Sunday, October 28, 2007

Stopping the arms race

We have written several times about tax competition – that is, the ongoing struggle between nations (and, sometimes, states within nations) to dangle ever-growing tax incentives in order to suck people, companies or capital out of other countries, leading to a process of erosion of national sovereignty as governments find it ever harder to apply the tax policies their voters want.

Robert Reich, a labour secretary under Bill Clinton (and now a professor at the University of California at Berkeley), tells us in an interview published by The Economist about another arms race: a struggle between companies to influence political processes in their favour. Financial liberalisation and new technology have intensified competition and accelerated the race.

Capitalism is making it hard for people to be heard because there is a kind of arms race going on in Washington, in Brussels, and in some other capitals of the world – they are pouring more and more money into the political process, mostly to advance or guard their own competitive positions relative to their rivals. What we’ve seen over the past 30 years is an intensification of competition – barriers to entry are declining. . . that means companies are not only going to do (things) including reducing wages, outsourcing, fighting unions, but also . . . they are going to go into the political process to guard themselves with regard to public policies. We now have something of the order of 40,000 lobbyists in Washington, tens of thousands of lawyers, political campaign it looks like we are going to hit the $5 billion mark – a new record. Money is pouring in.
And the result of all this? Among other things:

Income inequality, and wealth inequality even more so, are worse in the United States since the 1920s, and by some measures since the 1890s. Most of the economic gains In the past 25 years have gone to the top 15-20 percent of Americans, but more recently, in the past six to seven years, most of the economic gains have gone to the top one percent. . . . the average CEO is making about 380 times more than the average worker – a huge gap relative to what it used to be 40 years ago – it was about 30 times.

Another of Bill Clinton's officials, the former U.S. Treasury Secretary Larry Summers, in an interview in October, puts the impact of this shift in even more frightening terms.

If the income distribution in the United States were the same today as it was in 1979, the bottom 80 percent of the population would have about $670 billion more, or about $8,000 per family. And the top one percent would have about $670 billion less, or about $500,000 per family.

Reich has written a book called “Supercapitalism,” in which he argues that the current political debate in the United States is drowning in misdirected moral outrage. (See it reviewed here in the International Herald Tribune.)

Once some companies discovered they could gain an edge by influencing government decisions in their favor, rivals had little choice but to join the fray. And once some candidates began altering their votes to attract contributions, others faced strong pressure to follow suit.

We cannot hope to solve our problems, Reich says, without first understanding the forces that have caused them. If our social ills are rooted in increased competition, our only recourse is to change the rules. Denouncing greed is simply wasted energy. If we want less inequality, he says, we must make taxes more progressive. (If you think this is a left-wing argument, think again: this is almost exactly what Matthew Slaughter, one of president George W. Bush’s former economic advisors was arguing quite recently.)

The opportunity is taken by some demagogues on the right and the left to stir up resentment—use the anxieties that the stagnation of incomes in the middle class and the fear of job loss have already given rise to—and use them to transmit those anxieties to targets, whether they be foreigners, immigrants, or the poor or any other target that might come along - the French.

That is one of the key goals of TJN: to restore the ability of governments to set up progressive taxation systems, which safeguard the credibility of the political system, and underpin the relationships between rulers and ruled. We oppose the arms race that pits state against state in the competition to lower tax, and that pits company against company in their race to corrupt and skew government policies in their favour.


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