Neoliberalism 2.0: Regulating and Financing Globalizing Markets

A Pigovian Approach for 21st Century Markets

L. Nijs

• Éditeur: Palgrave Macmillan
• Année: 2016
• ISBN:
  9781137535566
• Sujet: Economics
• Sous-sujet: Econometrics

In today's increasingly globalized environment, many economic fundamentals need to be reconsidered in order to regain stability in the global marketplace. One such consideration is the failing dynamics of the international tax infrastructure. Neoliberalism 2.0 brings a 21st century assessment of the Pigovian taxes, considering a completely new calibration of the international tax systems, inspired by the historically developed Pigovian tax model. The book considers the impact neoliberalism had and will have on regulatory infrastructure, democracy in an era of globalization and reduced legitimation of the national state. The Pigovian model brings home the often forgotten relationship between taxation (as a part of the regulatory sphere), macro-economics, and the political-philosophical context in which law and economics emerge. The model also takes into account the phenomena of globalization and financialization and is tested using the financial sector as an example. This book addresses the many challenges a Pigovian shift would imply for the sovereign and its national economies. Neoliberalism 2.0 demonstrates the ability to design a paradigm-changing alternative to the current tax infrastructure, while taking into account a low economic growth environment of the future, the implications of globalization and the changing relationship between citizens and their state.

1

Introduction

1.1An initial survey

The world is globalizing, although maybe not as much as we think. Nevertheless, there is a trend that emerged in the early 1980s that could be considered the starting point of what these days we call globalization. Over time, it has changed its dynamics and seen its fair share of setbacks, and the underlying drivers of development have been shifting. Those drivers ultimately resulted in the paradigm shifts that we have been undergoing in recent decades. Globalization was initially a one-way street along which the OECD or developed countries exported their products and services into non-developed economies and markets. Alternatively, those non-developed nations were used as a manufacturing hub for the world by Western companies, thereby engaging in labor arbitrage that fueled Western consumption with products that could be offered at steeply discount prices relative to average Western purchasing levels. These markets are called ‘emerging markets’¹ these days, although the term has become quite obsolete as it now captures pretty much every country in the world outside the OECD region. Some of them have even made it onto the OECD list in recent years. In the last 10–15 years those initial dynamics have been changing somewhat. The emerging economies now account for a large part of global growth, absorb their fair (and increasing) share of global consumption and involve approximately five billion out of the seven billion people on this planet.² Many questions can be asked about whether there is effective decoupling manifesting itself (to be precise ‘emerging economies growing and developing independently from their developed counterparts’) and about the sustainability of the way globalization was constructed, as well as how it undeniably altered the global competitive playing field for governments, companies and employees alike. All these, although they are engaging topics, are beyond the scope of this book.

In more recent times, however, the direction in which globalization will go, and in particular its economic dimension, has become unclear. What has become self-evident is that its initial fundamentals have to change in order to provide regained stability to the global marketplace. That stability would avoid excessive imbalances and accountability of nation-states for globalizing public goods beyond their national capacities and mandates. Globalization and the accompanying economic policies put in place also have unintended (or at least unwanted) consequences, in that the relationship between state and citizen has changed, yielding globally slower economic growth, which persists today. That phenomenon has been most visible within an EU context. Deeper integration efforts have been answered with renewed national sentiment, while democratic legitimacy within and between nation-states and the EU has been severely scrutinized. That process was fueled by anemic economic growth, inadequate governmental policies, and a tendency to efface the dynamics of the European welfare states.

But parallel to, and in symbiosis with, this globalization phenomenon the world has witnessed a certain number of key trends. It has been faced with challenges that relate to how to regulate those globalizing markets and asks for some fundamental questions to be answered. Those include, for example, how we can protect what we have created so far (welfare state concept, public goods, …) in order to build on it further rather than create a zero-sum game that will only redistribute wealth globally, without intrinsically adding any. I am not going to be able to answer most or even some of these questions in this book (even assuming that one could exhaustively list and survey the increasingly long list of theoretical and practical questions that come with globalization and its nexus with capitalism).

Underlying the dynamics of globalization is also a shift of global political and economic power and an attempt to respond to or anticipate those shifts. These shifts include on the one hand a concentration of economic power in the hands of a reducing number of global multinationals and networks (e.g. the World Economic Forum), and on the other hand the national sovereign states, which try to regulate markets and players that have become essentially global, but with a regulatory mandate and reach that is still pretty much domestic. That leaves them relatively powerless and frustrated while trying to regain control over markets and economic life, and their impact on societies – justifiably so, as they are ultimately still responsible for fostering domestic social and economic cohesion within their nations. The result is a pallet of all sorts of domestic measures and control functions that often also attempt to control and mitigate the possible downside of foreign activities³ in those respective countries. Those attempts often fail, for example when forming a regional or global steering mechanism to control truly global institutions such as the financial sector. With a handful of global banks, four global accounting firms, three global credit rating agencies, two global data providers, and a few sizeable law firms serving the financial sector, it has become unmanageable for domestic democracies and institutions. International and supra-national (regulatory) cooperation has proven to be difficult at a G7/G20 level (or on the EU level for that matter) on a variety of occasions and topics. The EU and its regulatory mandate for the region, despite the good, the bad, and the ugly, can still be seen as a poster child for enhanced regulatory, economic and political cooperation across the nation-states.

