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Tax avoidance by the rich imperils sound economy
By Joseph E. Stiglitz |
September 17, 2012, Monday
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A major theme of the underlying political debate in the US 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, modern economies are founded on technological innovation, which in turn presupposes basic research funded by government.
This is an example of a public good. Conservative politicians in the US underestimate the importance of publicly provided education, technology, and infrastructure. Economies in which government provides these public goods perform 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 percent of their reported income clearly are not paying their fair share.
There is an old adage that a fish rots from the head.
If presidents and those around them do not pay their fair share of taxes, how can we expect that anyone else will?
Democracies rely on a spirit of trust and cooperation in paying taxes. Trust and cooperation 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 cooperation and effort. Yet Americans are coming to believe that their economic system is unfair.
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. Mitt 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 recognize 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; and bankers who have engaged in predatory lending and abusive credit-card practices.
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.
Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University. "Copyright: Project Syndicate, 2012. www.project-syndicate.org. Shanghai Daily condensed the article.
For example, the financial crisis that began in 2008 demonstrated the need for adequate regulation. Moreover, beyond effective regulation, modern economies are founded on technological innovation, which in turn presupposes basic research funded by government.
This is an example of a public good. Conservative politicians in the US underestimate the importance of publicly provided education, technology, and infrastructure. Economies in which government provides these public goods perform 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 percent of their reported income clearly are not paying their fair share.
There is an old adage that a fish rots from the head.
If presidents and those around them do not pay their fair share of taxes, how can we expect that anyone else will?
Democracies rely on a spirit of trust and cooperation in paying taxes. Trust and cooperation 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 cooperation and effort. Yet Americans are coming to believe that their economic system is unfair.
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. Mitt 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 recognize 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; and bankers who have engaged in predatory lending and abusive credit-card practices.
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.
Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University. "Copyright: Project Syndicate, 2012. www.project-syndicate.org. Shanghai Daily condensed the article.
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