The Competition State

Zucman conservatively estimates that $7.6 trillion is invested in hidden offshore bank accounts, the equivalent of 8 percent of the world’s total wealth. That translates into at least $200 billion in lost tax revenue every year, according to his estimates.

Zucman is almost certainly correct that the offshore banking economy is the primary reason corporations have managed to pay much lower tax rates than they’re supposed to. As his data indicate, the nominal rate of taxation on capital has fallen substantially in recent decades, but the effective tax rate has fallen even more, down to just 15 percent of corporate profits.

If our long-term goal is to restructure the state’s finances in order to redistribute wealth from the rich to the poor, we certainly need to close the gap between nominal and effective rates. To do this, Zucman proposes the creation of an international financial register that would record asset ownership across national boundaries, rendering secret banking all but impossible.

Zucman’s plan, if enacted, would be a momentous accomplishment. But it would only solve part of the problem.

Even if the world’s superpowers got serious about ending tax evasion and committed to this type of cooperative record-keeping, the broader pattern of diminishing taxes on capital would persist. As long as money can flow frictionlessly from one country to another, states will find it hard to hike their effective rate. Faced with a situation in which other governments can always offer a slightly more generous investment climate, they become “competition states,” relentlessly pursuing private investment.

The problem, in other words, is not merely the legally dubious pattern of tax evasion facilitated by tax havens, but the legally acceptable pattern of tax avoidance facilitated by neoliberal globalization.

Our Forgotten Best Option

Most economists recognize the conundrum of capital taxation. Zucman’s research partner, Thomas Piketty, has described the problem in detail and has suggested instituting a comprehensive global wealth tax — an idea that even he concedes is utopian.

It is hard to imagine the nations of the world agreeing on any such thing anytime soon. To achieve this goal, they would have to establish a tax schedule applicable to all wealth around the world and then decide how to apportion the revenues.

A global wealth tax would prevent capital from hopping from one polity to another to avoid taxes by making rates the same everywhere. While the international cooperation and institutional capacity needed for such an undertaking may be lacking now, Piketty argues that the global wealth tax is nonetheless an important long-term goal for economic progressives.

This may be so, but a global wealth tax, like Zucman’s global registry, would still leave capital free to move at will, whether to shop around for weak regulations or low wages.

We therefore need to consider the idea of reintroducing capital controls — a system of taxes and limitations on international transfers of wealth.

Capital controls have been used by almost every country at one point or another. Typically they are used to protect a country’s currency from destabilizing activities by speculators.

They were in effect for this reason in most Western countries throughout the post–World War II Bretton Woods period. Throughout the late 1920s and ’30s, currency speculation had wreaked havoc on international markets, making steady trade between North America and the European states impossible. At the 1944 Bretton Woods conference, development-minded policymakers agreed that the best way to protect trade was to implement capital controls and keep their currencies pegged to the gold standard.

Their main objective, then, was to safeguard capitalism, not restrain it. As Leo Panitch and Sam Gindin have argued, the international system of capital controls was not very robust, and Washington’s long-term commitment to it, given Wall Street’s persistent complaints, was always shaky.

States administered the restrictions on a purely voluntary basis, and they were far from comprehensive. International trade in stocks, bonds, and currency was restrained, but foreign direct investment (the buying or building of plants or companies in another country) was generally exempted from the controls.

Enforcing controls was also a major challenge, as offshore-style transactions began to emerge. Typically, offshore banking involves transfers of money to shell companies that are disguised as payments for services never actually rendered.

For instance, an American company might send several million dollars to a fake consulting firm registered in the British Virgin Islands whose bank accounts are in Switzerland. Both the giving and receiving bank accounts are controlled by the same people. But regulators may not see the full picture and think they are looking at a perfectly legitimate transaction.

Distinguishing between the two varieties — capital and current account transactions, in the parlance — was already a major challenge for regulators in the Bretton Woods era. The advent of computerized banking made it even more difficult.

In many ways, the controls were deficient even in their heyday, and in the 1970s the system broke down entirely. The Nixon administration decided to ditch the gold standard; profits on Wall Street were depressed by a weak domestic economy; and the opportunities for profitable investment abroad seemed endless. Most importantly, US dollars had begun leaving the country as a result of the country’s trade deficit, and both bankers and policymakers were keen to lure them back by offering high-return financial services.

For all these reasons, capital controls were dismantled in 1974, marking a watershed victory for finance and an enormous defeat for workers.

