My opinion: more progressive taxation is necessary for social progress

Governments must innovatively develop progressive ways to finance the large-scale social spending needed to improve lives and livelihoods, especially after the Covid-19 pandemic. More egalitarian tax reforms should allow governments to equitably mobilize the revenue they desperately need to advance sustainable development for all.

Fiscal policy challenges

Responding to the pandemic and its economic fallout has required a massive mobilization of resources to protect people’s health and livelihoods, stem economic decline and stagnation, and ensure lasting progress.

Fiscal policy allows governments to harness and deploy resources. But the modes of financing and state expenditure adopted vary in their impact on economic inequalities. Monetary policy measures can be supportive, but they cannot replace fiscal efforts.

However, due to the economic downturn, much more government spending is needed, largely financed by sovereign debt, i.e. government borrowing. This has no doubt been necessary to weather the pandemic, but fiscal policy must be consistently countercyclical: expansionary to counter downturns, and conservative in good times.

Rich countries have generally been more fiscally aggressive in managing deficits to increase spending since the global financial crisis, but they have stepped it up particularly in response to the pandemic. Massive economic aid and stimulus programs have tried to protect incomes and failing businesses, albeit unevenly.

Regressive taxation

Regressive colonial taxes were levied on subject populations, but the tax incidence became more progressive after independence in most, but not all, postcolonial societies. Over the past four decades, most governments have reformed tax policies for the worse, reducing the share of tax revenue and shifting the tax burden from the wealthy to the general public.

Policy advice from international financial institutions and political pressure from powerful elites and foreign investors have reduced the progressive aspects of taxation. With former US President Donald Trump, laughable arguments such as the Arthur Laffer Curve – without any solid theoretical or empirical basis – are always invoked to justify regressive tax reforms.

Corporations and wealthy individuals paid less and less direct taxes, while the public paid more and more indirect taxes, usually on consumption. Most countries still tax income, but tax rates on corporate income, high income earners, property and inheritance have declined in most countries over the past few decades.

The assets of the wealthy are mostly held in the form of stocks, shares and real estate. Their income comes primarily from these assets, rather than being earned in the form of wages. Taxing profits and excess wealth can generate considerable revenue to finance development policies and measures, in addition to reducing the gaps between beneficiaries and others.

Instead, wealth is generally taxed at low rates, while huge loopholes allow these assets to be hidden, usually offshore. Several trillions are hoarded in often secret accounts in tax havens, both offshore and onshore. All of this has accelerated the concentration of wealth and economic inequality.

Make taxation more progressive

Governments derive their budgetary resources mainly from tax revenue or borrowing. Taxation is undoubtedly the most sustainable, efficient and responsible way for states to raise funds. Both progressive taxation and public spending can reduce inequality, although in different ways.

Taxes on windfall profits

A few individuals and businesses are reaping huge benefits from the pandemic while most have suffered. Many billionaires are said to have become much richer, with the top 10 having more than doubled their wealth from US$700 billion (RM2.9 trillion) to US$1.5 trillion since March 2020!

Windfall taxes at high rates are easily justified. After all, most of those who have earned a lot owe their newfound wealth to circumstances that are largely not of their making. Exceptional revenue or profits during the pandemic can be determined by comparing recent profits with past profits. These gains should be heavily taxed for the same reason.

Wealth tax

Wealth taxation has come down significantly in recent decades thanks to the successful lobbying of the wealthy. The introduction or reintroduction and extension of the progressive wealth tax will generate considerable revenue if the loopholes can be closed, not only at the national level, but also at the international level.

Perhaps even more than income tax, wealth taxes are a progressive way to raise revenue. They also have greater potential to address other inherited privileges and inequalities, including those associated with culture, lineage, ethnicity, and gender.

Conditional support

Government spending – including subsidies and relief measures – should not benefit companies that pay taxes abroad or do not pay them at all. Many companies use tax havens and other loopholes to pay less tax where they operate and profit.

More progressive systems

Tax systems should get much more from those who are most accountable and able to pay. Concretely, this should include:

• Introduce or increase taxes on assets such as real estate, wealth, inheritance and investment income (“capital gains”).

• Increase personal and corporate income tax rates and progressivity.

• Shift in relative reliance on indirect taxes — for example, on value added or sales or consumption — which tend to be regressive towards more progressive direct taxation.

• Strictly crack down on tax evasion and evasion — especially by the wealthy, even politically influential.

• Strengthen international cooperation on taxation to gradually increase and distribute tax revenues.

Such systemic reforms are essential for progressive fiscal redistribution, for example by financing medium- and long-term sustainable development. Of course, an immediate short-term priority is to fund a forward-looking recovery from the pandemic and its aftermath.

Coordinate fiscal policy

Governments are expected to raise enough revenue to fund the services, goods, facilities and infrastructure they are expected to provide, i.e. to meet public expectations regarding citizens’ rights. The popular assumption is that tax incidence is not only progressive, but increasingly so, although the converse is more likely to be true.

Taxation is generally expected to reduce, if not correct, inequality. If well designed for effective implementation and enforcement, the international track record suggests that it is achievable. In line with public expectations of progressive redistribution, government should be like Robin Hood – take from the rich to give to the poor.

Of course, the progressivity of the tax depends on how it is collected and spent. Therefore, tax and expenditure policies should be considered together. But it is now clear that some pandemic relief programs have mainly benefited influential businesses, with the crumbs going to those most in need.

International cooperation is needed for appropriate tax reforms in the era of financial globalization and to prevent increased capital outflows from developing countries. For now, reducing tax evasion depends on fair and effective international cooperation on terms that are fair to all, rather than conditions imposed by rich countries, as has been the case.

Jomo Kwame Sundaram, a former professor of economics, was UN Under-Secretary-General for Economic Development. He is the recipient of the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.