Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Build back better—then pay for it

Charles Enoch 6th January 2021

The pandemic-linked crisis is not the time for fiscal consolidation. But introducing a genuinely progressive tax system will become essential.

progressive tax system,progressive taxation,non-linear taxation
Charles Enoch

Politicians and commentators rightly say that the world economy has to be built back better after the pandemic—we cannot just go back to the old. But building back will cost—and governments everywhere are already more deeply in debt than they ever expected to be.

Of course, governments should not take measures now to rein in the deficits. The lessons of misplaced austerity after the global financial crisis have not been fully forgotten—although the British government, for one, is sticking its toe in the water, aiming to restore public-sector wage freezes.

At some point, though, the deficits will need to be reduced. Since reductions in public expenditure are not appropriate when services and living conditions for many have already been drastically curtailed, and when governments still have costly wish lists, this means taxes will have to rise.

Unfit for purpose

The old tax system is not fit for purpose. Corporations have been able to shift their profits to low-tax jurisdictions and pay derisory amounts. High-net-worth individuals have similarly been able to shelter earnings and have frequently experienced average rates below those of the much-less-affluent mainstream. Eva Joly among others has pointed out the inequities in the present system and rightly expressed impatience at the efforts to address them by the Organisation for Economic Co-operation and Development.

Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content.


We will never send you spam and you can unsubscribe anytime.

Thank you!

Please check your inbox and click on the link in the confirmation email to complete your newsletter subscription.

.

The election of Joe Biden as president of the United States may be a game-changer. The incoming Biden administration, while likely still to press the interests of US corporations (many were among his major donors), understands the benefits of international co-operation and wishes to demonstrate a clear break from the years of chaos and confrontation under Donald Trump.

Biden may well press the OECD to move at least some way towards accepting the designation of corporate income in the jurisdiction where it was earned. He has already spoken of a minimum effective rate of tax, of 21 per cent—not far from the 25 per cent advocated by Joly and her colleagues on the Independent Commission for International Corporate Tax Reform.

Importantly also, Biden would be less likely than his predecessor to take revenge in the event that the European Union, or member states or others, unilaterally establish a minimum rate of effective tax, or indeed impose digital taxes or the heavy carbon taxes necessary to achieve the targets of the Paris climate accord, which Biden is committed to rejoin. These should be high on the European agenda.

Major legacy

This still leaves a major legacy of neoliberal tax regimes. Although single-rate, ‘flat’ taxes have not been introduced by any major western state in recent years, many countries have compressed their personal tax systems into just two or three bands. This implies a flat tax rate above the threshold of the higher band. In the United Kingdom this is currently £150,000. In the US, even progressives such as Alexandria Ocasio-Cortez postulate a flat tax rate—in her case, 70 per cent—above a threshold. 

There is no reason ever to have a linear rate. The tax burden under such a system takes the form of a concave curve: there is less increase in progressivity the higher up the income scale one goes. But any number of formulae can be devised so that the marginal tax rate rises as income goes up.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Given the ever-rising inequality in the western world, and the fact that some of the very richest have made a lot of money during the pandemic, if ‘we are all in it together’ one would expect that ‘the broadest shoulders should bear the greatest burden’. There is substantial untapped potential tax revenue—and hence availability of funding for critical public services—without serious economic disadvantage or inequity.

A non-linear formula might be that those earning less than $1 million per annum would pay roughly the same as now, those between $1 and $10 million a marginal rate of 70 per cent, above $10 million 80 per cent, above $100 million 90 per cent and for those earning a billion the marginal rate would be 99 per cent. Although this may seem radical it is not too different from the early postwar period, where concepts of commonality in sacrifice led to top tax rates above 90 per cent in the US.

It would also leave the very rich still with a lot of money, while providing a decent amount for the state coffers. Establishing a convex tax structure—in technical terms, the second derivative of the tax rate with regard to income remains positive along the entire income scale—should be a non-partisan objective of policy, even if there is debate on the gradient and the limit of the curve.

Concomitant policies

A number of concomitant policies would be needed to make this work. First, to avoid distortions tax on dividends should be set at the same rate as on earned income. In this scenario, it would mean dividends being taxed at a maximum of 99 per cent where the payee had earnings of over $1 billion.

Capital-gains tax too would need to be at that level for the über-wealthy. Indeed, one might wish to follow a Swiss model, under which the tax rate is supplemented by a factor reflecting the length of time the asset has been held—essentially an interest charge to compensate for the ability to defer tax liabilities through holding an asset over many years.

Such a change to the tax regime would need to be accompanied by surveillance of—and increased transparency and specificity over—any costs individuals or corporates would be entitled to deduct from gross income, as there would be a huge incentive to inflate or even invent such costs. Would charitable contributions still be deductible, and if so which charities and up to what rate?

