The pandemic-linked crisis is not the time for fiscal consolidation. But introducing a genuinely progressive tax system will become essential.
Politicians and commentators rightly say that the world economy has to be built back better after the pandemic—we cannot just go back to the old. But building back will cost—and governments everywhere are already more deeply in debt than they ever expected to be.
Of course, governments should not take measures now to rein in the deficits. The lessons of misplaced austerity after the global financial crisis have not been fully forgotten—although the British government, for one, is sticking its toe in the water, aiming to restore public-sector wage freezes.
At some point, though, the deficits will need to be reduced. Since reductions in public expenditure are not appropriate when services and living conditions for many have already been drastically curtailed, and when governments still have costly wish lists, this means taxes will have to rise.
Unfit for purpose
The old tax system is not fit for purpose. Corporations have been able to shift their profits to low-tax jurisdictions and pay derisory amounts. High-net-worth individuals have similarly been able to shelter earnings and have frequently experienced average rates below those of the much-less-affluent mainstream. Eva Joly among others has pointed out the inequities in the present system and rightly expressed impatience at the efforts to address them by the Organisation for Economic Co-operation and Development.
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The election of Joe Biden as president of the United States may be a game-changer. The incoming Biden administration, while likely still to press the interests of US corporations (many were among his major donors), understands the benefits of international co-operation and wishes to demonstrate a clear break from the years of chaos and confrontation under Donald Trump.
Biden may well press the OECD to move at least some way towards accepting the designation of corporate income in the jurisdiction where it was earned. He has already spoken of a minimum effective rate of tax, of 21 per cent—not far from the 25 per cent advocated by Joly and her colleagues on the Independent Commission for International Corporate Tax Reform.
Importantly also, Biden would be less likely than his predecessor to take revenge in the event that the European Union, or member states or others, unilaterally establish a minimum rate of effective tax, or indeed impose digital taxes or the heavy carbon taxes necessary to achieve the targets of the Paris climate accord, which Biden is committed to rejoin. These should be high on the European agenda.
This still leaves a major legacy of neoliberal tax regimes. Although single-rate, ‘flat’ taxes have not been introduced by any major western state in recent years, many countries have compressed their personal tax systems into just two or three bands. This implies a flat tax rate above the threshold of the higher band. In the United Kingdom this is currently £150,000. In the US, even progressives such as Alexandria Ocasio-Cortez postulate a flat tax rate—in her case, 70 per cent—above a threshold.
There is no reason ever to have a linear rate. The tax burden under such a system takes the form of a concave curve: there is less increase in progressivity the higher up the income scale one goes. But any number of formulae can be devised so that the marginal tax rate rises as income goes up.
Given the ever-rising inequality in the western world, and the fact that some of the very richest have made a lot of money during the pandemic, if ‘we are all in it together’ one would expect that ‘the broadest shoulders should bear the greatest burden’. There is substantial untapped potential tax revenue—and hence availability of funding for critical public services—without serious economic disadvantage or inequity.
A non-linear formula might be that those earning less than $1 million per annum would pay roughly the same as now, those between $1 and $10 million a marginal rate of 70 per cent, above $10 million 80 per cent, above $100 million 90 per cent and for those earning a billion the marginal rate would be 99 per cent. Although this may seem radical it is not too different from the early postwar period, where concepts of commonality in sacrifice led to top tax rates above 90 per cent in the US.
It would also leave the very rich still with a lot of money, while providing a decent amount for the state coffers. Establishing a convex tax structure—in technical terms, the second derivative of the tax rate with regard to income remains positive along the entire income scale—should be a non-partisan objective of policy, even if there is debate on the gradient and the limit of the curve.
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A number of concomitant policies would be needed to make this work. First, to avoid distortions tax on dividends should be set at the same rate as on earned income. In this scenario, it would mean dividends being taxed at a maximum of 99 per cent where the payee had earnings of over $1 billion.
Capital-gains tax too would need to be at that level for the über-wealthy. Indeed, one might wish to follow a Swiss model, under which the tax rate is supplemented by a factor reflecting the length of time the asset has been held—essentially an interest charge to compensate for the ability to defer tax liabilities through holding an asset over many years.
Such a change to the tax regime would need to be accompanied by surveillance of—and increased transparency and specificity over—any costs individuals or corporates would be entitled to deduct from gross income, as there would be a huge incentive to inflate or even invent such costs. Would charitable contributions still be deductible, and if so which charities and up to what rate?
This would all be much better done multilaterally, or with ancillary measures to avoid it being easy for individuals or corporates to move from a high- to low-tax jurisdiction. A larger state would be able to do this more easily than a smaller one, and there would be benefits in a ‘coalition of the willing’ moving in this direction.
Some of the über-wealthy might not have sufficient liquidity to make these tax payments. The tax authorities should therefore be ready to accept payment in assets, for instance stock. In anticipation, preparations should be made to take a portfolio of surrendered stock—perhaps to form the basis of a sovereign wealth fund or to sell over time while avoiding fire sales of the assets. Holding stock in this way would also avoid the risk that the respective stock price would fall, killing the golden goose laying the tax revenue.
Such tax restructuring would leave the burden on the vast majority of the population unaffected or possibly slightly lower—certainly, it would reduce the burden compared with what the majority would have to pay if the revenue required had to raised conventionally. It should therefore be politically more acceptable and the usual drumbeat against higher taxes less evident.
This could also be a strong anti-trust weapon, especially as other anti-trust measures in recent years have been weak. Levying a 99 per cent tax on a billionaire would not reduce their ‘effort’ or ‘contribution to society’ but would likely reduce their creation of ever-expanding commercial empires which suppress competition through cross-subsidisation and quasi-monopoly powers.
Moving to a non-linear taxation system is technically trivial nowadays. It would be an answer to gross inequalities in society, high government debt and expenditure needs, and the lack of any anti-trust policy which might address continuing increases in inequality.
It should be a non-partisan principle to introduce such a system—the argument would be about the end-points and the rate of climb. And, once over the shock of hearing about a marginal rate of 99 per cent on earnings of over a billion, the response would be: why on earth not?