In choosing this title for the section, I am not suggesting that the standard policy prescriptions are without value. It is right that Europe, faced with the twin challenges posed by globalization and technological change, should emphasise education and the up-skilling of the labour force. “Smart growth” makes sense. In the same way, I support calls for a return to a more redistributive tax and transfer policy. Rises in top income tax rates, or the introduction of a luxury rate of VAT, can contribute to fiscal consolidation and help ensure that the burden of fiscal adjustment can be more fairly shared. But I also believe that we need to look beyond the options currently prominent in public debate, and be willing to “think outside the box”. The proposals sketched in this section may immediately be dismissed as politically infeasible; however, I would like to urge that they be given serious consideration.
The policies are grouped at the national level, the EU level, and the global level, with two under each head.
One of the lessons of the economic crisis is that the determination of pay is not a matter from which governments can stand aloof. Citizens have become increasingly aware of the fact that pay is not simply a product of market forces but that it is influenced by institutions and social norms that govern the behaviour of workers and employers. The job search model now standard in the macro-economic literature makes clear that any job match generates a “surplus” which has to be shared between the two sides. In the lower ranges of earnings, the decline in the strength of trade unions has reduced their bargaining power. At the other end of the scale, the rise in top earnings reflects the fact that the surplus is larger – on account of technology and global reach – but also that the division of the surplus is increasingly being tilted in favour of top earners. Such a tilt may result from increased bargaining power, with executives attaching more weight to pecuniary rewards (a development that may in turn be explained by the reductions in top tax rates). The tilt may also result from changing social norms, with top earners are exercising less “restraint” than in the past.
In this context, national governments can influence the distribution of earnings. This could take the form of enhanced minimum wage legislation, to tackle the problem of “in work poverty”. It could be a lighter touch exercise of moral suasion, as in some incomes policies in the past, coupled with publicity concerning the extent of pay differentials. In between, in degree of intervention, would be the use of government purchasing power to insist on fair pay practices by private contractors, coupled with the active use of shareholdings in companies part or wholly owned by the state.
Inequality is not only about pay. National governments should also give serious consideration to the ownership of capital, and specifically to schemes for asset-based egalitarianism (see Ackerman and Alstott, 1999). In the United Kingdom, such a scheme was enacted in 2004 in the form of child trust funds, which were a vehicle for saving tax free with a contribution paid by the government. (The funds were abolished by the Coalition Government on coming to office.) The idea is however an old one. Thomas Paine in 1797 in his Agrarian Justice proposed:1
“To create a national fund, out of which there shall be paid to every person, when arrived at the age of twenty-one years, the sum of fifteen pounds sterling, as a compensation in part, for the loss of his or her natural inheritance, by the introduction of the system of landed property” (Paine, 1797).
To fund it, he favoured taxing inheritance, and it seems important today to reconsider the role of inheritance taxation. Historically, the taxation of wealth transfers was an important source of tax revenues. In the United Kingdom, in the 1930s, a higher proportion of the population were taxed on their estates at death than typically paid income tax on their incomes in any one year. The role of inheritance declined over the twentieth century, but there are signs that it is returning in importance. In France, we have seen a significant rise in the amount of wealth passing from one generation to another, with a particular role played by gifts inter vivos (Piketty 2011). This evidence of the return of inheritance points to the re-establishment of effective taxation on lifetime wealth transfers received, based on the (indexed) total amount received in bequests and gifts over the lifetime. Calling it a lifetime capital receipts tax, rather than a transfer tax, would emphasise the aspect at which the tax is directed – the transmission of unearned advantage.
In this section I consider two proposals that are radical, but not outlandish. Both are in fact discussed in the recent report on Employment and Social Developments in Europe (European Commission, 2012). The first proposal is for an EU-wide unemployment benefit. This is far from a new idea, having been proposed – without success - by the Marjolin Report in and supported by the MacDougall Report in 1978. The latter saw such a step as an important aid to the operation of monetary union:
“Apart from the political attractions of bringing the individual citizen into direct contact with the Community, it would have significant redistributive effects and help to cushion temporary setbacks in particular member countries, thereby going a small part of the way towards creating a situation in which monetary union could be sustained” (MacDougall and chair 1977, page 16).
Fast forwarding a third of a century, the proposal has been put back on the table in the report to the December 2012 European Council Meeting on the Roadmap Towards a Genuine Economic and Monetary Union (Van Rompuy, 2012) (see, for more details, Andor (2012)).
