Taxation, Poverty and Welfare: What Kind of Fiscal Europe Dr Jeremy Leaman

1. European Social ConferenceBalancing Social and Economic Policy in Europe during the First European SemesterBrussels, 19-20 September 2011 Taxation, Poverty and Welfare: What Kind of Fiscal Europe Dr Jeremy Leaman Loughborough University & EuroMemo Group

2. Crises and Interdependence as Context Structural crisis of advanced capitalism Socio-economic crisis of structural dependence on monetary accumulation Cyclical crisis of trade and production Structural crisis of over-consumption Ecological crisis of resource depletion and habitat destruction Demographic crisis Social Crisis of Deprivation & Exclusion Crisis of economic governance

3. Halting recovery from major Shock Loss of momentum points to more than just a cyclical crisis: Industrial Production

4. Irretrievable Loss of Welfare-Enhancing Economic Activity? A lost decade?

5. Long-term costs World output loss in 2009: $4 Trillion (€2.8 Trillion) [Haldane] European bank bailouts 2008-2009: €2.99 Trillion [Trichet] Cumulative permanent loss to world output (assuming 3% real growth): $60-$200 Trillion [Haldane]; this looks very optimistic! Unemployment 2007-09: +19% from 178 to 212 million [ILO] Youth unemployment 2007-09: +10.7% to 81 million [ILO] European youth unemployment 2011: 20.7% [Eurostat] (Sp: 46.2%; Latvia: 29.7%; Lithuania: 33.1%; Greece: 38.5%; Italy: 27.6%; Ireland: 28.3%) >> Demonstrable ‘Wage scar’ for young unemployed [Gregg & Tominey 2004]

6. Rising Unemployment

7. A predictable failure The neo-liberal expectation of a virtuous circle involving higher profits, higher investment, increased employment, increased production and higher profits has NOT materialised >> Say’s Law disproven early in 1980s Higher profits channeled into financial investments, not real investment Profits Ratio up, Investment ratio down !!

8. Interdependence of Fiscal Policy and Income Distribution • Tax Policies in Advanced States after WW2 were informed by: • A) increased need to provide public goods (physical and social infrastructure) • B) increased need/ desire to boost the welfare of all citizens. • Therefore: • Progressive income tax systems • Increased expenditure on welfare and public goods (redistribution)

9. Neo-liberal paradigm reduced ambition of the state and tolerated greater disparity of market incomes

10. European Redistribution Worse than average 1980-2005

11. Inevitable increase in inequality, measured by Gini Coefficient Wage ratio fall = Rise in Gini Coefficient

12. Anglo-Saxon states: rise in share of top 1 percent in to between 9% and15% of Nat Inc

13. Less marked rise in Continental Europe

14. Still evidence of shift towards top percentiles

15. Interdependence of Fiscal Policy and Income Distribution 2 • The state adjusts the disparities of ‘market incomes’ through targeted transfers. • If market inequalities increase, the cost of compensatory welfare rises. • If the progressivity of direct taxation is reduced, the scope for redistribution becomes narrower, the cost higher. • If market inequalities are less, the need for compensatory state transfers is less!

16. Fiscal and Social History of Europe since 1980 The neo-liberal ‘roll-back’ of the state involved ‘roll-back’ of the ‘social state’ Market incomes disparities have widened markedly in most EU economies Social expenditure has remained comparatively high because of: Structural unemployment Increasing dependency ratio (declining birth and death rates)

17. Fiscal and Social History of Europe since 1980 2 Failure to harmonise Income and Corporation Tax in EU Loss of progressivity in direct taxation, firstly in EU15 then During transition process off CEECs: FLAT TAX regimes in Estonia, Lithuania, Latvia, Slovakia, Bulgaria, Romania, Czech Republic Accelerated tax competition 2000-2008

18. Erosion of Progressivity in Income Taxation

19. Higher reliance of EU10 on Indirect Taxes (as % of total revenue)

20. Consequences of Fiscal Policy for Social Policy Gradual General Shift of Tax Burden to Indirect Taxation and reduction in CT and PIT rates: Regressive effect, affecting poorer households disproportionately Downward pressure on Social Transfers before 2008 despite increased risk of poverty (Social Exp Ratio EU: 1996: 27.8; 2006: 26.9) Strong accompanying argument in favour of greater inequality: ‘welfare fosters a slovenly and improvident way of life ... the poor need most of all the spur of their poverty’ (George Gilder 1982) Tax Relief Measures in 1980s and 1990s favouring capital increased general disparities of income distribution

