John Menadue. Capitalism, inequality and taxation.

Nov 25, 2014

In his challenging series last week on ‘Is capitalism redeemable’ Ian McAuley drew attention to how growing inequality is the cause not only of serious social concerns, but it is also presenting us with some quite serious economic problems.

There is not much doubt that in the US, the growing tax concessions for the wealthy and the obstacles placed in the path of low income and poor people to organise themselves through trade unions, has had serious economic as well as social consequences. With companies like Walmart paying poverty wages, low income people don’t have the money to buy goods and services that businesses would like to sell. And despite US companies and the wealthy being awash with money, particularly as reflected in the buoyant US stock market, business is not investing in new businesses and jobs for the chief reason that the demand is just not there. Inequality is a major economic problem.

The IMF has highlighted the economic damage that inequality is doing. A staff policy paper 2014 found that ‘our work built on the tentative consensus in the literature that inequality can undermine progress in health and education, cause investment-reducing political and economic instability, and undercut the social consensus required to adjust in the face of shocks and that it tends to reduce the pace and durability of [economic] growth.’

The managing director of the IMF has been even more explicit. She recently noted that the 85 richest people in the world control as much wealth as the poorest half of the global population – 3.5 billion people. She commented ‘With facts like these, it is no wonder that rising inequality has risen to the top of the agenda – not only among groups normally focused on social justice but also increasingly among politicians, central bankers and business leaders. … It is therefore not surprising that IMF research – which looked at 173 countries over the past 50 years – found that more unequal countries tended to have lower and less durable economic growth.’

The Governor of the Bank of England warned us only a few months ago that unless action was taken on inequality ‘capitalism would devour its children’.

The OECD in its June 2014 report said that ‘OECD data shows that well into the recovery from the global economic crisis, the distribution of pre-tax and transfer income remains significantly more unequal than it was before.’ In particular the OECD expressed concern about ‘anchored poverty’ particularly amongst the young.

Ian McAuley has pointed out that because of growing inequality and the unwillingness of corporations and individuals to fund new growth and new jobs, more and more people have to rely on government benefits to tide them over. That in turn results in increased budget problems. We all instinctively know that well-paid jobs in a strong economy are better for everyone than government benefits. We need to address this downward spiral by the poor who become increasingly dependent on welfare with severe personal and social consequences but also serious public finance problems.

One feature of modern capitalism particularly by global companies is tax avoidance. We are reading about it almost every day. It is not only unfair but has serious economic consequences. As Ian McAuley put it ‘The economist Joseph Stiglitz points out that well-crafted taxes can actually improve a country’s economic performance. Tax regimes which give a leg up to new ventures, which encourage retraining, or which shape depreciation provisions to encourage the uptake of new technologies, can all help improve a country’s economic adaptability. A carbon tax is an example not only of the payment for harm done to others, (negative externalities in the language of economists) but also of an incentive for industries to adjust and modernise their productive methods.’

But unfortunately Australia is going in the opposite direction with widespread tax avoidance. Companies such as Westfield paid an effective tax of only 8% over the last decade. News Corp tops the list with 146 subsidiaries in tax havens.

Companies like this are the real ‘leaners’ and not the welfare bludgers that Alan Jones and the Daily Telegraph talk about. But not content to avoid company tax on an enormous scale they have their corporations fund their private travel, private entertainment, and their private boats

In 2011-12 according to Peter Martin in the SMH on 13 May ’75 ultra-high earners had a taxable income of $1.10 each’.

Almost every day we have more and more information about tax avoidance and tax havens. What is becoming increasingly clear is that the benefits to the rich are damaging both our society and our economy.  Our four major international tax advisory firms are facilitating this large scale tax avoidance. They call it ‘aggressive tax planning’ or the means to overcome ‘unfair tax competition’, presumably by other tax avoiders in Australia and elsewhere.

The government is not making it easier to crack down on major tax avoidance by cutting back experienced and professional staff in the Australian Tax Office. The government and the ATO also need information on where profits are being made and taxes incurred by jurisdiction. The ATO needs new legislation to address profit shifting through transfer pricing, thin capitalisation and debt loadings. We hoped that the G20 in Brisbane would address this issue but it seems to have been overwhelmed by other matters.

The most consistent critic of inequality and concern for the poor is Pope Francis. A year ago he seemed a voice in the wilderness.  But he is now being joined by such people as the managing director of the IMF, the Bank of England and senior politicians.

We are finding that inequality breeds not only social problems but has serious economic consequences for the future of capitalism.

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