A new report published by the United Nations Conference on Trade and Development (Unctad) argues that policymakers should consider taxing profits from productive entrepreneurial activity at a lower rate than those derived from financial activities as part of efforts to deal with the growing global problem of growth-sapping inequality.
The recommendation is contained within the 175-page ‘Trade and Development Report, 2012’, which was released globally on September 12 under the theme of ‘Policies for inclusive and balanced growth’.
Unctad economist Alex Izurieta, who presented the report's findings in Johannesburg, said the recommendation of differential tax rates was premised on the need to stimulate long-term growth and development by improving levels of employment, as well as employment conditions.
Various solutions were considered by the authors, including aligning tax rates to the creation of jobs. “In that way, you are discriminating immediately between the financial and the industrial sectors, because the financial sector doesn’t create as much employment,” Izurieta asserted.
Higher rates should apply especially on speculation and unearned capital gains, which “provide no benefits to the overall economy”.
“Taxation of transactions in equity, bond, currency and derivatives markets, applied internationally or nationally, may help check a further expansion of destabilising speculative activity,” the report stated, adding that taxing financial-sector bonuses at a higher rate than regular wage incomes could also reduce the incentive for excessive risk taking.
Besides considering tax regimes that discriminate in favour of industrial sectors, the report also calls for deployment of progressive taxation systems to ensure that high-income earners contribute more to government revenues.
Unctad argues that, while lower taxation on high-income groups and company profits was expected to lead to greater growth-supporting investment, the reforms actually fuelled inequality without providing better social services, higher investment and stronger employment creation and growth.
For resources-rich developing countries, such as South Africa, Unctad recommends that governments seek to appropriate “a greater share of commodity rents” to ensure that this wealth benefits the entire population and not only “a few domestic and foreign actors”.
“There appears to be considerable scope in many countries for collecting a larger amount of royalties and taxes, especially from companies active in the oil, gas and mining sector.”
Izurieta said commodity prices had supported growth in Africa, but warned that these prices had become more volatile, partly because of the growing presence of financial investors in commodity markets. The report notes that there was almost a 40-fold increase in commodity assets under management between 2001 and 2011.
There should also be a recognition that the terms-of-trade gains were likely to be temporary and, therefore, should not be relied upon to sustain government revenues.
“However, even if temporary, the higher rents and windfall profits in the primary sector can still be used to help accelerate productivity growth and job creation elsewhere in the economy. This requires special taxation of the windfall profits and channelling them into productive investments elsewhere in the economy.”
Apart from the progressive tax recommendations, the Unctad report also suggests greater public spending to reduce inequality, as well as active policy interventions to avoid further “wage compression”, as a tool for expanding employment.
In fact, the report argues that cutting wages in the context of a fragile recovery would be counterproductive as it would dampen demand even further.
By contrast, higher wages and lower inequality could stimulate demand and output growth, which could provide the basis for increased investment.
“If overall productivity grows without a commensurate increase in wages, demand will eventually fall short of the production potential, thereby reducing capacity utilisation, profits and investment.”