21. EU Social Policy • PARADOX: High quality of internal and commissioned research on social policy, exclusion and poverty BUT weak translation of perceptions of best practice into policy reality in individual MS • Reflected in 2010 Joint Report on Social Protection and Social Inclusion • Rhetoric of Multi-Dimensional Approach to SP: ‘Balanced active inclusion strategies, combining adequate income support, access to the labour market and to social services, can reconcile the goals of fighting poverty, increasing labour market participation, and enhancing efficiency of social spending’

22. EU Joint Reports JRSPSI acknowledges existing problems: Diversity of social protection systems Divergence of social welfare cultures Disparity in state capacities: ‘Not all MS have the financial means to meet rising demand and some have large gaps in their safety nets. Narrowing these gaps is now a priority’ (p.2)

23. Obstacles to EU Social Policy • Subordination of Social Policy to dominant macro-economic/ macro-political preferences: • deflationary imperative, debt-reduction, debt-management, attracting/ maintaining loyalty of capital • dominance of ‘efficiency’ and ‘affordability’ in objectives • Joint Report should be read in conjunction with ‘The Road Map for a Stronger European Economy’ from 13 April 2011 • Business as usual, supply-sidism – no social dimension • http://ec.europa.eu/news/economy/110413_en.htm • Extensive abuse of tax avoidance and low-tax jurisdictions by corporations and ‘high-net-worth’ individuals

24. Neglect of Market Distribution • Market distribution has frequently neutralised state redistribution in recent years. • Example New Labour administration in UK 1997-2010 • Blairite supply-sidism tolerated the emergence of inflated top salaries and City bonus culture • ‘We are intensely relaxed about people getting filthy rich’ (Peter Mandelson) • The results were predictable >> • Despite marked increases in spending on public services, including ‘tax credits’ for poorer households >>

25. Strong growth in UK Public Spending, but ……..

26. It has only slowed growth in inequality

27. Official Conclusions • Consensus view of Commission and major MS: • The sovereign debt crisis is worse than the other crises • ‘We only need to lead the markets back to normality’ (Trichet) • We can ‘crowd in’ private investment and growth (by reducing state demand for credit) • We can pacify financial markets with austerity • We can export our way out of recession

28. Alternative Conclusions • Pro-cyclical austerity will empoverish millions of poorer citizens (particularly in the EU-peripheries) and stunt growth • We need the former ‘market normality’ like a bullet in the head • Germany’s ‘deflate and export model’ is a negative sum game & seriously naive • Market distribution of income will become more disparate, unless we make radical changes to policy architecture and policy preferences

29. Address European Disparities • EU Policy is characterised by an asymmetrical policy architecture and contradictory preferences • Subordination of fiscal policy to monetary policy • Subordination of social policy to macro-economic priorities • Wide disparities in state capacities • Weak coordination and harmonisation • Self-defeating fixation on austerity Therefore: Poverty cannot be combated in isolation from macro-policy framework

30. Policy Recommendations 1 New Policy Architecture based on institutional coordination and international cooperation Location of Social Justice and Poverty Reduction at the Core of Macro-Policy Objectives: ‘More equal societies almost always do better’ (Wilkinson & Pickett) Stabilisation of European state finances with a new Code of Solidarity: Commitment to Progressive Taxation, Elimination of Tax Competition, Stabilisation Facility based on common Eurobonds

31. Policy Recommendations 2 Weaker peripheral states must be conceded longer periods of recovery and modernisation, conditional on the abandonment of ‘free rider’ tax behaviour and the achievement of sustainable fiscal regimes (i.e. minimum tax ratios) Rectification of chronic external balances within EU27 by refocussing on convergence (common deficit and surplus reduction) >> European Clearing Union

32. Recommendations 2 • Eliminate the programmatic tax and regulatory arbitrage of TNCs • Close down European and offshore ‘tax havens’ through Global Tax Accord • Reduce the extent of ‘social dumping’ in Europe and worldwide • Develop strong cultural commitment to intergenerational ecological justice; reconsider ‘growth’ and ‘welfare’ • Strengthen the solidaristic features of civil societies and the insight into the interdependence of human existence • Crisis as opportunity: Approach Poverty (and its exploitation) as something that is as unacceptable but as curable as Smallpox

33. What kind of Fiscal Europe do we need? We need fiscal arrangements in Europe that are rooted in solidarity and decency A managed market system which precludes wide disparities of incomes and thus reduces the need for state transfers Harmonised system of Progressive taxation Well resourced public budgets at central, regional and local level Well resourced EU-level with refined system of fiscal equalisation

34. Strong European Civil Society Above all, we need an active, reflective and well informed civil society with the ability to influence and to act both nationally and internationally: Days of Action across Europe? Maintaining the Audibility and the Visibility of Unjust Distribution & Social Exclusion Make Poverty as unacceptable and treatable as Smallpox

35. Declining Share of Wages and Salaries in National Income of Advanced Economies