A Possible Economic Recovery Thanks to a Tax Plan

The decision of the U.S. Congress to raise taxes on high-income earners is much more than a simple, nonetheless important, public finance move urged by the necessity of warding off the preposterous and absolutely avoidable collapse of the U.S. economy. Beyond its practical impact, this decision represents a turning point — the end of one of the guiding principles of modern capitalism.

This is a guiding principle that has pervaded the U.S. political economy since Reagan’s presidency, in other words during the last 30 years: The belief that lowering taxes on high-income citizens is enough to obtain an increase in growth and a general rise in production, income and wealth.

The first results were not negative — the Internet revolution can be considered the offspring of not only liberalization, but also of the tendency to tax high incomes benevolently — but after the first stage it appeared that several important collateral effects emerged that were worsened by the economic crisis: Only a small fraction of Americans gained large benefits from the growth hauled up by this type of tax cut. Often the “normal” employees had to work more to maintain an unchanged consumption level; the income disparity had increased so social unrest became even more acute. All these things happened and continue to happen, not only in the U.S., but also in Europe, and Italy is no exception: The tax cut for high-income earners implemented by previous governments in the last 15 years — largely through the 2003 building sanction and tax amnesty — has not seemed to have positive effects on the Italian economy’s derisory growth level.

Because these negative elements added up to the economic crisis, the situation has changed dramatically. Almost two years ago, Warren Buffet — the billionaire financial expert, a quintessential figure of the American economic scene — caused quite a stir when he denounced the American fiscal system as aberrant because too few people like him were taxed. His earnings from the stock exchange were not taxed as much as his secretary’s earnings. Two days ago, during the World Day of Peace, Pope Benedict XVI delivered a scathing attack on “deregulated financial capitalism” — and we could add, hardly taxed.

In the meantime, the European Union gave the green light to the so-called “Tobin Tax,” which affects financial transactions, and 11 countries, including Italy, have adopted it or are about to do so. In France after the Constitutional Court vetoed the “tax on the rich,” the government reaffirmed its willingness to proceed in this direction, and in his dull and hasty end-of-the-year speech French President Hollande confirmed the necessity of a major contribution from the rich for the recovery of public finance. In Italy, the Monti program aims at general taxation relief, giving priority to lower income groups.

Are these measures pointing to a return of the 60s and 70s social democracy? Not quite. The reduction of the tax burden, starting from the low-income earners and the redistribution of this same burden from the lowest to the highest income earners, seems to represent a comprehensive attempt to get out of the crisis, a goal that wasn’t reached by printing more money. Tax relief for low-income citizens of 1,000 euros produces a higher increase in demand than tax relief of 1,000 euros for the high-income citizens. In fact, low-income people would spend everything or almost everything to get their living standard back or to make some purchases that they had to postpone, while the lifestyle and the level of consumption of high-income people would be almost unchanged. A different distribution of the tax burden can therefore be an appropriate instrument to unlock the mechanisms clogged by the global economy. In the mid- and long- term, however, the taxation levels of various income brackets seem to be put into question.

Realistically, in order to restore the economy, top-income earners need to be asked not so much to consume more but to invest and risk more. Unfortunately, in the last 20 years, not only in the U.S. but also in Europe, the most important earnings of high-bracket taxpayers didn’t go in this direction but rather toward financial transactions that have nothing to do with the real economy. If this behavior doesn’t change, one of the conditions of the system in which the state and the market can coexist will disappear: We will have an economy with a low growth trend and a society increasingly unequal. In this situation, the proposals made by some Italian political forces of plain and simple elimination of unpopular taxes such as the unified municipal tax, which taxes real estate and weighs mainly on the richest, appear to be dissonant with the proposals of the other developed countries and without real effects on growth.