Saturday, May 21

More taxes, and more progressive, to mitigate inequality

Inequality has increased in recent decades. Interest in measuring and analyzing it has also increased. And it has been found, in case it wasn’t already clear, that high levels of inequality have harmful effects on our societies. It distances equal opportunities, necessary to provide social justice to the economic system. It constitutes a brake on the growth and development of societies. And it poses a serious threat to the continuity of democratic systems.

After the great recession of 2008, inequality increased markedly. The crisis created by the pandemic, despite its more “egalitarian” origin (the virus does not look at income before attacking), also has more damaging economic consequences for the weakest segments of society.

The public sector plays, in the most developed countries, a crucial role in mitigating inequality, through its redistributive policies. In Spain, a recent study concluded that, before the pandemic, taxes and social benefits reduced inequality in employment by 35%. household income distribution.

Economic policy has generated a forceful response to the pandemic, with fiscal and monetary policies acting hand in hand in an enormously expansive manner, adding extraordinary instruments of great power to those that were already being used on a regular basis. This means that, surely, the performance of the public sector today reduces inequality by a percentage greater than that mentioned. Thus, another more recent study indicates that, in full confinement (spring 2020), unemployment benefits, together with the transfers provided to workers in ERTE, allowed cushion 80% of inequalities salaries created in that dramatic situation.

We can explain it another way. Citizens directly observe the very negative effects that the virus has had today in terms of physical and mental health. And we see the many economic projects that have had to be abandoned and the workers who saw their wage incomes decline. What we do not see, because it is not directly observable, is what would have happened in the absence of public policies. What would have happened if we did not have a welfare state built in the last 40 years or the decisive action of economic policy in the present. The previous data barely allow us to get a minimal idea of ​​the catastrophe that we would have faced.

The economic response to the health crisis has involved a sharp increase in public spending. The purchase of vaccines has been addressed, social benefits and economic aid have been increased; ERTEs have been strengthened, notably lowering the cost for companies to keep these workers on their payroll. And aid has been approved at an unprecedented European level. This formidable increase in public spending has been financed with public debt. And unlike what happened a decade ago, this public debt has not yet had a negative impact since it has been bought by the European Central Bank within the design of that strongly expansionary monetary policy.

But this economic effort based on spending financed with public debt cannot be sustained for much longer. Monetary policy must turn if we do not want current inflation rates to consolidate. And if there is something that exacerbates inequality in a society, it is sharp price increases. In the fiscal field, we must gradually return to the path of budgetary stability. Hopefully the reform of the fiscal rules that is being studied in the framework of the European Union concludes with a successful agreement that will lead us to more effective, transparent and simple rules to apply. Resuming the current ones, now suspended, would be a drag on the recovery of the economy.

At the national level, it is time to design a comprehensive tax strategy. That, among other objectives, seeks to reverse the advance of inequality. For reasons of justice and economy. To achieve this, we must guarantee the financing of a welfare state that generates at least the same benefits as the current one. We must do it at the same time that we reduce our public debt ratio (if we do not want to be grossly unfair to the younger generations).

The aging of our population implies that it is necessary to spend more (and also better, reinforcing the steps already taken in terms of evaluating public policies) to provide the same benefits. In case it was not already evident, the pandemic makes it possible to visualize, through suffering, the costs necessary to properly care for the elderly population.

Thus, the time has come for a profound tax reform that increases the collection capacity of our system. Politicians who argue otherwise must take off their mask and show the consequences of what they proclaim: a sharp decrease in the quantity and quality of health, educational and social services, in parallel with a sharp increase in inequality. A future scenario with some winners (the richest) and many losers, and which poses a serious threat to the stability of our democracy.

In addition, given that to mitigate inequality the State now relies mainly on benefits, we must accentuate the redistributive potential of taxes, providing them with greater progressivity. In this regard, personal income tax is the tax that admits a greater margin of adaptation. The inheritance tax has a low collection potential, but it is the tax figure created specifically to contribute to equal opportunities, since a large part of the wealth is inherited. The design of the tax is very improvable in Spain, but the politicians who use their margin to annul this figure make an explicit declaration of their appreciation for more unequal societies.

Let us trust that the experts that the Government has gathered are right and provide the keys to increase the collection capacity of our taxes. That would make it possible to continue financing a welfare system that, especially through benefits, already contributes to containing inequalities. Let us also hope that these advisers give clues to enhance the contribution of taxes to income redistribution. But then our Government should not waste any more time.