporate the notion of multigenerational family support. A three-generation mixed family and solidarity-based pension model redefines the importance of the third generation. In a system where children contribute partially to future pensions, Maslow’s security level also becomes a factor, encouraging families to have more children. Linking childbearing to income in old age, through the creation of a family pension account, could have positive effects on multiple levels. Grandparents would see their children and grandchildren making contributions, giving a human face to the otherwise faceless concept of solidarity.
The ability to choose to contribute to a pension fund at home should be available for people working abroad. For example, emigrants could support their grandparents either directly or by contributing to their pension fund. This creates a sense of responsibility and consciousness, strengthening emotional, intellectual, and financial bonds within the family.
Placing the tax system on a family basis is the first step in state support for encouraging childbirth. The goal is to ensure that parents of large families live as well or better than couples or individuals who, for whatever reason, choose not to have children. The family health account and family pension account contribute to this goal. The state has a responsibility to create a framework of pension and healthcare interests that supports emotional commitment. Once all three major financial systems (tax, healthcare, and pension) are aligned in this direction, the social phenomenon of "free riders" will diminish. After all, who would cheat their grandmother out of a pension? Family cohesion and living together make people better.
I speak from experience—over the past 50 years, my family and friends have made me a better person. I thank them by putting these thoughts to paper, hoping they spread as a MEME and benefit the country as well.
https://taxfoundation.org/data/all/state/combined-federal-state-corporate-tax-rates-2022/
https://mfor.hu/cikkek/vallalatok/ime-a-bizonyitek-hogy-magyarorszag-adoparadicsom.html
https://www.webbeteg.hu/cikkek/sport_egeszseg/12470/extrem-sportolok-tarsadalombiztositasa
https://www.babelmatrix.org/works/hu/Pilinszky_János-1921/Halak_a_hálóban
https://www.sztnh.gov.hu/sites/default/files/files/kiadv/szkv//06-konyv-3.pdf
The above has been translated from Hungarian to English with the use of AI.