The 2008-initiated financial crisis put the global economy on the brink of a total meltdown. Its aftermath and the regulatory responses it triggered had very little impact on those global markets, global players, and the regulatory landscape. The headline-seeking initiatives, when analyzed with respect to the real change they created, included only minor ‘real and effective’ changes. Changes in terms of shifting the so-called negative aspect of the ‘globalization’ paradigm in order to make it sustainable and manageable, as well as creating effective control over global players, have been mostly absent. What made things worse is the fact that the unhealthy relationship between politics and the financial sector has deepened. Politicians sit on the boards of financial institutions, where they cement the ability of governments to finance themselves through the banking sector, which they provide with the liquidity to do so. This happens on most occasions through the central banking liquidity facilities they offer. It seems that globalization has created a top end of the global market that has exempted itself from the gravity and supervision of national regulators ‘in real terms’ and the dynamics of democracy in general.

This has happened because the banking lobby influenced the design, implications, and timing of new laws trying to regulate the market and the functioning of the financial sector. The concept of ‘too big to fail’, which essentially comes down to ‘too complex to regulate’, has left governments standing with their backs against the wall when bailing out institutions with a balance sheet often ten or (not exceptionally) hundred times larger than the gross domestic product of the respective home countries. Under distress, those global banking giants become national companies again, relying on the national budget of their home country. In that sense there is no ‘free market’ at the upper end of the globalizing market. Even more, democracy and free markets seem not to relate very well. Indeed, the austerity train racing through Europe not only had the intention to restore some order to national finances, but seemed to strip national governments of the ability to shape welfare states as they see fit, given their individual cultural, societal, and civic backgrounds. The limited fiscal ability remaining and the non-cyclical conditions imposed on government budgets have turned national governments numb and unable to respond adequately to deteriorating economic conditions in recent years.⁴

The implications of all the above have been significant, and include (1) governments struggling to keep their welfare states in place; (2) a significant change in labor relations, where certainty has been reduced and replaced by flexibility; (3) moderation of compensation for most of society, fueling limited economic growth; and (4) random tax hikes to fund budget deficits often combined with austerity measures gradually eroding the aforementioned welfare states. Austerity to protect the welfare state has led to nothing but the gradual fading out of the welfare state. In such a context, politicians have been reduced to technically administering the transition from a welfare state to a free-market state (‘state-market’). While doing so, they often use questionable governance models not reflecting the statesmanship required to adequately represent a nation-state. It is, however, characteristic of the reduced mandate of an administrator of the state-market.

In a context where the certainties in life that were built up over decades erode and where the purchasing power of citizens has been reducing for years, certain questions can be asked: With whom do I want to share my welfare and to what extent? How do I define my relationship to others in a world that seems seamlessly global? How do I perceive and define my freedom in a world without boundaries?

Those personal questions have a systemic impact on the functioning of our democracies, our national institutions, the way we relate to others in our societies, and the way we define solidarity. And, more specifically, the way we finance that solidarity.

1.2The taxation perspective

The nation-state has been under the weather in recent times. Part of that links back to the erosion of decision-making in favor of doing so at the EU level. Another part is to be traced back to the internationalization or globalization of most interactions in this world. These can be business transactions or human interactions in the private sphere. The functioning of the sovereign is further directly linked to its ability to raise government revenues and use the tax infrastructure as a tool to (dis)encourage socially accepted behaviors and conduct. Tax systems are essentially domestically generated and oriented in nature. That makes sense, as they historically were developed when economies were still inward focused and no signs of globalization were emerging. Over time, each sovereign has anticipated this globalization trend and has welded its tax system to that of others. That happened through a pipeline system of bilateral and asymmetric treaties. The essential functioning of these treaties is limited to avoiding ‘double taxation’ (both sovereigns in a transaction would otherwise tax), avoiding ‘no taxation’ (both sovereigns refrain from taxing or do not include a certain income in their taxable base), and facilitating communication and information exchange regarding those transactions. As those treaties are bilateral (or multilateral, as suggested in more recent times), the content is negotiated reflecting the economic and fiscal agenda as well as the relative bargaining power of each nation at the table. The OECD model convention is often used as a starting point and backbone for discussions. These bilateral negotiations have yielded a myriad of content-asymmetric treaties that have allowed those in a position to do so to benefit from these asymmetries and escape the gravity of taxation overall. This was further fueled by the fact that states, driven by globally accepted neoliberal policies, competed for capital and human capital through their domestic tax systems. That has resulted in a legally acceptable form of tax planning (tax avoidance) that has eroded the budgetary room of the national sovereign even further. It burdened those taxable objects that were not able to escape that gravity (often including labor income). The ongoing repair and maintenance efforts, including the most recent BEPS (Base Erosion and Profit Shifting) initiative of the OECD can therefore be qualified as ‘enhanced legal plumbing’ within that context.

