By Michael Every of Rabobank
The IMF and World Bank spring meetings are about to kick off, where those who pay no income tax get to talk about tax evasion, tax hikes, inequality, and Building Back Better. US Treasury Secretary Yellen will use the platform to push for a global standardization - upwards - of corporate tax rates. National Security Advisor Sullivan has also tweeted in support:
“The US is committed to end the race to the bottom on corporate tax rates and prevent corporations from shifting jobs overseas. A core piece of our national security strategy is national competitiveness: creating jobs & raising wages at home, not incentivizing tax havens.”
That as Democratic Senator Manchin says he doesn’t support the tax increase from 21% to 28% proposed by his own party, with 25% being the limit; and Republicans attack POTUS and FLOTUS for having used a corporate vehicle to reduce their tax on $13m of 2017-19 income from book royalties and speaking fees.
Taxes are unpopular with those who pay them, and those who can will try to avoid them, but whether taxes are needed depends on one’s politics, not economics (and actually sees neoliberalism and MMT agree: they are optional). Moreover, imposing a global corporate tax rate makes *logical* sense if one wants to limit the power of capital vs. labor - and such agreements are seen in other areas of regulation. Except:
This would make a key tax rate a global, not a national issue; who would decide the rate?; what if it didn’t fit the economic cycle in some states?; tax hikes would hit smaller global economies hard; yet there would have to be more state spending to prevent a recession. Yet even standardised tax wouldn’t solve the problem of capital and jobs flight: what of interest rate differentials - or do we need one interest rate/curve?; what of regulations - or do they need to be standardized? And what of exchange rates – or should we adopt one currency to make it all easier? In which case we will all need one central bank too - and won’t that solve *all* problems, as we see in Europe?
In short, this appears a reach for economic utopia – and yet we live in an ever-more realpolitik world. However, as this is now “US national security”, don’t dismiss the risk of gunboat diplomacy being used to achieve it - but that will only accelerate the ongoing global arms race to the top that is matching the global tax race to the bottom.
It’s probably a sign of getting older, but my mind keeps turning back to the key books of my youth for guidance at these moments. Koestler’s ‘Darkness at Noon’ in particular holds truths deeply relevant to today. Yes, it’s a high-level view, but it is even more valid than where inflation will be in six months. (Higher, of course: the only issue is if that inflation is then stagflation or not, and then how long until deflation returns.) Consider these quotes:
“Every jump of technical progress leaves the relative intellectual development of the masses a step behind, and thus causes a fall in the political-maturity thermometer. It takes sometimes tens of years, sometimes generations, for a people’s level of understanding gradually to adapt itself to the changed state of affairs, until it has recovered the same capacity for self-government as it had already possessed at a lower stage of civilization.”
Care to stop making pouty FlipFlop videos, or not being able to sleep because ‘someone on the internet is wrong’, to say why that analysis is? And yet does this mean the masses now don’t get to choose tax rates? Is that how our system works now? This is deeply political-economy and/or political philosophy. (For those not making videos of themselves trying to eat a spoonful of cinnamon.)
“They dreamed of power with the object of abolishing power; of ruling over the people to wean them from the habit of being ruled.”
The irony being that this applies to both the intellectual Bolshevik revolutionaries and their equally-intellectual neoliberal opposites. Somehow we have ended up with Build Back Better under both. And equally low interest rates – which says something.
“So the question now ran: Was such an operation justified? Obviously it was, if one spoke in the abstract of “mankind”; but, applied to “man” in the singular, to the cipher 2—4, the real human being of bone and flesh and blood and skin, the principle led to absurdity.”
Are we all long or short absurdity at the moment, may I ask? But then we come to the real crux of the book:
“It was a mistake in the system; perhaps it lay in the precept which until now he had held to be incontestable, in whose name he had sacrificed others and was himself being sacrificed: in the precept, that the end justifies the means. It was this sentence which had killed the great fraternity of the Revolution and made them run amuck.”
The ends justifies the means…doesn’t it? For example, in monetary policy we have moved from low rates to QE to negative rates to talk of yield curve control, and the end of price discovery in capital markets under ‘capitalism’ – with the ends being either “because markets”, or “making rich people richer to make poor people slightly less poor”, depending on one’s interpretation. Now we see talk of a standardization of global tax policy: while perhaps a logical and worthy end, what means will we have to use to get ourselves there? And what subsequent moves will be necessary to resolve all the other issues that will then flow from that victory? And how many starched Gletkins will be needed to carry this all out?
“Each wrong idea we follow is a crime committed against future generations.”
So say the crypto enthusiasts, loudly. And yet the realpolitik they have thrived on will likely see they end up like the antihero Rubashov, alone in a cell and waiting for his end at the hands of a more realpolitik force – the state (watch where India leads, and who follows, more so now US taxes are national security).
For those who haven’t read it, the key message of ‘Darkness at Noon’ is that even with the best of intentions, if you abandon the deep-rooted imperfect social systems in search of utopia --and markets are just such a social system!-- all you have left is the raw power of ‘the end justifies the means’: and that opens the door to ever-more radical actions and outcomes, with the heuristic of very dark end-points. And I am talking about worse things than a drop in the stock market, believe it or not.
Maybe things will work out better this time: but it’s Koestler, not cost-push, that should worry markets more morning, noon, and night – and not just in the US, but all over. Yes, the cinnamon-eating public don’t seem to care, but neither do QE-eating markets.
The intellectualism which once made Koestler a US best-seller has seemingly been devoured by the social media combo of narcissism and materialism - as Bruno Maçães put it so brilliantly, it’s now all about the memes of production; and free markets just want free money, not freedom. Yet the same markets that will probably react badly to any efforts towards global tax standardization, again like Rubashov, didn’t see that the power to give them all that free money would ultimately pave the road to such an end.