Tax rates and income inequality
“Treasury Secretary Janet Yellen has been clear since her confirmation hearing and subsequent press appearances that the Biden Administration needs to raise new tax revenues…Part of the solution is reforming the corporate tax rate- not just in the US but far beyond its borders. To that end, Yellen is in active talks with other countries about setting a global minimum rate for corporate taxes” — Insider
Clearly we have another sign that the Reagan-Thatcher, go-go 1980s are over. Redistributive fiscal policies appear to be making a comeback after three-plus decades, except in a so-called developed country where it needs it the most.
That country? Bermuda.
I read with interest William Soares’s Letter to the Editor in The Royal Gazette on March 23 and I agree with his overall critique of the Budget submitted by the finance minister Curtis Dickinson on behalf of the Government. I would also agree with him that once again the Government has been adept at kicking the can down the road — the Premier’s chief talent, it seems. But neither they nor Soares, who has a distinct conservative bias, has risen to the occasion and proposed the type of transformative policies to our political economy that reflect and prepare Bermuda for the major geopolitical and strategic changes that are now under way and have been before the words “Covid-19” or “pandemic” were on anyone’s list.
These redistributive policies being proposed in the United States, by way of President Joe Biden’s administration, as articulated by Treasury Secretary Janet Yellen, are the types of changes that represent a major sea change in ideology and public policy away from neoliberal dogma, which prevailed during this period. They include the introduction of a wealth tax on top earners and the first significant rise in the US corporate tax rate in three decades.
Even more groundbreaking is that the US is now prepared to sign on to the establishment of a global minimum tax rate. This rate is intended to halt the race to the bottom on taxes that has been damaging to countries globally, particularly poor ones. Tax havens such as Bermuda have taken advantage of this global financial ecosystem for some time. What has been the straw that has broken the proverbial back on this issue? At its heart has been the massive increase in income inequality and its impacts that most Western countries, including ourselves of late, have experienced over the past few decades — essentially since the 1980s.
The Organisation for Economic Co-operation and Development reports that income inequality in OECD countries is at its highest level in decades. Further, it states that “the average income of the richest 10 per cent of the population is about nine times that of the poorest 10 per cent across the OECD, up from seven times 25 years ago”. It is important to note that these figures do not take into account how the pandemic, which began in early 2020, has actually worsened income inequality globally, including in Bermuda.
The same Insider article cited work from the very conservative Tax Foundation, which stated that since the 1980s the “worldwide statutory corporate tax rate has consistently decreased”. The biggest declines occurred during the early 2000s. The Biden Administration is also proposing a massive fiscal stimulus package of $3 trillion in total, broken into two Bills to address major public investments in infrastructure and other progressive, so-called people-focused, public-policy goals.
It seems that fiscal policy will now take the lead in the US over monetary policy set at the Federal Reserve. President Biden, to his credit, has always projected himself as a moderate, even at times a centre-right, Democrat throughout his long career and he ran as one — but he has turned that on its head. He is now tacking leftward, unlike the Progressive Labour Party government, which is still mimicking the old script. Biden instinctively knows that the times call for a massive change and not just mere reform. We are entering into a new epoch. The Democratic Party is ready to take the party back to its roots in a way that echoes more Franklin Delano Roosevelt than Bill Clinton.
The fundamental problem here in Bermuda, though, is as Soares highlights in the context of the recent Budget that the trick that has been playing out quite often over the past few years by mostly PLP governments in Bermuda has been to knowingly oversell while consistently underperforming upon assuming office. They don’t seem to have gotten the message that it has reached its shelf life.
In the matter of government debt, both the Fiscal Responsibility Panel’s report of 2018, which I cited in an op-ed in January 2021, and Soares concluded that economic growth alone will not dig us out of this fiscal deficit and debt hole that we are in. And note that report offered its dismal assessment pre-pandemic. Yet, here in Bermuda, our centre-right PLP finance minister and our conservative premier seem to believe erroneously that economic growth alone, as I explored previously, will almost miraculously take place of over the next fiscal year and beyond.
The reality is that local corporate bodies and international business — the purveyors of finance capitalism more broadly — are the worst offenders when it comes to contributing equitably to our tax base. But they must be indispensable to fixing this problem. We are not China circa 2005 in terms of the economic growth rate and are unlikely to become China anytime soon. We will not see, as Soares indicated, an additional $800 million in gross domestic product at a minimum to address the projected deficit of $125 million for 2021 anytime soon and something tells me that the finance minister must know this.
Moreover, with the proliferation of these new more dangerous mutations of the virus, any economic forecasting that would project solid economic growth for 2021-22 is likely to be unrealised. This notwithstanding the slow but growing numbers of those vaccinated or news that one of the Royal Caribbean ships has committed to “homeporting” in Bermuda over the summer. Even that glimmer of positive news, with others potentially to follow, may never occur if we experience another major spike in transmissions locally — as appears to be the case right now.
On Saturday we crossed a record-breaking threshold of 81 new transmissions in a 24-hour period and for the first time heard the Premier announce, unfortunately, that community spread has finally arrived in Bermuda. It seems that the more contagious and very virulent British variant has begun to take a significant and growing toll on Bermuda’s population. This alone has the potential to certainly upend some of the more credible economic projections announced by the finance minister only days before.
Unlike Soares, however, I believe that cuts to government spending, which he advocates, and the targeted, yet substantive raising of taxes, which he does not, must occur because we really have no options left especially now — in order to avoid going over the finance minister’s fiscal cliff. We must do the following as a minimum:
• Execute cuts in spending that preserve jobs as much as possible
Wielding an axe to Civil Service, government and public-sector jobs would result only in the collapse of whatever consumer demand is left in an economy now experiencing an historic deflationary cycle that is entering its fifth month. The announcement by the Government that the last quarter once again saw a negative inflation rate should be very concerning. In July, as the daily reported, Bermuda recorded its first negative inflation rate since 1965. Too little inflation is just as bad as too much; just in a very different way.