This would all be much better done multilaterally, or with ancillary measures to avoid it being easy for individuals or corporates to move from a high- to low-tax jurisdiction. A larger state would be able to do this more easily than a smaller one, and there would be benefits in a ‘coalition of the willing’ moving in this direction.

Some of the über-wealthy might not have sufficient liquidity to make these tax payments. The tax authorities should therefore be ready to accept payment in assets, for instance stock. In anticipation, preparations should be made to take a portfolio of surrendered stock—perhaps to form the basis of a sovereign wealth fund or to sell over time while avoiding fire sales of the assets. Holding stock in this way would also avoid the risk that the respective stock price would fall, killing the golden goose laying the tax revenue.

Politically acceptable

Such tax restructuring would leave the burden on the vast majority of the population unaffected or possibly slightly lower—certainly, it would reduce the burden compared with what the majority would have to pay if the revenue required had to raised conventionally. It should therefore be politically more acceptable and the usual drumbeat against higher taxes less evident.

This could also be a strong anti-trust weapon, especially as other anti-trust measures in recent years have been weak. Levying a 99 per cent tax on a billionaire would not reduce their ‘effort’ or ‘contribution to society’ but would likely reduce their creation of ever-expanding commercial empires which suppress competition through cross-subsidisation and quasi-monopoly powers.

Moving to a non-linear taxation system is technically trivial nowadays. It would be an answer to gross inequalities in society, high government debt and expenditure needs, and the lack of any anti-trust policy which might address continuing increases in inequality.

It should be a non-partisan principle to introduce such a system—the argument would be about the end-points and the rate of climb. And, once over the shock of hearing about a marginal rate of 99 per cent on earnings of over a billion, the response would be: why on earth not?

Charles Enoch

Charles Enoch is director of the political economy of financial markets programme at St Antony's College, Oxford. He was previously a deputy director at the International Monetary Fund.

Home ・ Politics ・ Build back better—then pay for it

Most Popular Posts

schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling
world order,Russia,China,Europe,United States,US The coming world orderMarc Saxer
south working,remote work ‘South working’: the future of remote workAntonio Aloisi and Luisa Corazza
Russia,Putin,assets,oligarchs Seizing the assets of Russian oligarchsBranko Milanovic
Russians,support,war,Ukraine Why do Russians support the war against Ukraine?Svetlana Erpyleva

Most Recent Posts

Sakharov,nuclear,Khrushchev Unhappy birthday, Andrei SakharovNina L Khrushcheva
Gazprom,Putin,Nordstream,Putin,Schröder How the public loses out when politicians cash inKatharina Pistor
defence,europe,spending Ukraine and Europe’s defence spendingValerio Alfonso Bruno and Adriano Cozzolino
North Atlantic Treaty Organization,NATO,Ukraine The Ukraine war and NATO’s renewed credibilityPaul Rogers
transnational list,European constituency,European elections,European public sphere A European constituency for a European public sphereDomènec Ruiz Devesa

Other Social Europe Publications

The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era

Foundation for European Progressive Studies Advertisement

EU Care Atlas: a new interactive data map showing how care deficits affect the gender earnings gap in the EU

Browse through the EU Care Atlas, a new interactive data map to help uncover what the statistics are often hiding: how care deficits directly feed into the gender earnings gap.

While attention is often focused on the gender pay gap (13%), the EU Care Atlas brings to light the more worrisome and complex picture of women’s economic inequalities. The pay gap is just one of three main elements that explain the overall earnings gap, which is estimated at 36.7%. The EU Care Atlas illustrates the urgent need to look beyond the pay gap and understand the interplay between the overall earnings gap and care imbalances.


BROWSE THROUGH THE MAP

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

ETUI advertisement

Bilan social / Social policy in the EU: state of play 2021 and perspectives

The new edition of the Bilan social 2021, co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), reveals that while EU social policy-making took a blow in 2020, 2021 was guided by the re-emerging social aspirations of the European Commission and the launch of several important initiatives. Against the background of Covid-19, climate change and the debate on the future of Europe, the French presidency of the Council of the EU and the von der Leyen commission must now be closely scrutinised by EU citizens and social stakeholders.


AVAILABLE HERE

Eurofound advertisement

Living and working in Europe 2021

The Covid-19 pandemic continued to be a defining force in 2021, and Eurofound continued its work of examining and recording the many and diverse impacts across the EU. Living and working in Europe 2021 provides a snapshot of the changes to employment, work and living conditions in Europe. It also summarises the agency’s findings on issues such as gender equality in employment, wealth inequality and labour shortages. These will have a significant bearing on recovery from the pandemic, resilience in the face of the war in Ukraine and a successful transition to a green and digital future.


AVAILABLE HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube