Friday, June 15, 2007

America: is the mood changing on tax?

Misguided ideologies can take a long time to die, but die they eventually do when confronted with incontrovertible evidence. Such will be the fate of an ideology, widely supported in the United States in particular, that holds that taxes should be low in all cases, all the time, and anything that will serve to drive taxes down can only be a good thing. (TJN does not support high taxes or low taxes - just tax levels that voters want, and a level playing field with as few distortions as possible.) As Grover Norquist, one of the most vocal proponents of this low-tax-at-all-costs ideology put it, "My goal is to cut government in half in twenty-five years, to get it down to the size where we can drown it in the bathtub."

The new architects and proponents of this simplistic ideology were, until quite recently, in the ascendant; the Iraq war is probably the biggest reason why the pendulum is now swinging back to normality. As is happening in the UK, newspapers across the political spectrum in America are currently exercised about distortions in the tax treatment of private equity. Why should Blackstone Group, the New York Times wonders, pay a tax rate of just 1.3%?

But distortions are not the only concern. Inequality is another growing worry, and is now also provoking a queasy feeling on both left and right. Globalisation appears, among other things, to have had some good effects (such as increasing the world’s wealth, on aggregate) and bad effects (like increasing inequality -- although technology has probably played an important role here too.) One of TJN’s main concerns is that tax havens and tax competition between countries intensify the bad part and neutralise the tools that can be wielded to tackle it. Redistribution of wealth through taxation is, of course, a powerful tool for tackling this problem, which is not just about wealth and poverty but has important political dimensions.

Now it appears that serious people on the other side of this ideological divide – including Matthew Slaughter, one of President George Bush’s former advisors, has signalled that he recognises the dangers that stem from neo-conservative ideologies on taxation. Writing in the prestigious American journal Foreign Affairs, he now argues that the United States needs a “New Deal for globalisation - one that links engagement with the world economy to a substantial redistribution of income.” He, and others, are especially worried about the effects of inequality on protectionism, (although there are many other reasons to worry about inequality too.) Here are some excerpts from the article:

Over the last several years, a striking new feature of the U.S. economy has emerged: real income growth has been extremely skewed, with relatively few high earners doing well while incomes for most workers have stagnated or, in many cases, fallen. Less than four percent of workers were in educational groups that enjoyed increases in mean real money earnings from 2000 to 2005; mean real money earnings rose for workers with doctorates and professional graduate degrees and fell for all others. In contrast to in earlier decades, today it is not just those at the bottom of the skill ladder who are hurting. Even college graduates and workers with nonprofessional master's degrees saw their mean real money earnings decline. By some measures, inequality in the United States is greater today than at any time since the 1920s. . .

Advocates of engagement with the world economy are now warning of a protectionist drift in public policy. This drift is commonly blamed on narrow industry concerns or a failure to explain globalization's benefits or the war on terrorism. These explanations miss a more basic point: U.S. policy is becoming more protectionist because the American public is becoming more protectionist, and this shift in attitudes is a result of stagnant or falling incomes. . .

Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor. . . . U.S. policymakers must recognize and then address the fundamental cause of opposition to freer trade and investment. They must also recognize that the two most commonly proposed responses -- more investment in education and more trade adjustment assistance for dislocated workers -- are nowhere near adequate. Significant payoffs from educational investment will take decades to be realized, and trade adjustment assistance is too small and too narrowly targeted on specific industries to have much effect.

The best way to avert the rise in protectionism is by instituting a New Deal for globalization -- one that links engagement with the world economy to a substantial redistribution of income. In the United States, that would mean adopting a fundamentally more progressive federal tax system.

Policy is becoming more protectionist because the public is becoming more protectionist, and the public is becoming more protectionist because incomes are stagnating or falling. . .

There is reason to worry even if one does not care about social equity. The time has come for a New Deal for globalization -- one that links trade and investment liberalization to a significant income redistribution that serves to share globalization's gains more widely.

The pendulum appears to be swinging, in favour of more democratic tax systems, and away from one-size-fits-all ideologies. As we have been saying recently, tax justice seems to be catching on.


Anonymous Anonymous said...

This was a great story. first I'am not a typist or do i have some higer education. but what i do have is discerment and my eyes wide open since rosevelt started tax on income. thing have went dramaticaly down hill here we have poor and even middle class tring to make it in this god forsake generation and when they start to get some where uncle not no uncle of mine sam comes along and like a big bully in school give me all your not some of your money and guess what you got nothing to show yet a feared going person.

9:53 pm  

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