The left must embrace fiscal restructuring

A raft of new instruments are required to address the rentier capitalism of today and the threat to the ecosphere.

For the past century, social democrats have supported a model of society in which high and progressive taxes on income and consumption have been justified as the means of reducing inequality and poverty, while paying for a growing array of state benefits and public services. For many decades, that prescription served them well, assuring regular electoral victories.    

Since the 1990s, however, that has ceased to be the case. The political right may not have won the intellectual or moral argument. But its prescription of low income and consumption taxes has had increasing popular appeal, draining support for the left from those gaining from tax cuts, even if they still support public services and benefits.

It is no use the left lamenting the passing of that era. It must reinvent fiscal policy. To do so, it must recognise once and for all that the income-distribution system of the social-democratic decades of the 20th century has broken down irretrievably. Whether economic growth is high or low, most of the extra income flows to the owners of property—financial, physical and intellectual—while less and less goes to those who rely on labour. That applies in countries where unions are strong as well as where they are crippled. This is the era of rentier capitalism.

Moreover, in a globalised economy dominated by finance, it is easy for high-income recipients to avoid income taxes, including by recourse to tax havens. Across Europe, offshore wealth is about 10 per cent of gross domestic product; in the United Kingdom it is about 20 per cent. The wealthy hardly pay income tax, whatever the rate.

The left has however been weak in responding to cuts in income, consumption and corporation taxes. This was symbolically demonstrated by Britain’s Labour Party in its reaction to the regressive—if short-lived—‘mini-budget’ introduced by the brief government of Liz Truss on September 23rd. The budget envisaged lowering the basic rate of income tax to just 19 per cent, beyond a tax-free allowance of £12,570. Immediately, Labour said it would not reverse the cut. It accepted a low tax rate  that would make financing public services even more problematic, despite opinion polls showing that a majority of Britons preferred higher taxes to increase spending on health, education and social benefits.

Making taxation popular

The more general question for the left across Europe is how to make taxation popular, progressive and functional. The answer should be based on overcoming the right’s populist trick—that taxing income is ‘disincentivising’ and a reflection of the ‘envy’ of the losers in society towards dynamic entrepreneurs and ‘hard-working’ labour.

The left should opt for an eco-fiscal policy, designed to dismantle rentier capitalism. It should accept that high progressive income tax is out of date. It should make clear that income and consumption taxes are mainly for public services and infrastructure, including transport, defence, housing, schools and other social needs. Beyond that, the aim should be to restructure fiscal policy as a means of common justice.

It may seem esoteric, but we should start by reviving the idea of the commons—the resources and assets that belong to all of us, as commoners. The commons include land, air, water, minerals, the sea, seabed and seashore, as well as commons bequeathed to us by previous generations. Yet all forms of commons have been taken or eroded illegitimately, through enclosure, spoilage, privatisation and financialisation. The left should demand that commoners be compensated for that plunder.

Land, wealth, carbon

This should start with a progressive land-value tax (LVT), levied on holdings of above the typical garden size, to avoid it being dubbed ‘a garden tax’ and thus politically difficult. A progressive LVT is further justified by the fact that in Europe the value of land has jumped as a share of non-financial assets, partly due to globalisation and speculation by global finance. Land now accounts for over a third of non-financial wealth—in the UK this proportion has risen from 39 per cent in 1995 to 56 per cent today.  

Next should come a wealth tax, excluding land if there is an LVT. In European countries, wealth is taxed much less than income. Yet wealth inequality has risen relative to income inequality and the majority of wealth is inherited—by definition unearned. Even a 1 per cent wealth tax would raise huge revenue, and be harder to avoid than income tax.

Following Sweden’s lead, there should also be a high carbon levy, taxing the carbon emissions causing climate change and acidifying the oceans. According to the International Monetary Fund, only a fifth of global emissions are covered by proper pricing. A carbon levy would transform the atmosphere into a regulated commons. And we know that the rich cause most of the pollution, while low-income groups mainly bear the costs, including in ill-health. 

By itself, a carbon levy is potentially regressive, in that paying for emissions would represent a higher share of a poor person’s income. It would only become progressive if all the revenue were recycled to all commoners equally. The way to ensure this is to channel the revenue into a ‘commons capital fund’, from which all legal residents would be entitled to equal dividends.

