Stiglitz: how to use tax to build an economy

Joseph_Stiglitz_Nobel_Prize_Laureate_at_Forum_Invest_FINANCE_2009

Joseph Stiglitz. Forum Invest, Creative Commons 3.0

Nobel Laureate Joseph Stiglitz has just published a White Paper with the Roosevelt Institute entitled Reforming Taxation to Promote Growth and Equity. It is a fascinating and clear piece of work, distilling a number of powerful tax principles – and it includes a section on formula apportionment (or unitary taxation).

We will highlight just a few things of note – most of which we’ve pointed out on several occasions, but are nice to see endorsed here:

[The U.S.] economy has been performing well below potential, and the reason for this dismal performance is lack of aggregate demand. Thus, we need to be particularly mindful of the effect of tax reform on aggregate demand in general and employment in particular.

Taxes on the rich and superrich, who save a large fraction of their income, have the least adverse effect on aggregate demand. Taxes on lower income individuals have the most adverse effect on aggregate demand. Thus, increasing the progressivity of the tax system not only improves the distribution of income – reducing the inequality that has come to mark the country – but also stimulates the economy.

He notes that inheritance taxes, incentivising the wealthy to consume now, are particularly useful. And he makes interesting points about taxes on pollution – notably carbon emissions.

“A tax on pollution has a triple dividend because it leads to a better environment which can itself lead to stronger economic performance and it raises revenue, even as it reduces the bad externalities spilling over on the rest of us. Moreover, it incentivizes firms to retro-fit, thus encouraging investment that leads to higher output and employment.”

And here is another point we’ve made on several occasions too, related to the first:

America’s large corporations are siting on more than $2 trillion in cash. What is holding back investment, especially by large corporations, is the lack of demand for their products. If there were demand, firms would respond, as they always have, even when tax rates were far, far higher than they are now (as they were until 1980).

Remember: taxes are not a cost to an economy but a transfer within it, from one productive sector to another productive sector. So there’s no obvious reason from first principles why particular levels of corporate taxes should make a difference to economic growth either way. Once you factor in the current aggregate demand question, then it seems likely that corporate taxes at appropriate levels – including curbing corporate tax abuses – is likely to foster economic growth. (And see further reasons why this is the case, here.) He also provides tips for fine-tuning the corporate tax system to maximise growth.

Also take a look (on p8) at his clear expositions of the unarguable Henry George Principle, and the consequent need for land value taxes and natural resource taxes “as close to 100 percent as possible,” and his brief exploration of financial sector taxes and on the overlapping notion of taxes on monopolies and rent-extracting sectors.

A long section on corporate taxation includes the following:

The current system is based on trying to infer the value of what is produced within any given jurisdiction. Firms are asked to assess what they would have received for the goods that they produced in a particular place, if they had sold the products in an arm’s-length transaction – even if there are not markets anywhere for the half-finished goods that may be shipped from one jurisdiction to another.

The states recognized the hopelessness of the transfer price system in the economically integrated U.S. as goods repeatedly move across state boundaries in the process of production. State taxes use a formula that takes into account the fraction of the company’s sales, employees, and capital that occurs within any given jurisdiction. (Even here, tax avoidance is possible, but the scope appears markedly lower than under the transfer price system.) But as globalization has progressed, the same problems are arising internationally.”

Read more about unitary tax and formula apportionment here and here.

If there’s one shortcoming to Stiglitz’ report, it’s that there’s no good discussion of the truly enormous subject of what is widely known as tax ‘competition’ – more accurately described as Tax Wars.


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