It would be simply counterproductive to place relatively well-paid public-sector workers out of a job. Although we may have no choice other than to reduce the size of the Public Service workforce in the short to mid-term if we do not enact option B at a minimum. Remember, the era when we easily could have our cake and eat it, too, has now ended as even the sinking fund has for all intents and purposes run dry. In the third quarter of 2020 our economy declined by 5.9 per cent.
Which leads us to the indispensable option B:
• Impose a corporate income tax on all corporations and partnerships in Bermuda
This is long overdue, especially in the international business/financial services sector, which still represents an oasis amid an encroaching economic desert for the rest of us. This is unavoidable. Having the ability to work at home, workers in the financial services and international business sector, along with the majority in the public sector, have experienced little in the way of economic hardship.
Globally, as the International Monetary Fund has confirmed, income inequality — which was bad enough before the pandemic in the West, as noted above in places such as Britain, especially the US and even Bermuda, one of the tarnished stars of neoliberalism — has now exploded as a consequence of the pandemic accelerating economic insecurity and poverty for many as one of it chief by-products.
Look at the growing lines of want and food insecurity at any food bank or charity feeding programme island-wide. I seldom go into Hamilton much these days, but I was absolutely floored in seeing the extraordinary lines at the cathedral in Hamilton during one particular midday period where the line for the daily meal snaked out of the church hall and headed west for half a “New York City block” in length.
One other observation: my guessitmate is that well over 95 per cent (wink, wink) of the waiting recipients were Black men and women. Ditto at the Eliza DoLittle site or at the Presbyterian church across from Belmont Hills golf course — both in Warwick and both experiencing unbridled demand. But every site island-wide is seeing these lengthening lines of woe.
Curtis Dickinson, the quintessential Wall Street banker, who only three weeks ago in relation to the Budget while outlining the phenomenal economic decline, essentially said “well, at least we still have international business” without a hint of irony. He appears to be oblivious that international business’ phenomenal, largely untrammelled growth over the quarter century has come with a significant cost on the downside and has contributed immensely to the mess that we find ourselves in.
Second, that at least significant numbers of Bermuda’s working poor, most of whom are Black, form at least 40 per cent at a minimum of his party’s base. They were also part of that voting bloc that, to the tune of more than 5,000 registered voters who while voting in 2017 for the PLP, emphatically stayed home only 40 months later at the last election. They have also those who have been most affected by the rampant growth of income inequality that has been in part driven by the enormous expansion of international business or the financialisation of our economy .
As to international business, I have never been an uncritical cheerleader of that sector. That is not to say that I do not appreciate its benefits. However, too many have been blind to what it has brought in its wake. It’s a fairly complex picture. I for one do not believe the fairytale that it has paid its fair share of the tax burden at all. Remember they pay 0 per cent in corporate income tax in Bermuda along with non-exempt corporations such as Ascendant, Butterfield & Vallis, Dunkley’s etc.
It’s long overdue that the one of the greatest tax havens in human history — that would be us — ensure that the sector along with other major corporate players in Bermuda pay their fair share as well.
As in the US and Britain, the problem we have had in Bermuda is not that financial services aren’t necessary. They are. But rather that when financial services become too large a share of one’s economy, as outlined in the research paper called the Finance Curse: how oversized financial centres attack democracies and corrupt governments by Nicholas Shaxson and John Christensen, it tends to hollow out or as they describe it or crowd out other economy sectors overall with only financial services and the sectors that service it showing any real sustainable growth over time.
It also is a dominant sector that means it can use its leverage and dominance to influence governments by way of what is called “political capture”, crowding out other legitimate interest to their political benefit. They no longer dance to our tune; we dance to theirs. They also note that what begins to happen over time, as financialisation of the economy continues, is that finance begins to grow far faster than the broader economic growth. That has been the case in Bermuda for many years — at least since the late 1990s.
The growing global chorus calling for change with respect to the proposed global minimum corporate tax rate if implemented would be multilateralism’s finest hour in years, shifting the pendulum of Western political economy back towards the egalitarian Left. And it would allow our future governments to exact an equitable share of tax revenue from international business and those at the top 5 per cent to 10 per cent of income without the threat of those companies leaving. Because if successfully adopted and implemented by the global community — and that is not a given at this point — countries and tax havens such as the Cayman Islands, British Virgin Islands, Mauritius, Switzerland or Guernsey will all have to adhere to and impose the same range of corporate taxation. As it stands right now, these exempt companies in Bermuda pay in effect a 0 per cent corporate tax rate while literally hundreds of billions of dollars pass through or are domiciled here tax-free.
As I said in Parliament not too long ago, I don’t want their charity or paternalism. What I want and what the people of Bermuda and the world deserve is for them to pay their fair share so that a country that is so wealthy in terms of private wealth can possess a government that can not only pay off most of its debt but one that, as the US is beginning to do now, can strengthen its social safety net so that it can provide unemployment insurance, establish a healthcare system to be proud of with full universal care for the Bermudian people and residents — pre-pandemic, more than 5,000 mostly Black Bermudians were without health insurance — and provide enhanced care and pensions for our rapidly ageing population, to name but a few items on the long-overdue list.
I also want a corporate landscape that looks like Bermuda. Four decades after international business’ meteoric rise, we are now only hearing the words “racial diversity” and “inclusion”. Shame on them and us.
• Rolfe Commissiong was the Progressive Labour Party MP for Pembroke South East (Constituency 21) between December 2012 and August 2020, and the former chairman of the joint select committee considering the establishment of a living wage