Tuesday, May 06, 2008

Lawrence Summers on tax justice

Lawrence Summers, formerly U.S. Treasury Secretary and ex-president of Harvard University, has just written a thoughtful column in the Financial Times. So thoughtful, in fact, that it might as well have been written by a member of the Tax Justice Network. It is part of a set of articles he has written on globalisation, and the challenges it poses to nation states and citizens. He describes the challenge:

"In a closed economy, corporations have a huge stake in the quality of the national workforce and infrastructure. The situation is very different in an open economy where investments in innovation, brands, a strong corporate culture or even in certain kinds of equipment can be combined with labour from anywhere in the world. Workers no longer have the same stake in productive investment by companies as it becomes easier for corporations to combine their capital with lower priced labour overseas. Companies, in turn, come to have less of a stake in the quality of the workforce and infrastructure in their home country when they can produce anywhere. Moreover businesses can use the threat of relocating as a lever to extract concessions regarding tax policy, regulations and specific subsidies. Inevitably the cost of these concessions is borne by labour."

If you doubt his analysis, you need look no further than another page in today's FT, where a powerful business organisation is warning UK Prime Minister Gordon Brown that he is in "very dangerous territory" on corporate taxation, with Britain "facing an exodus of companies moving to lower tax regimes." The same problem applies to regulation: where competition between states (and sometimes within them) promotes a race to the bottom. Summers sees the fallacy in the arguments promoted by such businesses who like to threaten our democratically elected representatives:

"There is a reason why progressives in the early part of the 20th century sought to have the federal government take over many kinds of regulatory responsibility. They were concerned that competition for business across states, and their ease of being able to move, would lead to a race to the bottom. Financial regulation is only one example of where the mantra of needing to be “internationally competitive” has been invoked too often as a reason to cut back on regulation. There has not been enough serious consideration of the alternative – global co-operation to raise standards."

Absolutely. He describes the problem, in a nutshell, and outlines the essence of the central solution:

The US should take the lead in promoting global co-operation in the international tax arena. There has been a race to the bottom in the taxation of corporate income as nations lower their rates to entice business to issue more debt and invest in their jurisdictions. Closely related is the problem of tax havens that seek to lure wealthy citizens with promises that they can avoid paying taxes altogether on large parts of their fortunes. It might be inevitable that globalisation leads to some increases in inequality; it is not necessary that it also compromise the possibility of progressive taxation. Second, an increased focus of international economic diplomacy should be to prevent harmful regulatory competition.

Right again. Those who argue the opposite appear to be wilfully blinded by ideology - they like to pretend, for example, that inequality is not a problem, or to argue simply that governments can't make the right decisions, but private citizens (or corporations) can. A statement from this economist (a former president of George W. Bush's Council of Economic Advisers - which he seems curiously reluctant to admit), responding to Summers' column, highlights the problem:

"If you think that the main job of government is to facilitate voluntary exchange by protecting property rights, rather than re-slicing the economic pie as it sees fit, then tax competition is a good check against excessive interventionism."

No: what tax competition is this: a "good check" against the wishes of electorates and their democratic representatives. It is an invasion of national sovereignty. Summers is right. In fact, the whole article is worth reading.

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