Exploiting the commons

Next, fiscal policy should target rental income gained by exploiting the commons. We should salute Norway, which has just announced a ground rent on industrial aquaculture (salmon farming) and hydropower. Given that major aquaculture firms only pay 40 per cent of the costs associated with their production, the rest being borne by local communities and surrounding ecosystems, the proposed 40 per cent levy could be copied in other European countries where fish farming is booming. The principle could be extended to sea fishing, seabed mining and offshore windfarms.  

There should also be a digital-data levy. The Big Tech corporations make billions of dollars from the information we provide to them, gratis, whenever we (or our appliances) are online. They are taking rental income from the information commons. That income should be shared, justifying a levy on their advertising revenue, added to the mooted commons fund.

The left should play on the right’s ideological contradictions. It justifies ‘shareholder-value’ capitalism by claiming that shareholders (‘principals’) pressurise managements (‘agents’) to pursue long-term growth. That had some appeal decades ago when the average time a share was held was seven years, but today it is under six months and falling.  A financial-transactions levy would discourage speculative trading and incentivise what the right claims to want. And it would be progressive.

Similarly, a market-concentration levy would be a form of anti-trust measure. The right says it is opposed to monopoly as contrary to a ‘free market’. Yet monopolisation of market power was found to have resulted in a sixfold increase in the average mark-up of prices over production costs by 70,000 firms around the world between 1980 and 2016. To combat such concentration, a levy should be imposed on profits of corporations controlling more than 20 per cent of their market.

Regressive subsidies         

The other dimension of fiscal policy—government subsidy—receives remarkably little attention in progressive economic thinking, though in reality it is mostly regressive negative taxation. A progressive fiscal policy would take an axe to the many selective subsidies governments give to special interests. I have identified 1,190 in the UK. If the right claims to believe in ‘free markets’, supporting their distortion by subsidies is hypocritical.

One egregious example is fishing, where huge, damaging and regressive subsidies, mainly for fuel, have enabled ‘long-distance fishing’ by industrial fisheries which have destroyed fish populations around the world. The World Trade Organization trumpeted an agreement reached in mid-2022 but all it did was ban some subsidies for ‘illegal’ fishing, with reference to ‘harmful subsidies’ removed from the final text. Globally, $35 billion is spent on such subsidies each year.

The resort to subsidies during the pandemic was an opportunity for the left to be consistent, applying a progressive ‘stress test’—that a fiscal policy should only be supported if it does not increase inequality. The job-furlough schemes failed that test miserably. But most leftish parties vociferously supported them, as did unions. It was predictable from the outset that they would intensify inequality—giving far more to the salariat than to the precariat—and be subject to massive fraud. They also propped up numerous ‘zombie’ firms.

Vast profits

More generally, progressive politicians have gone along with bailouts of companies deemed ‘too big to fail’. In effect, commoners pay for the socialisation of investor losses. Worse, the left has not opposed the globalisation of the United States intellectual-property-rights regime, which enables corporations to make monopoly profits for 20 years through patents and for much longer in the case of copyright and industrial designs—even when patents are the result of publicly-funded research and development, where the public bears the risk. This was highlighted shamefully by the vast profits earned on Covid-19 vaccines. At the very least, the public should have an equity stake in any patented product if public money is used to subsidise the R&D.          

Progressives should also oppose implicit subsidies to capital. Under investor-state-dispute-settlement clauses in trade agreements, multinationals can sue governments if in their view actions threaten their profitability. So, as has happened, if a government pursues anti-pollution measures it can be sued for hundreds of millions of dollars. This should be scrapped, saving revenue and increasing fiscal space.      

Similarly, the Energy Charter Treaty (ECT) should be abandoned. It dates back to the 1990s and ironically was drawn up to help ex-Soviet countries by protecting investors in their oil, gas and coal industries, obliging governments to compensate companies if reforms hit their potential profits. Today, five energy companies are using it to sue European governments for almost €4 billion over restrictions on fossil-fuel projects. If they win, Europeans will see their taxes diverted to paying them, while further disincentivising energy firms from efforts to decarbonise.

In sum, progressives across Europe should reposition fiscal policy to dismantle rentier capitalism, contribute to ecological revival and reduce inequalities.