Joseph Stiglitz speaks at the World Economic Forum annual meeting, 01/26/11. (photo: Getty Images)
03 September 12
If politicians and those around them do not pay their fair share of taxes, how can we expect that anyone else will?
Mitt Romney's income taxes have become a major issue in the American presidential campaign. Is this just petty politics, or does it really matter? In fact, it does matter - and not just for Americans.
A major theme of the underlying political debate in
the United States is the role of the state and the need for collective
action. The private sector, while central in a modern economy, cannot
ensure its success alone. For example, the financial crisis that began
in 2008 demonstrated the need for adequate regulation.
Moreover, beyond effective regulation (including
ensuring a level playing field for competition), modern economies are
founded on technological innovation, which in turn presupposes basic
research funded by government. This is an example of a public good -
things from which we all benefit, but that would be under-supplied (or
not supplied at all) were we to rely on the private sector.
Conservative politicians in the US underestimate the
importance of publicly provided education, technology, and
infrastructure. Economies in which government provides these public
goods perform far better than those in which it does not.
But public goods must be paid for, and it is
imperative that everyone pays their fair share. While there may be
disagreement about what that entails, those at the top of the income
distribution who pay 15% of their reported income (money accruing in tax
shelters in the Cayman Islands and other tax havens may not be reported
to US authorities) clearly are not paying their fair share.
There is an old adage that a fish rots from the head.
And if no one does, how can we expect to finance the public goods that
we need?
Democracies rely on a spirit of trust and co-operation
in paying taxes. If every individual devoted as much energy and
resources as the rich do to avoiding their fair share of taxes, the tax
system either would collapse, or would have to be replaced by a far more
intrusive and coercive scheme. Both alternatives are unacceptable.
More broadly, a market economy could not work if every
contract had to be enforced through legal action. But trust and
co-operation can survive only if there is a belief that the system is
fair. Recent research has shown that a belief that the economic system
is unfair undermines both co-operation and effort. Yet, increasingly,
Americans are coming to believe that their economic system is unfair;
and the tax system is emblematic of that sense of injustice.
The billionaire investor Warren Buffett argues that he
should pay only the taxes that he must, but that there is something
fundamentally wrong with a system that taxes his income at a lower rate
than his secretary is required to pay. He is right. Romney might be
forgiven were he to take a similar position. Indeed, it might be a
Nixon-in-China moment: a wealthy politician at the pinnacle of power
advocating higher taxes for the rich could change the course of history.
But Romney has not chosen to do so. He evidently does
not recognise that a system that taxes speculation at a lower rate than
hard work distorts the economy. Indeed, much of the money that accrues
to those at the top is what economists call rents, which arise not from
increasing the size of the economic pie, but from grabbing a larger
slice of the existing pie.
Those at the top include a disproportionate number of
monopolists who increase their income by restricting production and
engaging in anti-competitive practices; CEOs who exploit deficiencies in
corporate-governance laws to grab a larger share of corporate revenues
for themselves (leaving less for workers); and bankers who have engaged
in predatory lending and abusive credit-card practices (often targeting
poor and middle-class households). It is perhaps no accident that
rent-seeking and inequality have increased as top tax rates have fallen,
regulations have been eviscerated, and enforcement of existing rules
has been weakened: the opportunity and returns from rent-seeking have
increased.
Today, a deficiency of aggregate demand afflicts
almost all advanced countries, leading to high unemployment, lower
wages, greater inequality, and - coming full, vicious circle -
constrained consumption. There is now a growing recognition of the link
between inequality and economic instability and weakness.
There is another vicious circle: economic inequality
translates into political inequality, which in turn reinforces the
former, including through a tax system that allows people like Romney -
who insists that he has been subject to an income-tax rate of "at least
13%" for the last 10 years - not to pay their fair share. The resulting
economic inequality - a result of politics as much as market forces -
contributes to today's overall economic weakness.
Romney may not be a tax evader; only a thorough
investigation by the US Internal Revenue Service could reach that
conclusion. But, given that the top US marginal income-tax rate is 35%,
he certainly is a tax avoider on a grand scale. And, of course, the
problem is not just Romney; writ large, his level of tax avoidance makes
it difficult to finance the public goods without which a modern economy
cannot flourish.
But, even more important, tax avoidance on Romney's
scale undermines belief in the system's fundamental fairness, and thus
weakens the bonds that hold a society together.
Joseph E. Stiglitz, a Nobel laureate in economics,
has pioneered pathbreaking theories in the fields of economic
information, taxation, development, trade, and technical change. He is
currently a professor at Columbia University, and is the author of "The
Price of Inequality: How Today's Divided Society Endangers Our Future."
1 comment:
This just so says it all.
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