Tax cuts have left a massive hole in the budget; more redistribution may lead to higher growth The Offshore Wrapper is written by George Turner; taxjusticenetwork Greece is the word Syriza’s election triumph in Greece has provoked media and financial markets hysteria. Overnight the Euro hit a ten year low against the dollar. Here at Wrapper Towers we have been reflecting on the politics of debt reduction and would like to sprinkle some facts. Right-wingers argue that the only way to pay back sovereign debt is for the government to stop spending. This will lead to savings, which can be used to pay back debt. At the same time, they say, taxes can be cut to stimulate the economy to generate more growth. This, of course, relies on a huge assumption. Government revenue will remain the same or increase with higher growth. Instead what we are seeing in many countries that have taken this debt reduction medicine is that tax cuts mean governments raise less tax, and pubic spending cuts mean there are fewer tax officials to collect it. So we end up with more debt, more inequality and poorer services: a triple whammy. As we recently pointed out , a study from the European Tax Inspector’s Union has shown huge cuts to tax collection agencies across Europe as part of the austerity drive. This has led to tax evaders getting away with it, which in turn harms government revenues. In Kansas, Art Laffer, the economist behind a right-wing economic ideology, advised the state government. His medicine failed. Instead of tax cuts paying for themselves, a massive hole was left in the state budget. Fiscal conservatism indeed. And in Greece, despite huge cuts to public services and public sector pay, revenue has dropped too. Greece has not succeeded in getting its debt problems under control. Instead debt has increased from 130% to 175% of GDP since 2010. This is a big reason behind the desire to try something new. So does a left wing alternative for higher tax and higher spend work or is Greece completely screwed? Well consider these facts. First, the IMF has completed a vast study of government fiscal policies over the last 30 years and demonstrated that measures to increase redistribution (higher taxes on the rich) do not harm growth. In fact, more social equality leads to higher growth. Second, the majority of wealth is held by rich people as a recent Oxfam report has shown (see last week’s Wrapper). Thirdly, left-wing governments can demonstrate better performance in debt reduction than their right wing counterparts. As our very own Jim Henry has shown, Argentina’s debt problems are largely down to the low tax low policies of the military junta and subsequent pro-privatisation governments. The left-wing government of the last decade has done more to pay down Argentina’s debt than any other previous government going back to the 1950s.
Posted on: Tue, 27 Jan 2015 07:20:50 +0000
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