Here are some examples of the consequences of this competition between states in Europe:
•Tax competition. Between 1997 and 2007, the average corporate tax rate in the old EU countries fell from 38 to 29 per cent, in the new EU entry countries from 32 to 19 per cent. Cuts in corporate tax rates started as early as in the 1980s. Between 1980 and 2006 the average company tax rate in the EU-15 (UK) fell from 49 (52) per cent to 30 (30) per cent; for the EU-25 it was only 25 per cent in 2006.2 Eurostat: ‘Finally, the EU has by and large become a low-tax area when it comes to statutory corporate tax rates.’3
•At the same time the top personal income tax rate in the EU-15 (UK) went down from an average of 67 (60) per cent in 1980 to 48 (40) per cent in 2006. For the EU-25 it was only 42 per cent.4 US President Reagan lowered the top tax rate in 1982, initially from 70 per cent to 50 per cent, and then to 28 per cent.
•Transition to dual income taxation. Profits on interest and from dividends are increasingly subject to a flat tax and no longer to an individual, progressive tax rate. That means that the higher the income, the higher therefore the income tax rate, the more the taxpayer profits from the flat tax upon income from interest.
•A shift from direct to indirect taxation, primarily taxes upon consumption. The main source is the value added tax (VAT). According to EU regulations, the VAT can range between 15 and 25 per cent. In the last few decades, the rate has approached the upper limit. Thus, between 1980 and 2008 the VAT in Germany rose from 13 to 19 per cent, in the UK from 15 to 17.5 per cent, in France from 17.6 to 19.6 per cent, and in Italy from 14 to 20 per cent. In the course of the euro crisis, the VAT has been further increased in many countries. Added to this are rising so-called ecological taxes on energy. Taxes upon consumption disproportionately burden poorer households whose income is spent primarily upon consumption.
•The tax burden on labour in the European Union started growing strongly in the early 1970s and continued to grow. The consequence: a shift in the tax burden. In 2007, within the EU-27, consumption taxes have contributed a third of the total revenue from taxes. Taxes upon employed labour income amount to about 40 per cent of the share. About one-fifth falls upon taxes on capital.
•Part of the competition between states to attract capital was, alongside tax policies, wage policy and the weakening of labour unions, whose negotiating position weakened on the basis of increasing unemployment and tangible repression against organized labour, particularly in the US and Britain. As a consequence, since the 1970s and 1980s, in every single industrial country the share of national income accounted for by wages declined.5 The share of income from business activity and wealth rose accordingly. From the 1980s until the 2000s, the share of economic performance allotted to capital income rose by about 11.5 per cent in Germany, 18.7 per cent in Italy, by about 19.4 per cent in France and by about 18.7 per cent in Spain. In the United States and Britain, the increase was almost 8 per cent for both.
Declining taxes on capital, declining wages – the consequence was an increasingly unequal distribution of income and wealth. Since the 1980s on, the gap widened in almost all industrial countries.6 Thus in the US, the share of total income of the wealthiest 5 per cent of households grew from 22 per cent to almost 34 per cent between 1983 and 2008.
This development, however, was not regarded as a scandal. It was usually explained as a consequence of ‘globalization’ (that is, the greater reservoir of labour available to business worldwide, which is to say increased competition between workers for jobs) and of ‘technological change’ that gave an advantage to highly skilled workers and exerted downward pressure on the income of low-skilled workers.7 This growing inequality was thus regarded first of all as an inevitable consequence of ‘globalization’ and ‘technology’, and secondly as the result of the necessary and growth-promoting competition between countries for capital and investment. Inequality was positively regarded even within social democratic political parties as a spur to performance and thus an engine of growth.8 According to the ideology, all would profit from this promotion of growth in accordance with the motto: a rising tide lifts all boats.
This legitimation of inequality encountered difficulties with the financial and economic crisis starting in 2008. The crisis incurred enormous costs – especially for the bank bailouts – which precipitated an increase in public debt. Between 2008 and 2013, the government gross debt for Euro states grew from 70 per cent to 93 per cent of economic output. In the UK, it increased from 52 to 91 per cent of economic output, in the US from 73 to 104 per cent, and even in Japan, where public debt was already at 192 per cent, it increased to 244 per cent.
This increase in public debt was essentially due to the financial crisis.9 However, politicians and the majority of economists interpreted it as a problem of state expenditures under the mantra ‘we’ve been living beyond our means’. Financial markets were not regarded as the source of the crisis; conversely, the slogan was put forward that through austerity policies, states would have to win back ‘the trust of the markets’.
The consequence in many countries was a drastic reduction in expenditures and a search by states for new sources of revenue in order to decrease budget deficits. This put the question on the table: who should pay for the costs of the crisis and the bank bailouts? The value added tax was increased in many places, which made consumption more expensive. The crisis and austerity programmes led at the same time to a considerable decline in wages and social benefits. Largely spared, in contrast, were the banks, although they were simultaneously pilloried as the parties responsible for the crisis. The ‘wealthiest’ were also spared, this despite the fact that the share of the wealthiest per centile of the population of total pre-tax income in all industrial countries had risen for decades, thanks also to the developments that had ultimately led to the crisis.10
With the crisis it also became clear that it was not only public debt that had risen. The debt of private households and businesses had increased for decades. Thus total debt in the US (for both the public and private sector) amounted at the beginning of the 1980s to about 120 per cent of gross domestic product (GDP); but by 2008 it had risen to 240 per cent of GDP. In the eurozone, the ratio of total debt to GDP had risen from 150 to almost 300 per cent, in the UK from 150 to 280 per cent, and in Japan from 250 to almost 400 per cent.11 These obligations on the part of debtors corresponded to the claims of creditors; it thus reflected the rise in private financial wealth.
Crisis, debt, growing inequality and enormous financial wealth – all of that called for an explanation and split the thinking of the economic mainstream, which had been rather unified before the crisis.12 The still orthodox ‘neoliberals’ among these economists interpreted the crisis as a consequence of the failures of states, in particular of erroneous interest rate policy on the part of central banks. For others, in contrast, the crisis was a consequence of a liberalization of financial markets that had gone too far.
Alongside all this, in the years after the outbreak of the crisis, many scholars and institutions began to also discuss the growing gap between rich and poor as a cause of the crisis. What had earlier been the domain of leftists and critics of capitalism had reached the mainstream. The latter now problematized growing inequality; not, however, primarily as a social problem or a question of justice, but rather as a problem for the economic conjuncture and economic stability. It was pointed out that growing inequality was an important, if not the decisive, reason for the crisis of the financial system. The upturn of the stock exchanges and a tendency towards the decreasing taxation of capital gains had supposedly led to a swelling of financial wealth which discharged in crisis. With a more just distribution of wealth and a stronger tax burden upon wealth, the state could thus contribute to making the economy and the financial system more stable. It could also create new sources of revenue in order to limit or decrease public debt.13
The following are a few examples of reconsideration by the mainstream:
•In November of 2010, the IMF published a working paper14 that pointed out the connection between growing inequality and financial crises. Three years later, a similar paper followed.15 Income inequality, warned the IMF, could lead to non-sustainable growth, since