Stop this race to the bottom on corporate taxation
With a quarter of a million people on the streets of London protesting against budget cuts, and with the US government days away from a potential shutdown, social divisions over fiscal policy are deepening. It is not hard to see why. Both the US and UK have had a profound shift of income distribution from the poor and the middle-class to the rich in the past 30 years, yet the fiscal adjustments are dominated by sharp cuts on public services combined with lower corporate taxation.
Globalisation has driven down the wages of low-skilled workers while providing new opportunities for investments. The pre-tax income of the top 1 per cent of households has soared, from 10 per cent of household income in 1979 to 21 per cent in 2008 in the US, and from 6 per cent in 1979 to 14 per cent in 2005 in the UK.
Each government aims to attract globally mobile capital by cutting corporate taxation. The rich doubly benefit: by the forces of globalisation and by the governmental response.
Another reason for tax cuts at the top is the tawdry role of big money in political campaigns. US national campaigns cost several billion dollars every two years, with Big Oil tending to finance the Republicans and Wall Street, the Democrats.
The result is that both the US and UK are battling deficits of about 10 per cent of gross domestic product. But America's situation is far graver. Total government revenues as a share of GDP in the US are 32 per cent, roughly 9 percentage points below the UK and 15-20 percentage points below countries such as Denmark, Finland and Sweden, which all have much lower budget deficits and highly effective public services. The UK coalition deserves credit for battling the deficit before it is too late. Grudgingly the US may be starting to close its deficit as well after years of naive Keynesianism and fiscal opportunism. But both the US and the UK are aiming to do the impossible: run a modern, high-technology, prosperous 21st-century knowledge economy without the requisite tax base.
The symptoms of a devastating race to the bottom are everywhere. In the UK, the government asks for further cuts in corporate tax in the face of swingeing budget cuts. To his credit, the chancellor is leaning against the wind with new taxes on banks and oil companies, and other UK taxes have been raised. In the US, the Obama White House and Republicans agreed in December to a $900bn two-year tax cut (extending the expiring Bush-era cuts) and then turned around to cut domestic spending programmes that protect the poorest communities. In Canada, the Conservative government, brought down in a no-confidence vote on Friday after being found in contempt of parliament, had just proposed a new budget with a further cut to the corporate tax rate, while Ireland has clung to its irresponsible tax-haven status in the middle of a crippling turn to austerity.
For too long, fiscal politics has been debated on false premises. Left-of-centre politics has played down the importance of closing the budget deficit, arguing against spending cuts on the basis that deficits do not matter. Right-of-centre politics has played down the importance of taxing higher incomes, arguing that only spending cuts can reduce the deficit. A more responsible position takes note of both sides. We must reduce the deficits but in a fair, efficient and sustainable manner, by levying higher taxation on the rich, who are enjoying a boom in living standards and an unprecedented share of national income.
Yet countries cannot act by themselves. As a starting point, the Organisation for Economic Co-operation and Development should urgently convene a meeting of finance ministers to enunciate basic principles: that fiscal adjustments towards budget balance are needed for medium-term solvency but must be carried out fairly; that the basic needs of citizens need to be protected in this period of fiscal stringency; that trends towards unprecedented inequalities of wealth and income require increased, not decreased, taxation of higher incomes, including corporate profits; and that tax and regulatory co-ordination across countries are vital to prevent a ruinous fiscal race to the bottom.
The writer is director of the Earth Institute at Columbia University