In recent years, progressives and social democrats have begun to embrace a much bolder tax fairness agenda than was the case even five years ago. This is especially true in the United States where Democratic Presidential candidates Bernie Sanders and Elizabeth Warren have both made the case for a significant tax on large holdings of wealth, the closure of personal tax loopholes for investment income such as stock options, and serious corporate tax reform. In the 2019 federal election, the NDP similarly called for a wealth tax, higher taxation of capital gains in the personal income tax system, and a higher corporate tax rate.
These proposals counter the conventional wisdom that globalization forces countries to lower corporate and personal income taxes in order to attract mobile capital and highly skilled labour. It is indeed the case that the tax “burden” in most advanced economies has shifted from taxation of capital and the affluent to taxes on labour through regressive sales and payroll taxes, and lower income tax rates for the top 1% over the past two decades or so, even under supposedly progressive governments.
However, tax experts Emmanuel Saez and Gabriel Zucman argue in a new book that the issue of fair taxes is deeply political and that we can reverse the trend by pushing for real change. (The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay.) The authors are colleagues of Thomas Piketty and have advised Senators Warren and Sanders. Their book is focused on the United States, but holds many lessons for Canadians.
The book shows that the total effective tax rate in the United States (all taxes paid as a share of income) is now almost flat at just under 30% for all income groups, but is a bit lower for the very rich. Over time, corporate tax revenues – which mainly impact the rich – have fallen from 8% to 1% as a share of GDP; top income tax rates have been cut deeply compared to rates as high as 90% back in the 1960s; and special tax treatment of capital income such as capital gains and dividends has been extended.
The total effective tax rate on the highest income group, the top 0.1% of tax filers has fallen from 60% to less than 30% since the 1960s.
Saez and Zucman show that corporations allow the rich to shelter much of their income and wealth from tax. For example, billionaires like Bill Gates and Warren Buffett hold most of their wealth in corporate shares, which increase in value in value over time. This growth in wealth is taxed at a very low rate unless and until it is paid out to the owners as dividends.
Further, corporations are allowed to funnel profits earned outside the United States to holding companies in countries with very low corporate tax rates, such as Bermuda and Ireland. Often, high tech companies such as Apple say that their intellectual property is owned by a subsidiary in an offshore tax haven, so that profits made on global sales are shifted to a tax haven by saying that they are payments for services.
Falling effective rates of tax on corporate profits have greatly undercut government revenues, with no overall economic gain. Real corporate investment has not increased as a result, but rather higher profits have been used to enrich shareholders through higher dividends and share buy backs.
When it comes to the corporate tax, the book argues that the United States could and should require US companies to disclose their world wide operations broken down by areas such as sales and production, and pay taxes to the US based on that percentage. This would stop shifting profits to lower rate jurisdictions.
More ambitiously, they argue that countries should agree to not just to limit profit shifting, where some limited progress has already been made, but also to apply a minimum rate of corporate income tax. While this could be challenging, it is mainly very small countries who are most opposed. Big countries acting together should and could stop the erosion of the corporate tax base if they were prepared to stand up to the global elite.
Saez and Zucman are also major advocates of adding a wealth tax to our current arsenal of fair taxes, to be levied at a low but rising rate on very large fortunes. The aim would not be just, or even most importantly, to raise revenues, but to prevent the accumulation of huge fortunes which give the ultra rich far too much power and undermine democracy. Again, they believe that such a tax could be successfully levied in the United States, noting that the New Deal of the 1930s stretching into the post Ware period was deliberately intended to block the excessive accumulation of wealth.
The massive shift of taxes away from labour to the owners of capital in the US has been nothing short of staggering, undermining the fiscal base needed to support social programs and public services and exacerbating mounting inequality driven by the market economy. A major shift of direction is needed, and Saez and Zucman provide us with a well-documented analysis of tax injustice and a guide to needed reform.
Andrew Jackson is adjunct research professor in the Institute of Political Economy at Carleton University.