How Do Capatalism Depend on Foreign Markets and Colonies to Continue Existing

By Joseph E. Stiglitz, Todd N. Tucker, and Gabriel Zucman | Foreign Affairs

For millennia, markets have NOT flourished without the help of the state. Without regulations and government support, the nineteenth-century English cloth-makers and Portuguese winemakers whom the economist David Ricardo made famous in his theory of comparative advantage would have never attained the scale necessary to drive international trade.

The invisible hand of the market depended on the heavier hand of the state. Most economists rightly emphasize the role of the state in providing public goods and correcting market failures, but they often neglect the history of how markets came into being in the first place.

The state requires something simple to perform its multiple roles: REVENUE. It takes money to build roads and ports, to provide education for the young and health care for the sick, to finance the basic research that is the wellspring of all progress, and to staff the bureaucracies that keep societies and economies in motion. No successful market can survive without the underpinnings of a strong, functioning state.

That simple truth is being forgotten today. In the United States, total tax revenues paid to all levels of government shrank by close to four percent of national income over the last two decades, from about 32 percent in 1999 to approximately 28 percent today, a decline unique in modern history among wealthy nations.

The direct consequences of this shift are clear: Crumbling infrastructure, a slowing pace of innovation, a diminishing rate of growth, booming inequality, shorter life expectancy, and a sense of despair among large parts of the population.These consequences add up to something much larger: A threat to the sustainability of democracy and the global market economy.

This drop in the government's share of national income is in part the result of conscious choices. In recent decades, lawmakers in Washington — and, to a somewhat lesser extent, in many other Western countries — have embraced a form of fundamentalism, according to which taxes are a hindrance to economic growth.Meanwhile, the rise of international tax competition and the growth of a global tax-avoidance industry have put additional downward pressure on revenues.

Today, multinationals shift close to 40 percent of their profits to low-tax countries around the world. Over the last 20 years, according to the economist Brad Setser, U.S. firms have reported growth in profits only in a small number of low-tax jurisdictions; their reported profits in most of the world's major markets have not gone up significantly — a measure of how cleverly these firms shift capital to avoid taxes.Apple, for example, has demonstrated as much inventiveness in tax avoidance as it has in its technical engineering; in Ireland, the technology giant has paid a minuscule annual tax rate as low as 0.005 percent in some years.

It is not just corporations that engage in tax avoidance; AMONG THE SUPERRICH, DODGING TAXES IS A COMPETITIVE SPORT.An estimated eight percent of the world's household financial wealth is hidden in tax havens. Jurisdictions such as the Cayman Islands, Panama, and Switzerland have structured their economies around the goal of helping the world's rich hide their assets from their home governments. Even in places that don't show up on international watch lists — including U.S. states such as Delaware, Florida, and Nevada — banking and corporate secrecy enable people and firms to evade taxes, regulation, and public accountability.

Unchecked, these developments will concentrate wealth among a smaller and smaller number of people, while hollowing out the state institutions that provide public services to all. The result will be not just increased inequality within societies but also a crisis and breakdown in the very structure of capitalism, in the ability of markets to function and distribute their benefits broadly.

A WORLD FOR PLUTOCRATS

In the United States, the Supreme Court has at various times played the role of guardian of plutocratic privilege, making legally dubious rulings against a direct income tax in 1895 and early New Deal policies in the 1930s.

At the state level, an emphasis on SALES TAXES over property taxes shifted the burden disproportionately onto the poor and people of color, while sheltering wealthier white households.

The Bush administration broke with historical norms by starting a war in 2003 at the same time as it lowered taxes on the rich. It slashed top marginal rates, especially on those earning income from capital, while launching a calamitous war in Iraq that is estimated to have cost the United States upward of $3 trillion.

In 2017, the Trump administration pushed this trend still further, not only lowering top marginal tax rates and corporate taxes but also creating so-called opportunity zone schemes that allow the wealthy to avoid capital gains taxes by investing in poor neighborhoods. In practice, however, real estate developers have used the new tax incentives to build luxury condos and yoga studios in affluent communities that are adjacent to — and even included in — the opportunity zones.