Today there is little incentive for Western states to protect their currencies from the sort of fluctuations that occurred around the Great Depression. Futures and derivatives enable transnational corporations to hedge their risks on the currency markets; the US dollar remains the global currency; and Europe has the euro. Only a handful of countries (all with vulnerable, crisis-prone currencies) maintain capital controls. As Benjamin Cohen has noted, since the early nineties the US and the International Monetary Fund have been immensely successful at prying open the capital accounts of virtually every country with which they do business.

All this means that reintroducing controls would require serious and unprecedented forms of political action, tied to a vision that understands both the limitations of Bretton Woods and the complexity of the global economy. In all likelihood, the difficulty involved in implementing controls would necessitate either very strong international cooperation, or a revolutionary move to nationalize the banking sector, or both.

But these daunting prerequisites should not overshadow the real benefits of capital controls. In the postwar era, they enhanced governments’ policy autonomy, precluding massive capital flight and enabling states to tax companies at rates that today seem fantastically high.

Falling Wages, Falling Taxes

Ending tax breaks on capital gains, as Bernie Sanders proposes, would be a positive step forward. But without controls, it would make international tax havens even more appealing than they already are.

Welfare-friendly economists at Bretton Woods understood this well. As Keynes stated:

Surely in the post-war years there is hardly a country in which we ought not to expect keen political discussions affecting the positions of the wealthier classes and the treatment of private property. If so, there will be a number of people constantly taking fright because they think that the degree of leftism in one country looks for the time being likely to be greater than somewhere else.

The dynamic Keynes alluded to may represent the most powerful and important limit to what left-wing governments can actually accomplish. As various socialist strategists have observed, constraining capital’s ability to circumvent high tax rates would be an essential prerequisite for implementing major redistributive policies such as a universal basic income.

Controls could also directly strengthen labor’s hand. Indeed, economic analysts now generally agree that rising capital mobility has weakened labor’s bargaining power and with it, workers’ share of national income.

For instance, in an extensive survey of capital account liberalization and its relationship to income share, Kang-kook Lee and Arjun Jayadev concluded that increasing capital mobility shrinks labor’s piece of the pie. This, they write, is “strong evidence for the claim that a liberal financial regime may . . . reduce the relative power of labor versus capital.”

If this analysis is correct, then the liberalization of capital flows has been a strong contributing factor to labor’s declining share of income in the G7 countries.

Consider the United States. Labor’s portion of total GDP fell from 69 percent in 1970 to 61 percent in 2014, and capital’s increased accordingly, from 31 percent to 39 percent.

Part of this shift can be observed in the profits of American banks themselves. After losing ground during the successive recessionary waves of the seventies, the financial sector rebounded in the early eighties, expanding to new markets like sovereign debt and various forms of international banking. Whereas financial sector profits between 1948 and 1990 averaged 1.2 percent of GDP, from 1990 to 2015 they averaged 2 percent of GDP.

This is where proposals like Piketty’s come up short. While his global wealth tax could claw back some money and redistribute it, free-flowing capital would continue to exert downward pressure on wages everywhere.

The Class Politics of Capital Controls

But will restrictions on capital flow capsize the economy?

It is true that this kind of policy move could seriously damage investor confidence and cause a temporary crisis, yes. From a governmental standpoint, that is no trivial matter. François Mitterand’s attempts to rein in the financial sector in the early eighties ended in fiasco, because the state’s existing controls were not tight enough to prevent investors from ditching the franc and depressing its value.

But contrary to bourgeois assumptions, there is no strong evidence that capital account liberalization spurs economic growth. In fact, Lee and Jayadev’s data suggest that “where capital controls have been used as an active part of industrial policy . . . there is a significant positive effect on growth.”

Economic growth is of course no panacea, as the struggles of workers in high-growth countries like China and India illustrate. But these findings starkly contradict neoliberal common sense about development and global capitalism.

They also throw the class politics of the current moment of financialization into sharp relief: capital controls would carry potential benefits for almost everyone, and could certainly help reverse inequality and shore up deteriorating public services. Free capital flows, on the other hand, benefit only the upper echelons of the financial sector, a few multinational corporations, and anyone with enough wealth to exploit offshore financing.

Governments’ ability to truly set the agenda, or even collect an adequate level of taxation, seems weak today. Financial tax avoidance remains effectively legal, and the system of offshore secrecy — long known to politicians — is barely questioned.

Today, as capital searches the globe for the most favorable places to invest and absconds to other countries to skirt taxation, we need to find ways to break from the free-trade agreements that have defined the neoliberal period and reinstitute controls on capital. Only then will workers begin to regain at least a measure of control over the economy.