The Challenge of Tax Avoidance for Social Justice in Taxation

Abstract

The Occupy Wall Street (OWS) movement has been criticized for not having a tax policy agenda. Critics contend that it has “no message,” “no goals,” and “no leaders.” This contribution accounts for this policy agenda deficit. Various tax policy prescriptions that address social resource inequality, including a wealth tax proposed by Pikkety and Goldhammer (Capital in the twenty-first century, 2014), suffer from serious weaknesses. More specifically, I explain why the most salient of the income tax policy ideas (increasing rates) is not, on its own, a solution. To see why, consider the US. The US has high corporate income tax rates; nevertheless, large American corporations such as Apple, GE, Starbucks and Google have been able to reduce their effective corporate income tax rate liability below statutory rates, often close to zero. The crux of the problem is that increasing income tax rates leaves those confronting such rates with greater incentive to engage in various activities in order to avoid those taxes. It also increases the return from lobbying for tax changes that make avoiding that burden more possible. Therefore, increasing income tax rates is not the clear-cut effective policy prescription one might think it should be. The example of the Bush tax cuts for individuals, and certain kinds of capital income, illustrates that cutting income tax rates is also not the right approach. In many countries, claims that cutting taxes will increase tax revenues (i.e., that we “are on the wrong side of the Laffer curve”) are incorrect. Thus, if income tax rates are increased, it is not necessarily the wealthiest that will bear the greatest burden, and if tax rates are cut, it is not certain—or even particularly likely—that it will be the least well off who will benefit. OWS ought therefore not to be criticized for not articulating a message with respect to income tax policy. Recent developments show that popular political pressure on leaders has led the G20 to the right—albeit difficult—track. The best income tax reform is one of base broadening and increasing international tax cooperation, perhaps coupled with making a transition from reliance on income tax to a greater reliance on coordinated wealth taxes. Responding intelligently to demands for a more progressive tax system that promotes the realization of social justice will require us to confront difficult practical and political challenges. These tax policies are available only if the political will can be found to sustain their introduction and implementation.