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Low Taxes is an Act of Desperation

A low business tax can be counter-productive if a deadbeat infrastructure arises through lower state revenues. Ronald Reagan tested this in the US and the result was higher state debts through tax reductions, neoliberal insanity. Lowering business tax rates leads first to enormous budget holes. Employees will bear this burden at the end: through the social cuts sparked off by the budget imbalances and by the rise of mass taxes like the sales tax to offset this deficit.
LOW TAXES IS AN ACT OF DESPERATION


The economist Rudolf Hickel warns: The low tax plans of Theresa May and Donald Trump are dangerous. Down with taxes! Will Theresa May lure Indian firms to Great Britain?


[This interview published on 12/14/16 is translated from the German on the Internet, www.taz.de. The 74-year old economist is the author of many books and directed the Institute of Labor and Economy at the University of Bremen up to 2009. He is a co-founder of the Alternative Economic Policy study group.]


taz: Mr. Hickel, the future US president Donald Trump, Hungary's Premier Victor Orban, and Great Britain's Prime Minister Theresa May - all want to drastically lower business taxes in their countries. What is your opinion?


Rudolf Hickel: A primitive myth, the Swiftian tax table, stands behind the plans of the governments. When business taxes fall, businesses have more incentives for investments. The gross domestic product - the basis for assessment - and the tax revenues grow. So a lower t0061 rate should lead to higher tax revenues at the end.


Does this mechanism really function?


No, and that is proven by history. The height of the tax rate is not the sole decisive criterion for investments by businesses. The infrastructure, the supply of trained workers, and net possibilities are the really important reasons for a location decision. A low business tax can even be counter-productive if a deadbeat infrastructure arises through lower state revenues.


What does it look like in practice?


Look at Germany. The Schroeder government lowered the business taxes - like the corporation tax. The expected growth impulses and the additional tax revenues that should compensate the losses through the lower tax rates were canceled. Ronald Reagan tested that in the US. The result was higher state debts through tax reductions, neoliberal insanity.


Why then do countries like Luxemburg and Ireland profit from their tax incentives for businesses?


Businesses did not become sustainable and active in these countries and bring investments and employment. "Tax optimization" of big businesses occurred, for example withdrawing profits from other countries tax-free with the help of patent payments. The international companies in Great Britain are concerned that the country leaves the EU domestic market, not about excessive business taxes. No business from Germany would migrate to Great Britain only because the business tax is six percentage points lower - especially not with the current uncertainty and downswing of the pound.


How do you judge Theresa May's announcement?


The obsequiousness with low tax rates is an act of desperation. It is an admission that the Brexit has dreadful consequences - that cannot be stopped.


What dangers threaten through possible tax reductions in the US and Great Britain?


I see two great dangers with this policy. The first is within one country. Lowering business tax rates leads first to enormous budget holes. Employees will bear this burden at the end: through the social cuts sparked off by the budget imbalances and by increased mass taxes like the sales tax to offset this deficit.


What is the second danger?


This is the increasing competition between states to raise their location advantages and to lower taxes. This is the beggar-thy-neighbor policy - make your neighbor into a beggar. Tax dumping is carried out at the cost of other states to gain supposed economic advantages. This is similar to the Euro-crisis. Germany exports wage cost advantages and pushes out domestic businesses. A tax race also harms other countries and forces them to join in this competition. The results are the destruction of trade relations, state debt crises, and intensified austerity policies.


Where do you see parallels between Orban, Trump, and May?


Their tax concepts are an expression of re-nationalization, populism, and right-wing screening. They collect points among voters with the same sayings: USA First, Britain First. A screening policy follows in trade. Nationalist protectionism and the swing to the right are two sides of the same coin.


Let's stay with Trump for a moment. Aside from tax policy, what other nationalist measures do you expect in US economic policy?


In the election campaign, Trump promised to bring back jobs to people in the Rust Belt. He will promote screening American industry outwards. If he really does that consistently, he has two other instruments besides fiscal policy. One is an aggressive "Buy US" - strategy. This means hardly any or no foreign businesses will be commissioned in the public sector. As the second instrument, he could reject free trade agreements and impose high dumping tariffs on foreign imported goods. Dumping tariffs are a harsh instrument that can have very fast effects on world trade.


In Germany, there are only a few Trump fans. However, some say: "At least the TTIP (Transatlantic Trade and Investment Partnership between the EU and the US) will not pass now." Do you see it that way?


I cannot be glad about this. Critics of the TTIP do not want re-nationalization through screening. They want trade relations on the basis of the highest social, ecological and economic standards for all countries. We want above all to inactivate the power of corporations. Nationalist protectionism is the other extreme to the total neoliberal free trade.

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A difference between "in general" and "in particular" 21.Dec.2016 07:25

Mikie Novack

While not a particular fan of this approach, I can recognize that sometimes specifically TARGETED lower business taxes can be of benefit to all.

PLEASE -- I am NOT suggesting that this is what they are going to do. But I have heard of SOME proposals that would fall into that category. Ones where the lower taxes would be dependent on the desired results. For example, allowing immediate "expensing" of actual investments << as opposed to simply lowering their tax in the (silly*) hope that they would invest that tax saving >>

In other words, lower business taxes aren't ALWAYS a bad idea. And it isn't as simple a matter of how much they are taxed but how that is applied. To induce businesses to do X (whatever X might be) having their tax dependent on their doing X can be effective.


* silly, because conditions are such that it would pay them to invest (borrowing, if necessary) because would lead to higher profits, or not favorable for investments to lead to higher profits, so they wouldn't use any tax givebacks for that purpose.