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Why Additional Taxes Are Required To Adjust For Capitalism’s Shortfalls

February 23, 2020

I have argued for at least the past two decades that it is essential to have more revenue coming into government coffers.  The impact of more tax cuts following the previous tax cuts (etc.) not only undermines services but has, in part, created a very lop-sided society.  We are aware of the impact that Bernie Sanders had on the 2016 election cycle, and continues to have on the one now underway. Others, such as Elizabeth Warren are adding more muscle to the larger argument as to why the negative effects of capitalism must be addressed.  Conservatives will argue there is no reason to address the inequities.  But the resulting outrage from a large younger segment of the electorate demands accountability if for no other reason, than if left without a remedy not only will angst grow but the foundations of our economy and society will jump the rails.

While I have never supported Sanders for higher office, as a liberal Democrat I have decried the give-a-way tax cuts to the wealthy,  instead of using the power of such amounts of money to focus down on systemic problems such as our national infrastructure and education.   The tax cuts only have added to the massive and growing imbalance in our nation’s living standards.

With that as an opening, I want to share portions of a highly reasoned and powerful essay that I could find no fault with, as I read it outside with coffee this afternoon.  The whole article should be able to be read by anyone, as Foreign Affairs allows one read per month.  The authors of this piece are notables.  Joseph Stiglitz is University Professor of Economics at Columbia University.  Todd Tucker is a Fellow at the Roosevelt Institute. And Gabriel Zucman is an Associate Professor of Economics at the University of California, Berkeley.

Here then is a small sample with some points I want to stress.

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, booming inequality, shorter life expectancy, and a sense of despair among large parts of the population. These consequences add up to something much larger: a threat to the sustainability of democracy and the global market economy.

It is not just corporations that engage in tax avoidance; among the superrich, dodging taxes is a competitive sport. An estimated eight percent of the world’s household financial wealth is hidden in tax havens. Jurisdictions such as the Cayman Islands, Panama, and Switzerland have structured their economies around the goal of helping the world’s rich hide their assets from their home governments. Even in places that don’t show up on international watch lists—including U.S. states such as Delaware, Florida, and Nevada—banking and corporate secrecy enable people and firms to evade taxes, regulation, and public accountability.

Unchecked, these developments will concentrate wealth among a smaller and smaller number of people, while hollowing out the state institutions that provide public services to all. The result will be not just increased inequality within societies but also a crisis and breakdown in the very structure of capitalism, in the ability of markets to function and distribute their benefits broadly.

Much of the blame lies with the existing transfer price system, which governs the taxation of goods and services sold between individual parts of multinational companies. This system was invented in the 1920s and has barely changed since then. It leaves important determinations (such as where to record profits) to companies themselves (regardless of where the profit-making activity took place), since the system was designed to manage the flows of manufactured goods that defined the global economy in the 1920s, when most trade occurred between separate firms; it was not designed for the modern world of trade in services, a world in which most trade takes place between subsidiaries of corporations. When one of us (Stiglitz) chaired the Council of Economic Advisers, in the 1990s, under President Bill Clinton, he waged a quiet but unsuccessful campaign to change the global system to the kind used within the United States to allocate profits between states (this arrangement is known as “formulary apportionment,” whereby, for the purpose of assessing a company’s tax, profits are assigned to a given state based on the share of the firm’s sales, employment, and capital within that state). Entrenched corporate interests defended the status quo and got their way. Since then, intensifying globalization has only further encouraged the use of the transfer price system for tax dodging, compounding the problems posed by the flight of capital to tax havens.

The 2017 tax cut illustrates this dynamic. Instead of boosting annual wages by $4,000 per family, encouraging corporate investment, and driving a surge of sustained economic growth, as its proponents promised it would, the cut led to minuscule increases in wages, a couple of quarters of increased growth, and, instead of investment, a $1 trillion boom in stock buybacks, which produced only a windfall for the rich shareholders already at the top of the income pyramid. The public, of course, is paying for the bonanza: the United States is experiencing its first $1 trillion deficit.

Lower taxes on capital have one main consequence: the rich, who derive most of their income from existing capital, get to accumulate more wealth. In the United States, the share of wealth owned by the richest one percent of the adult population has exploded, from 22 percent in the late 1970s to 37 percent in 2018. Conversely, 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 next step would be to eliminate special provisions that exempt dividends, capital gains, carried interest, real estate, and other forms of wealth from taxation. Today, when assets are passed on from one generation to another, the underlying capital gains escape taxation altogether; as a consequence, many wealthy individuals manage to avoid paying capital gains taxes on their assets. It is as if the tax code were designed to create an inherited plutocracy, not to create a world with equality of opportunity. Without increasing tax rates, eliminating these special provisions for the owners of capital—making them pay the same rate as workers—would generate trillions of dollars over the next ten years.

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