Questions that can be asked in this respect are: Does it make sense to have tax systems that are to a large degree focused on their national markets and where tax systems are only linked to each other by a set of still bilateral asymmetric treaties in terms of their content? What is the role a tax system needs to play, beyond the pragmatic role of financing the budget? What should a tax system look like that observes the unique sovereignty of a nation while addressing the fact that value chains, value creation, and transactions are increasingly cross-border?

1.3The neoliberal context and the rule of law

Just focusing on the tax implications of globalization would be merely ‘symptom analysis and treatment’ and would disregard the deeper ‘root cause’ analysis and implications. Globalization has gone hand in hand for most of the century with capitalism, at least in the Western liberal-democratic nations. Capitalism can as such be described as a system based on individual (property) rights that leaves many of the transactions in a society to the free and private markets. It is the mechanism of the invisible hand that will lead to an optimal outcome for society in general.⁵ That free market embodies the aspirations of all aggregate individual aspirations. This was historically corrected, particularly in Europe, by a fair amount of supervision and correction by the sovereign. That occurred to ensure stability of the marketplace, avoid economically or socially unaccepted outcomes, and safeguard the place of ‘general public interest’ in what was a market driven by individual aspirations. Those industries where the interest was predominantly public often stayed under the control or at least the veto of the sovereign. That changed, starting in the 1980s, and was driven by the understanding that the expanding private market would enhance wealth generation and prosperity. It would relieve government budgets from hefty commitments in often underperforming industries and would allow the private market to decide what activities to maintain and which ones to shed. This has led to a wave of privatizations and deregulations in order to facilitate this happening. Looking back, and as illustrated in this study, growth disappointed and has been structurally lower than in the period prior to the deregulation wave. At the same time, sovereigns had to compete as part of the free market. Deregulation, rather than creating prosperity for all, has primarily resulted in the redistribution of wealth upwards, rather than across the board. This was and is particularly true for financial deregulation,⁶ but more broadly for deregulation overall. Deregulation was no longer about market enhancing efficiency, but about redistribution on the upside (‘insiders’). The privatization of essential utilities has cramped the purchasing power of citizens across the board and reinstated a type of postmodern version of feudal tax farming.⁷

The underlying driver of this trend, as will be argued in this study, is what we have come to define as neoliberalism. As will be demonstrated, this is not an economic theory or a political project as such; nor has it been captured in a program. Nevertheless, it has penetrated every aspect of public and private life. Even more, it has come not only to define economic and public choice decisions, but has also nested itself in our value system and degenerated our core values and morale, and became instrumental in our public and private governance models.⁸ To that effect, neoliberalism has not only contaminated the economic sphere of life, but also our relationship to the other and the sovereign, which are all perceived as moral and ethical hazards⁹ on the road to optimal self-development. It has allowed the economic models underlying neoliberalism to penetrate through its mainstream instrument ‘financialization’ and impacted society at large. The empirical validity of these economic models was extrapolated (or just misjudged) and society had to adjust to fit these models.

The direct nexus between neoliberalism and the ‘to be discussed’ Pigovian taxes (which are built around the theory of neutralizing externalities), is the fact that the legally and policy-anchored global neoliberalism is a continuous source of externalities. Those externalities often occur in a much more refined way than the more visible environmental damage, health damage, and the like. Externalities are not new and refer to the fact that individuals can be negatively impacted (and also positively though) by transactions conducted by other individual(s) and/or corporation(s), for which they are not compensated as their ownership rights in (often) public goods are not recognized by the market. The concept of (negative) ‘externality’ needs already here to be clearly separated from the better known ‘distortionary effect’ that taxes have on the functioning and optimal output of an economy. The former refers to third-party damage caused by a market transaction (or legislation trying to ‘discipline’ or ‘manage’ the market), while the latter refers to the fact that taxes create economic damage and result in an economy not operating in an optimal way (in terms of output) given the limitations and scarcity characterizing that market.

These externalities are subject to the same economies of scale as the market itself. A deregulated global market is an infinite source of externalities, especially when combined with a state that needs to compete in that free market. Some externalities produced by neoliberalism, or the root causes of them, are nested in legislation and policies, and therefore often below the radar. Externalities have historically been seen as disfunctionalities of the market. But the state and part of the free market (‘state-market’) has under neoliberalism become a source of externalities itself.

Particularly problematic has been the financial sector, where deregulation outsourced a public task (managing public deposits and ensuring stability in the public financial markets) to privately owned institutions. They acted and have been dealing as private companies, pushing the envelop...

Table des matières

• Cover
• Title
• Copyright
• Contents
• List of Tables
• 1 Introduction
• 2 Liberalism versus Neo-Neoliberalism
• 3 Changing Sovereignty, Democracy, Individual Freedom, and the Evolving Dynamics of Taxation in a Modern Neoliberal State within Europe
• 4 Constructing an Alternative Tax Model against the Background of a Changing (Tax) Sovereignty Paradigm within the EU
• 5 Applying Pigovian Taxes on a Regional Basis: The Quest for a Normative Model
• 6 A Pigovian Approach in a Globalizing Financial Industry
• 7 Conclusions
• Notes
• Index