Why 70 per cent tax rates would require capital controls

To avoid economic blackmail by the markets, any socialist government would need to impose limits on the movement of money by investors. 

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The inspiring Alexandria Ocasio-Cortez recently shocked the Democrats by endorsing marginal income tax rates as high as 70 per cent. The response from progressive economists such as Paul Krugman has been overwhelmingly positive. In a recent column, he pointed out that in the context of low bargaining power, rent-seeking by elites and the necessity of revenue-raising in the context of high US government debt (104 per cent of GDP – and more if you count sub-national debt), a top tax rate of 70 per cent is eminently reasonable.

As Krugman and many others have noted, top marginal tax rates of 70 per cent or more were normal in the post-war period – also known as the “golden age of capitalism” due to the combination of high growth with low inflation, unemployment and inequality. Since then, successive waves of tax competition have suppressed both income and corporation taxes, leading to a situation in which the UK, the fifth largest economy in the world, levies corporation tax (19 per cent) at a lower level than Afghanistan (20 per cent).

Most mainstream economists today accept that tax competition has been hugely destructive to the global economy. Indeed, implementing a global wealth tax of up to 70 per cent was the central recommendation of Thomas Piketty’s 2013 landmark work Capital in the Twenty-First Century. But the problem with these “progressive” economists is that they don’t seem interested in the structural factors that have made tax competition so easy.

Tax rates didn’t start slipping because everyone suddenly decided that letting multinationals such as Apple pay tax at a rate of 0.005 per cent was a good idea. Tax rates started slipping because elites wanted it that way – in fact, they had spent the post-war period constructing a global economy wired for tax competition.

The golden age of capitalism took place under the Bretton Woods system of exchange rate pegging, which permitted the use of capital controls (limits on the amount of money that can be brought into or out of a country). These controls were anathema to the global elite, which sought the right to move their money to wherever the most profitable investment opportunities – and lowest tax rates – could be found. Friedrich Hayek – the intellectual godfather of neoliberalism – called capital controls “the decisive advance on the path to totalitarianism and the suppression of individual liberty.”

As the 20th century progressed, international capital strained against the restrictions imposed by Bretton Woods. The Eurodollar markets emerged in London as a space of unrestricted capital flows outside of the jurisdiction of any national authority; massive multinational corporations grew up that were able to shift capital across borders; and eventually Bretton Woods itself collapsed. The neoliberals had already set about constructing the new world order that was to replace it.

As Quinn Slobodian writes in his recent book Globalists: The End of Empire and the Birth of Neoliberalism, they did so by constructing a set of international institutions to promulgate a new international legal framework that protected the “human right of capital flight”. The IMF, the World Bank, and the European Union were amongst the most enthusiastic adopters of this framework – the latter enshrining it into the creation of the single market as one of the four freedoms.

Rising capital mobility meant corporations, investors and wealthy elites were now able to threaten governments that didn’t abide by their preferred agenda. Tax rates around the world plummeted as governments “competed” with one another to attract highly mobile investors and corporations. The measure of a government’s success became its ability to implement “market-friendly” policies. Those who failed to do so would suffer the kind of economic blackmail experienced by French Socialist President François Mitterrand in 1983.

Raising top marginal tax rates is the best moral and economic course of action for the UK, but any socialist government that attempted to do so would be punished severely by “the markets”. Without constraints on capital mobility, investors will continue to exercise a veto power over domestic states’ fiscal policy, and tax competition will only get worse.

The technical infrastructure for the implementation of controls is there – most of it could be performed electronically through existing software. A Conservative government – the party of British finance – would never use it. A Labour government should; and that means making the ability to deploy capital controls in day-to-day monetary policy a central pillar of any Brexit deal. 

Grace Blakeley is the New Statesman’s economics commentator and a research fellow at IPPR.