Over the last four decades, new loopholes, the rise of a cottage industry of advisers eager to help firms avoid taxes, and the spread of a corporate culture of tax avoidance have led to a situation in which a number of major U.S. companies pay no corporate taxes at all. This phenomenon is hardly unique to the United States. Many governments around the world have made their tax systems less progressive, all in the context of rising inequality. This process has been driven by reductions in the taxation of capital, including the fall of corporate taxes.The global average corporate income tax rate fell from 49 percent in 1985 to 24 percent in 2018.

Today, according to the latest available estimates, corporations around the world shift more than $650 billion in profits each year (close to 40 percent of the profits they make outside the countries where they are headquartered) to tax havens, primarily Bermuda, Ireland, Luxembourg, Singapore, and a number of Caribbean islands.

Much of the blame lies with the existing transfer price system, which governs the taxation of goods and services sold between individual parts of multinational companies. This system was invented in the 1920s and has barely changed since then. It leaves important determinations, such as where to record profits, to companies themselves regardless of where the profit-making activity took place.

Since the system was designed to manage the flows of manufactured goods that defined the global economy in the 1920s, when most trade occurred between separate firms and was not designed for the modern world of trade in services –a world in which most trade takes place between subsidiaries of corporations, this current system disproportionately benefits corporations and the wealthy.

When one of us (Stiglitz) chaired the Council of Economic Advisers, in the 1990s, under President Bill Clinton, he waged a quiet but unsuccessful campaign to change the global system to the kind used within the United States to allocate profits between states (this arrangement is known as "formulary apportionment", whereby, for the purpose of assessing a company's tax, profits are assigned to a given state based on the share of the firm's sales, employment, and capital within that state). Entrenched corporate interests defended the status quo and got their way.Since then, intensifying globalization has only further encouraged the use of the transfer price system for tax dodging, compounding the problems posed by the flight of capital to tax havens.

Nowhere is tax avoidance more striking than in the technology sector. The richest companies in the world, owned by the richest people in the world, pay hardly any taxes. Technology companies are allowed to shift billions of dollars of profits to places such as Jersey, one of the Channel Islands, where the corporate tax rate is zero, with complete impunity.Some countries, including France and the United Kingdom, have attempted to impose a tax on some of the revenues the technology giants generate in their jurisdictions.But France's small, three percent tax, for example, has only reinforced the need for a new global agreement, for the tax does not go far enough;it targets only the digital sector, even though profit shifting is rampant across the board, including in the pharmaceutical, financial services, and manufacturing industries.

HOW THE RICHEST GET RICHER

Many policymakers, economists, corporate tycoons, and titans of finance insist that taxes are antithetical to growth. Opponents of tax increases claim that firms will reinvest more of their profits when less gets siphoned off by the government. In this view, corporate investment is the engine of growth:Business expansion creates jobs and raises wages, to the ultimate benefit of workers.

In the real world, however, there is no observable correlation between capital taxation and capital accumulation. From 1913 to the 1980s, the saving and investment rates in the United States have fluctuated but have usually hovered around ten percent of national income. After the tax cuts in the 1980s, under the Reagan administration, capital taxation collapsed, but rates of saving and investment also declined.

The 2017 tax cut illustrates this dynamic. Instead of boosting annual wages by $4,000 per family,encouraging corporate investment, and driving a surge of sustained economic growth, as its proponents promised it would,the cut led to minuscule increases in wages, a couple of quarters of increased growth, and, instead of investment, a $1 trillion-dollar boom in stock buybacks, which produced only a windfall for the rich shareholders already at the top of the income pyramid.The public, of course, is paying for the bonanza: The United States is experiencing its first $1 trillion-dollar deficit.

These enormous problems have created demands for even more extensive reforms.As younger voters tilt further to the left,delaying an overhaul of the current tax regime and continuing to strip revenue from the state may give rise to policy changes that are far more radical than those outlined here.A more chilling threat might come from the right:

Time and again, authoritarians and nationalists have proved adept at channeling public anger over inequality and exploiting it for their own ends.

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Source: https://guyaneseonline.net/2019/12/16/the-starving-state-why-capitalisms-salvation-depends-on-taxation-opinion/

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