What would an EU-wide unemployment benefit mean? What would be the relation with existing national systems of unemployment benefit? It is assumed that Member States would be expected to maintain their national benefit systems: i.e. they would not simply reduce their national benefits by the amount of the EU-benefit. The most straightforward EU scheme could take the form of extending the duration of unemployment insurance beyond the current national limits. As such it would closely parallel the federal extended Unemployment Insurance benefits in the United States. When unemployment reaches a threshold level, US states are required by federal law to extend benefits. In 2013, under the Emergency Compensation Program, benefits are paid according to a tiered scale: for example, up to 54 weeks where the state unemployment rate is 6 per cent or higher, reaching a maximum of 73 weeks where the unemployment rate is 9 per cent or higher. Extended unemployment insurance would in itself help address the problem of benefit exhaustion in national schemes, but other aspects would require action on the other benefit conditions. Here the EU scheme could, more ambitiously, seek to harmonise conditions such as those regarding “voluntary entry” into unemployment, availability for work, and refusal of job offers. An alternative would be to re-open the idea of a X+1th state, under which the EU would constitute itself as an additional state providing an autonomous social security system. 2 Initially envisaged for migrant workers, for whom it could be either voluntary or compulsory, a European Social Security System could be opened on a voluntary basis to all EU citizens. As such, it would provide a benchmark for national systems.
Our aspirations for reform of EU social protection should not however be limited to unemployment benefit and we need to consider new forms of social security. Of these, perhaps the most discussed is the idea of a “citizen’s income or a “basic income”, whereby a universal benefit is paid individually to all citizens, varying across Member States according to their circumstances. Again this is an old idea, but – with one exception – has not been adopted as part of European social protection. At a national level, it has typically been most discussed at times of reconstruction, such as after the Second World War, and in that sense it may be a natural idea for the EU to consider as part of a major “leap forward”. It does however raise the issue of the basis for eligibility. While a basic income is often described as “unconditional”, there has to be a qualifying condition. This is usually taken to be citizenship, but citizenship is not the same as the basis for taxation nor is it evidently the right basis in an EU labour market. Citizenship would mean that a Swedish worker in France would receive the Swedish basic income, not the French basic income. The rationale for a basic income that varies across countries is that the basic income should vary with the cost of participating in a particular society. An alternative approach therefore is to make the basic income conditional, not on citizenship, but on participation in society. “Participation” could be defined broadly in terms of social contribution, which for those of working age could be fulfilled by full- or part-time waged employment or self-employment, by education, training or active job search, by home care for infant children or frail elderly people, or by regular voluntary work in a recognised association. It should be noted that the qualifying non-market activities would require validation.
The exception to the statement that a basic income had not yet entered European social protection concerns child benefit. The payment of a universal benefit for all children, perhaps varying by age, can be seen as a specific form of basic income. Such payments are common in EU countries. If the EU is to go down the basic income route, then a natural starting point is with an EU basic income for children. Some ten years ago, the High-Level Group on the future of social policy in an enlarged European Union (European Commission, 2004) made such a proposal, as part of a possible “inter-generational pact”. In concrete terms, this could mean an EU-wide basic income for children, set, say, at 10 per cent of median income per capita in each Member State for each child, administered and financed by each Member State. Such a programme – refined in its details – would allow the EU to invest in its future – children and human capital.
A natural reaction to my earlier discussion of progressive taxation, such as raising top income tax rates, is that the world is very different from the 1950s and 1960s. Today a nation state is limited by global fiscal competition. This is clearly the case, but it does not imply fiscal impotence. Rather it points to the need for a global tax institution. This cannot be called a World Tax Organisation, but could – provided the Women’s Tennis Association agrees – be called a World Tax Authority.
Such a WTA should have a two-fold mandate. The first, and immediate, task is the co-ordination of national tax regimes, allowing the effective enforcement of national tax policies. The second is the administration of taxes on a many-nation, ultimately global, basis. The establishment of “global taxes” may appear totally unrealistic. There are however reasons to suppose that we are, slowly, moving in that direction. Recent years have seen significant steps towards the exchange of information and steps to close down tax havens. Public opinion has moved decisively against unprincipled tax avoidance. The EU moves towards a financial transactions tax suggests that flexible geometry works.
Finally, I have focused on rich countries and on inequality within countries. We cannot however ignore the interdependencies between countries. The policies pursued by OECD countries and by the EU have consequences for the rest of the world. If production is repatriated from Asia to the US, then this reduces the employment prospects of Asian workers. Nor can we ignore the fact that 2015 – the date for achieving the Millennium Development Goals – is rapidly approaching. Even if in total some of the key targets are being achieved, the success is not uniformly shared among developing countries. Brazil is on target to meet many of the goals; Benin is unlikely to meet any. Even if the number of people living below $1.25 a day is halved, that still leaves a major problem of world poverty after 2015. The United Nations needs to set an ambitious agenda for the next 15 years.