Taxing Super-Rich Can Open New Growth Path

There has been a historically unprecedented increase in inequality of wealth and income since the onset of the neoliberal phase of the capitalist system. This increasing inequality is both the consequence and the raison d’etre of the neoliberal phase of the capitalist system i.e. the increase in unemployment, underemployment and precarity in order to try and achieve price stability.

The principal component of this rising inequality is the increase in the share of the super-rich (billionaires and multimillionaires) in income and wealth. Wage inequality between high-wage and low-wage workers in order of magnitude is lower than the aforementioned principal component of rising inequality due to the rising share in wealth and income of the super-rich. But wage inequality is unduly emphasised by denizens of the neoliberal project to try and manufacture consent for rising income and wealth inequality, ostensibly on the grounds that this trend is the price to pay for greater innovation.

However, this claim is contrary to elementary considerations of macroeconomics. Viable innovation in the capitalist system is a complex outcome of the interaction of demand and research and development (whose public component tends to crowd in the private component) under the guidance of industrial policy that operates within a certain framework of international political economy.

Since the 1970s, and especially after the dissolution of the Soviet Union (which was the principal autonomous technological rival of the United States till 1991), research and development expenditure of the US. relative to output, underwent an attenuation relative to the period since 1945, with attendant negative consequences on private research and development.

However, the technological assent of China, especially in the 21st century (principally propelled by public research and development) has given rise to calls for public research and development in the US to once again start rising relative to output.

But trends in macroeconomic demand have become averse to innovation due to two interlinked factors. First, the achievement of the required level of unemployment, underemployment and precarity to the extent that makes price stability, possible involves the attenuation of macroeconomic demand management through counter-cyclical fiscal policy (that is enforced through the dominance of international finance capital) where the neoliberal project is hegemonic.

Second, the strategic conflict between the US and China (and Russia) has reduced the scope of exports propelling macroeconomic demand.

Therefore, the prospects of innovation in the neoliberal phase of the capitalist system are unclear at best. Moreover, rising income inequality tends to aggravate the slowdown in macroeconomic demand, since this regressive redistribution reduces consumption demand of the working people more than the resulting increase in (proportionally lower) consumption out of the larger magnitude of profits.

Likewise, the rising trend in wealth inequality involves a greater squeeze on the small-scale sector whose production tends to be relatively labour-intensive, resulting in a further slowdown of macroeconomic demand.

In response to this rising inequality of income and wealth, it has been argued that a (progressive) tax on income, holding of wealth and inheritance of wealth of the super-rich, is required to finance government expenditure to stimulate demand, output, investment and employment.

Denizens of the neoliberal project immediately advance the claim that this would reduce innovation whose speciousness has been demonstrated in the preceding paragraphs.

The second argument of these denizens is to claim that these taxes on the super-rich will lead to  billionaires and multi-millionaires exiting the countries (with such taxes) for other places that are relative tax havens.

This claim can be addressed in two ways. First, governments of all countries could agree on a minimum rate of tax on incomes and wealth of the super-rich with an appropriate mechanism for redistribution of tax revenue across countries to inhibit tax arbitrage. The lack of traction of related proposals for minimum corporate taxation demonstrates that the necessary conditions for the workability of such a  proposal in terms of international political economy are not present.

Second, the government of a country that institutes taxes on income and wealth of the super-rich, could put in place an exit regulation that is analogous to capitals controls on foreign portfolio investment flows.

Let us consider a stylised example to demonstrate this.

This condition implies that the post-tax return is higher in the home country when compared with the foreign country due to the existence of an exit tax.

Let us explain in terms of an arithmetic example. Let the magnitude of wealth be 100 and the rate of return be 5%. Now let the rate of taxation of wealth of the super-rich be 2%. If the super-rich stay put in the home country, then at the end of the period in question their wealth before tax will be 105. Now after paying the 2% tax on their wealth, the super-rich will be left with 105-2.1(=0.02*105) =102.9. If the super-rich choose to exit the country, then they will pay an exit tax of, say 3%, and be left with 97. On this, they will earn a return of 5%, which will leave them with 101.85. Clearly, the super-rich will gain if they stay put in the domestic country.

In case the rates of return in two countries are different, the rate of exit taxation can be suitably adjusted so that it is always “rational” for the super- rich to stay in the home country.

The revenue from taxing wealth could be spent by the government in the following ways:

One, effect transfers to the working people who in turn will spend it;

Two, institute an employment guarantee programme that can be designed to enhance the magnitude of social and physical infrastructural attainment;

Three, increase public research and development (which will in turn crowd in private research and development) to enhance ecological sustainability.

All these three modes of spending the revenue from taxing the super-rich will leave aggregate profits unchanged in the short run. But it will increase the degree of capacity utilisation and, therefore, investment and aggregate profits over time. Thus, taxation of the super-rich can be used to finance a path of growth that breaks with the neoliberal project.

The writer is professor, department of economics, Satyawati College, University of Delhi. The views are personal.