4. Where can fiscal policies make a difference?

I would like to emphasize two points in this respect. The first one is an emphasis on relative change to the tax burden, away from manual labor and towards capital. The second one is the introduction of a global tax to support the Global Social Contract previously mentioned. None of these points are new; they have been debated for a long time. Perhaps the time has come for these ideas to become a real policy.

4.1. Taxes on manual labor and capital
With the growing sophistication of technology and the resulting increased production levels -and the consequential decreasing amount of manual labor to reach a certain performance- it is one of the great paradoxes of our times that manual labor (employment) continues being so largely taxed. This is so in general terms but especially in Europe. The "gap" continues being important with respect to the contributions to social security by the employer and the imposition on the people, each one corresponding to some 50 per cent of the gross salary. At this stage everyone agrees that the taxes on employment must be reduced. According to statistics by the European Union, the taxes on capital were reduced by 10 per cent, on average, between 1980 and 1993, while the taxes on manual labor were increased by 20%, on average.

This indicates a general problem. According to the traditional economic wisdom, the taxes on capital gains should be low in order to attract more investment and capital. But recent studies have shown that higher taxes on capital gains lead to faster growth. Since the capital gains tend to accumulate in the case of adults, their taxation reduces the tax burden on the young, leaving more income for them out of which they may save. A higher tax on the capital gains implies a more reduced tax on the work income, which provides the young with a higher net income thus allowing them to save. Higher savings lead, at the same time, to a more rapid growth.7

This is obviously a largely complex issue and it is manifested in different ways from one region to another. Should "value changes" of property sale and individuals' actions be taxed? Should both capital losses and gains be taken into account? And the list could be continued. But, in the end, one of the main issues of the tax regime of the XXI century -in an era of high technology, unemployment and high capital gains- is how to design the best method to make manual labor cheaper for the employer and compensate him by making the capital more expensive.

4.2. A global tax for the global social contract
The above is the most urgent, since the governments of both developed and developing countries are discovering that their tax base is wearing away, especially its capacity to levy taxes on investment income and gains and corporate finances. In industrial countries, cash flows circulate throughout the world, making it difficult to define the benefits for tax purposes and to identify in which country the benefits to be taxed have been generated. The other countries are subject to such pressure to grant tax concessions, tax reductions and other incentives that they are the victims of an obsessive competition by the foreign investment. This wearing away of the tax base on the capital has increased the tax burden on manual labor as I have already mentioned. Globalization has forced governments into imposing a tax on the production factor that is less unstable, which has led to tax revolts. At the same time, the large amounts of "speculative capital" have given way to a great volatility in the financial markets.

How should we face the paradoxes and instability inherent to this state of affairs? One solution is to develop a tax on the companies dealing with these aspects of globalization. We can think of three possibilities: the Tobin tax on the volume of foreign currency; a tax on the direct foreign investment to support the labor and social reforms worldwide; and a single tax on the corporate profits that reduces the establishment of transfer prices.



The Tobin tax

The Tobin proposal was initially designed (1972) to promote financial stability adding a cost to speculation. If at the same time it created income, this has been a secondary benefit. Some time afterwards, the income derived from the Tobin tax became the core of the debate on global taxation.8

The original Tobin statement imposed a uniform international tax on all foreign currency conversions in cash. The tax had to be introduced simultaneously in all countries and it had to be identical, so that the financial institutions could not take their foreign currency transactions to a fiscal paradise and thus avoid tax on the business volume. Such a tax would have the additional advantage of restoring a degree of control on the monetary policy for the central banks, which today have lost certain monetary autonomy and tend to become passive repliers of the private financial markets.9 Tobin's original proposal consisted of a 1% tax rate which has continued to be the reference point in subsequent debates.

Over the last years the Tobin tax has mainly been seen as a possible income source which could be dedicated to multilateral purposes. Tobin himself suggested so in his 1978 article (see footnote) as a sub-product of the tax proposed, not as its main purpose. Tobin himself considers that the main property of the business tax is that it would automatically punish the comings and goings of the short-term funds, affecting at the same time in insignificant manner the trade incentives of the basic products and the long-term capital investments:

"A 0.2 percent tax applied to the comings and goings of funds to another currency exchange costs 48 percent a year if it is negotiated each working day; 10 percent if every week; 2.4 per cent if every month. But it implies a trivial burden on the trade of basic products or long-term foreign investments".10

The Tobin tax would create a very important amount of annual revenue (hundreds of billions of dollars, depending on the daily transactions and on the accurate tax rate). There exists no other global tax creating so much income. It has the combined advantages of a low fiscal tax rate with a minimum impact on capital markets, low distortion effects and an easy management. The other new global tax idea -echo taxes- would collect less, it would present higher rates and it would potentially produce higher distorting effects.



Fixed capital taxes

I do not have enough time to discuss the other tax possibilities that I have mentioned above. It is sufficient to say that the companies have improved their ability to avoid taxes through such devices as the establishment of transfer prices. There are two possibilities that would once again secure the lost base through capital turnover: one is a direct tax on foreign investment; the other would identify more specifically the gains achieved in each country of operation and it would focus the enigma of the establishment of transfer prices.11

7 For further information see Harald Uhlig and Noriyuki Yanagawa, "Increasing the Capital Income Tax may lead to faster growth", European Economic Review 40 (1996), pages 1521-1540.
8 See, among others: James Tobin, "The New Economics One Decade Older", The Ellot Janeway Lectures on Historical Economics in Honour of Joseph Schumpeter, 1972, Princeton University Press, 1974; James Tobin, "A Proposal for International Monetary Reform", Eastern Economic Journal 4, 1978, pages 153-159; Mahbub ul Haq, Inge Kaul, Isabelle Grunberg, The Tobin Tax, Coping with Financial Volatility, Oxford Univesity Press, 1996.
9 In this respect, see Howard M. Wachtel, The Money Mandarins, M.E. Sharpe Publishers, New York, 1990.
10 James Tobin, "Prologue", in Mahbub ul Haq et al, The Tobin Tax, op.cit, p. xl.
11 For those interested in further details, see Howard M. Wachtel, "The Mosaic of Global Taxes", a study presented at the Lecture on Global Futures on ISS 45th. anniversary, La Haye, October 1997.