What do Elizabeth Warren and Prophet Muhammad have in common?

The recent World Economic Forum 2019 in Davos brought fame to one Rutger Bregman, a Dutch historian and author on history, economics and politics.  In his viral speech about inequality, he told the forum that taxes -- specifically, equitable treatment of taxes and ensuring the rich pays their fair share -- is the only real way to eradicate poverty, while "all the rest is just bullshit".

Around the same time, 2020 presidential hopeful/Harvard law professor Sen. Elizabeth Warren (D-MA) announced her proposal for a wealth tax of 2% on fortunes above US$50mn (and 3% above US$1bn), under a scheme co-formulated by renowned French economist Thomas Piketty, to stop spiraling inequality, curb poverty, and address the balooning sovereign debt problem.  This is a novel idea, since tax is typically collected on flows (i.e. income), but not on accumulated assets -- putting the burden on the working class who pays payroll tax and letting those with passive income mostly off the hook.

I'd argue that in what many consider the backwoods area of the Middle East, a certain leader has the same vision.

That leader is Prophet Muhammad (pbuh), who lived in the 6th century AD Arabian peninsula.

Disclaimer: I am not preaching to impose sharia law to anyone.  Zakat is a policy that would be suitable for many Muslim countries, but otherwise needs to be voted on by a nation's citizens.  Nevertheless, let's take a peek what it prescribes -- there's quite a bit to digest.

What is Zakat?

Zakat, or alms-giving, one of the five pillars of Islam, is a religious obligation for all Muslims who meet the necessary criteria of wealth.

Some texts equate zakat to "tax", but there is an important distinction. Tax in its modern form is a form of government revenue; proceeds are used to fund government spending and capital expenditures. Zakat has purely social functions; according to Islamic doctrine, proceeds are to be paid only to (i) the poor (i.e. no income whatsoever), (ii) the needy (i.e. cannot meet basic needs), (iii) those who collect zakat, (iv) those who are interested in Islam, (v) to free from slavery, (vi) for debt relief, (vii) those in the cause of Allah and (viii) to benefit the stranded traveller.

The amount of zakat is calculated by the amount of wealth one owns. The customary amount is 2.5% p.a. on the assets owned for over one year, in excess of a certain minimum level ("nisab").  According to Majlis Ulema of Singapore, the current level of nisab is approx S$4,900 (US$4,000).  Note that it's assets owned for over a year, so if you're living paycheck-to-paycheck, your income is likely not subject to zakat requirements.

If this all rings a bell, this is basically Warren's wealth tax, but that much more inclusive and with a specific emphasis on eradicating poverty and alleviating hardship.

Focus on basic needs

Going back to Bregman, he argues against philanthrophy: sure, the Gates foundation sponsors well-intentioned research to cure HIV and malaria, but for every Bill Gates, there's a Steven Schwarzman who in 2015 "donated" $150m for a new concert hall at Yale, or a Charles Koch spending tens of millions to conservative PACs during every election cycle.  Bregman's argument is that for the most cases, philantrophy is misdirected because the rich rarely if ever understands the needs of the less fortunate.

In an article for the Guardian (and told in his TED talk above), Bregman highlights a research by social psychologists showing that poverty affects cognitive function, and makes the argument for universal basic income.  He writes as follows, and I quote at length:

"It all started when I accidently stumbled on a paper by a few American psychologists. They had travelled 8,000 miles, to India, to carry out an experiment with sugar cane farmers. These farmers collect about 60% of their annual income all at once, right after the harvest. This means they are relatively poor one part of the year and rich the other. The researchers asked the farmers to do an IQ test before and after the harvest. [...] The farmers scored much worse on the tests before the harvest. The effects of living in poverty, it turns out, correspond to losing 14 points of IQ. That’s comparable to losing a night’s sleep, or the effects of alcoholism. 

A few months later I discussed the theory with Eldar Shafir, a professor of behavioural science and public policy at Princeton University and one of the authors of this study. [According to Shafir] people behave differently when they perceive a thing to be scarce. What that thing is doesn’t much matter; whether it’s time, money or food, it all contributes to a “scarcity mentality”. This narrows your focus to your immediate deficiency. The long-term perspective goes out of the window. Poor people aren’t making dumb decisions because they are dumb, but because they’re living in a context in which anyone would make dumb decisions. 

Suddenly the reason so many of our anti-poverty programmes don’t work becomes clear. Investments in education, for example, are often completely useless. A recent analysis of studies on the effectiveness of money management training came to the conclusion that it makes almost no difference at all. Poor people might come out wiser, but it’s not enough. As Shafir said: “It’s like teaching someone to swim and then throwing them in a stormy sea.” 

So what can be done? Modern economists have a few solutions. We could make the paperwork easier, or send people a text message to remind them of their bills. These “nudges” are hugely popular with modern politicians, because they cost next to nothing. They are a symbol of this era, in which we so often treat the symptoms but ignore the causes."

He notes a Canadian city that experimented with universal basic income in the 1970s, ensuring nobody fell below the poverty line.  The results, he says, was a resounding success:

"[...] school performance of children improved substantially. The hospitalisation rate decreased by as much as 8.5%. Domestic violence was also down, as were mental health complaints. And people didn’t quit their jobs – the only ones who worked a little less were new mothers and students, who stayed in school longer. 

So here’s what I’ve learned. When it comes to poverty, we should stop pretending to know better than poor people. The great thing about money is that people can use it to buy things they need instead of things self-appointed experts think they need. Imagine how many brilliant would-be entrepreneurs, scientists and writers are now withering away in scarcity. Imagine how much energy and talent we would unleash if we got rid of poverty once and for all."

Wealthiest members of 2018 US Congress - Source: Roll Call

Because politicians have no experience in poverty (e.g. ~50% of US congress comprises of multimillionaires), because of the outsized political influence of the wealthy, today’s populist insurgents are more concerned with immigration than with the top income tax rates, whereas social policies have only touched on the margins.  We saw this symptom during the 2018 debate for Affordable Care Act replacement: pundits offered concepts like the "health savings account", which insulted those who can't cope with constantly rising costs.  Or in billionaire/commerce secretary Wilbur Ross' insensitive suggestion during the recent government shutdown that furloughed federal workers should "just get a loan". 

Basic needs -- money, food, and shelter --  are the things the poor really needs, everything else is just gravy.  This is why bringing electricity to the most impoverished town in Rwanda didn't really change lives for the better.   On the other hand, food stamps -- one of many social programs politicians dream of cutting -- have been proven to put poor kids on the right path to success in adulthood.  In Islam, zakat is payable and distributed only in cash or basic foodstuffs (rice or grains). As only after the fundamentals are fulfilled, can more advanced social programs (e.g. education, public health, entrepreneurship) bring effective and measurable results.