A more effective world

Joseph Stiglitz, former chief economist of the World Bank and economic advisor and chairman of the US Council of Economic Advisers, has recently published with two colleagues Todd Tucker and Gabriel Zucman, an article in Foreign Affairs The Starving State. Why Capitalism’s Salvation Depends on Taxation. (January/February 2020 issue). He is also an advocate of Georgist monetary theories. Economists since Adam Smith and David Ricardo have observed that, unlike other taxes, a public levy on land value does not cause economic inefficiency. The following essay is an unabashed recapitulation of the advocacies of Stiglitz and his colleagues. This endorsement of Stiglitz’s theories was motivated by two factors. One was the recent tax controversy world-wide that asserted that reducing corporate taxes would increase productivity and jobs. The second was the growing incidence of rioting and civil unrest originating through citizen demands to reduce price increases on public goods.

The state requires funding to perform its many tasks, Stiglitz and his cohorts argued. It takes money to build roads and ports, to provide education for the young and health care for the sick, to finance the basic research that is the underpinnings to progress. It also needs funding to staff the bureaucracies that keep societies and economies going. No successful market can survive without a strong functioning state. Even developing countries need an effective government for their growth. These facts are being forgotten. In the United States, total tax revenues paid to all levels of government shrank by close to four percent of national income over the last two decades, from about 32 percent in 1999 to approximately 28 percent today, a decline unique in modern history among wealthy nations. The direct consequences of this shift are clear: crumbling infrastructure, a slowing pace of innovation, a diminishing rate of growth.

These factors lead to inequality, shorter life expectancies, and a sense of despair among large parts of the population. The consequences pose a threat to the sustainability of democracy. The rise of international tax competition and the growth of a global tax-avoidance industry have put additional downward pressure on revenues. Today, multinationals shift close to 40 percent of their profits to low-tax countries around the world. The average corporate income tax rate world-wide fell from 49 percent in 1985 to 24 percent in 2018. Today, according to the latest available estimates, corporations around the world shift more than $650 billion in profits each year (close to 40 percent of the profits they make are outside the countries where they are headquartered) to tax havens, primarily Bermuda, Ireland, Luxembourg, and Singapore. Nowhere is tax avoidance more striking than in the technology sector. Technology companies shift billions of dollars of profits to places such as Jersey, one of the Channel Islands, where the corporate tax rate is zero, with complete impunity. The richest companies in the world, owned by the richest people in the world, barely pay taxes. Opponents of corporate tax increases claim that firms will reinvest more of their profits when less gets siphoned off by the government. This argument, according to Stiglitz and his associates, is wrong.

Not only corporations engage in tax avoidance. Dodging taxes is a way of life for the super-rich. An estimated eight percent of the world’s household wealth is hidden in tax havens. In the United States, the share of wealth owned by the richest one percent of the adult population has increased, from 22 percent in the late 1970s to 37 percent in 2018. Over the same period, the wealth share of the bottom 90 percent of adults declined from 40 percent to 27 percent. Since 1980, what the bottom 90 percent has lost, the top one percent has gained.

The net effect is negative.  Economic growth slows because less money overall is spent in the economy; inequality is passed down from generation to generation, giving the children of the wealthy access to the top schools and the best neighbourhoods, perpetuating a cycle of ever-deeper division between the haves and the have-nots.

Several approaches are possible. Countries must create a global wealth registry that records the ultimate owners of all assets. We also need to increase taxes on the wealthy. A possibility is a wealth tax, as recently proposed by Elizabeth Warren, the Democratic U.S. senator from Massachusetts currently running for president. She is at times accused of being too far left, an accusation reflecting the deep polarisation of the United States. Governments would also need to tax corporations chartered in their country of earning and not allow them to shift money to low-tax jurisdictions using subsidiaries. Tax Offices in all countries would need to be strengthened as would the World Trade Organisation. The Internal Revenue Service in the US has been reduced by roughly 13,000 employees between 2010 and 2016, a trend that has only increased in the Trump era.

Younger voters are tilting further to the left. Most of the participants in the Occupy Wall Street movement were “white young adults with college educations”.  The Queen in her Christmas Day message said that she's been struck by the "sense of purpose" younger generations have shown in tackling issues like climate change. They may be our answer.