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Myth 3: Taxing the rich scares off investors and stalls economic performance

Finance
Economics
Myth3Graph.jpg

An economic myth of neoliberalism is that private enterprise creates prosperity; taxation destroys it. So the less taxation there is, the more prosperous we’ll become. Competition between societies to cut tax attracts investment and encourages the creation of wealth.

In reality, without publicly funded education, healthcare, infrastructure and employment (let alone bailouts), private enterprise would be unable to function at all. Taxation creates prosperity every bit as much as private enterprise. Tax ‘wars’ that promote a ‘race to the bottom’ for tax levels, a ‘race to the top’ for cheating, threaten to impoverish, even destroy, societies. Shrewd investors – and even rich individuals – know this better than most. The idea that they only invest productively in the places with the most ‘competitive’ levels of tax is nonsense.

What, then, is the right level or kind of taxation? That is a political rather than economic question. In a democracy, basic principles of fairness are more likely to apply. ‘Progressive’ tax means the broadest shoulders carry the greatest burden. ‘Regressive’ tax, such as consumption taxes (VAT, GST and the like) paid at the same level by everyone, works the other way about.

Famously, the Nordic countries of Sweden, Norway and Denmark have among the highest and most progressive tax regimes in the world – yet they also feature regularly among the most prosperous and successful societies. When taxes in Sweden were increased to 60 per cent during the financial crisis in 2008, opinion polls reported that most Swedes were happy to pay them.1 You don’t have to want to live in Sweden to know that progressive taxation does not stall economic performance.

Read more in-depth: The Equality Effect – How living in less unequal society results in more happiness, less crime, more creativity and education

Neoliberalism has spawned regressive taxation and cheating. Funding an enormous industry of consultants, and weaving an elaborate web of havens, has become far more lucrative for wealthy corporations and individuals than paying the tax collector. The very wealthiest have ended up paying no tax at all. In effect, they are being subsidized by everyone else, including more rooted and numerous local enterprises.

All of this has been thrown into sharp relief by the Great Recession. Government borrowing and budget deficits only happen because tax receipts are insufficient to cover spending commitments. During a recession, tax revenues fall. On the face of it, increasing them threatens to make things worse – but then, so does cutting public expenditure. Another essentially political choice.

In Britain – a notorious shelter for tax havens – taxes on corporations and rich individuals have actually been cut, while VAT has increased sharply. Tax wars and regressive taxation have become defining features of ‘austerity’. But they’ve done nothing to stimulate investment. At the end of 2014, investment fell further than at any time since 2009;2 already lower than in the rest of the European Union, it has fallen consistently since 2009.3

Neoliberal tax regimes are not a given. There are other ways of seeing. Suppose, for example, we look at private wealth – corporate as well as personal – rather than income. Thomas Piketty estimates that governments on average now have no wealth at all. Their debts are roughly equal to their assets. Private assets, however, are six times greater than private debts. A one-off ‘flat’ tax of just 15 per cent on private assets, he suggests, ‘would yield nearly a year’s worth of national income and thus allow for immediate reimbursement of all outstanding public debt’.4

Piketty is not hopeful that such a tax will be raised any time soon, at least while neoliberalism prevails. The same might well apply to ‘transaction’ taxes on financial speculation, such as a ‘Tobin’ tax on currency dealing – which would have the added beneficial effect of discouraging financial mayhem. Both would help to solve persistent economic problems.

One kind of realism suggests that the prospects for better, fairer tax regimes are, well, not very realistic. Another kind of realism tells us that neoliberal tax regimes rely on myths and propaganda. In reality, quite modest taxes on wealth would produce more than enough resources to turn the Great Recession on its head. That might even please shrewd investors.

  1. The Guardian, 16 November 2008.

  2. The Guardian, 15 February 2015.

  3. European Commission, ‘Investment in the United Kingdom’, nin.tl/UK-investment

  4. Thomas Piketty, Capital in the Twenty-First Century, Harvard University Press, 2014.