As overt socialists such as British Labour Party leader Jeremy Corbyn and “Democratic socialists” like Alexandria-Ocasio Cortez climb in the polls, it seems that the far-left is growing in power and appeal.
Regardless, the long-term political future of Western far-left political movements in the West is very bleak. And movability of capital is why.
As the growth of technological innovation and the tech sector per se makes it easier for businesses to maintain strong market access regardless of their tax domicile, businesses will have ever increasing means of avoiding high tax domiciles. This is especially problematic for left-wing movements in Western democracies, where government policies are ultimately accountable to electorates in elections. After all, politicians like Corbyn and Bernie Sanders budget for their massive spending by positing on the foundation of imposing much higher corporation taxes. But if they can’t tax businesses without pushing those businesses abroad, they’ll be unable to collect the revenue they need to pay for their other spending priorities, and they’ll invite increasing unemployment. That’s a recipe for losing elections.
To their credit (albeit the intellectual detriment of their movement) some on the far-left admit this vulnerability in their philosophy. A prominent British far-left economics commentator recently argued that for socialism to work most effectively (yes, that’s a contradiction in terms), there’s a global “need for limits on capital mobility.”
Sorry, far-leftists, it’s not going to work.
For a start, why on Earth would a flourishing economy with low corporate tax rates ever sacrifice its competitive advantage to benefit another economy? It’s economically nonsensical and, in terms of geopolitics, utterly absurd. Do we seriously think a pro-business president like Donald Trump, or Singapore’s hyper-capitalist government wouldn’t jump at the chance to remain outside of a high-tax arrangement and thus take businesses from subscribing nations? Of course they would! And the movers and shakers of the 21st century: in sectors such as technology, advanced electronics/components, and pharmaceuticals, would simply relocate.
But that only speaks to a broader point against the socialists here. Namely, whether it would even be preferable for societies to have a high tax-treaty arrangement. Because even if you assume – as socialists do – that business owners would continue their economic activities at the same scale under higher tax regimes as they do under lower regimes (and they wouldn’t – especially in the case of entrepreneurs), it’s worth asking whether such tax regimes would be good for social interests in the first place?
And I believe the answer is firmly in the negative.
The underlying issue here is whether government is a better investor of capital than private businesses? Yes, depending on your policy interests, you might believe that government provides effective investment in limited matters of national defense and some measure of entitlement protection. But the history of economic development suggests that private industry is a much better investor at the margin. What is the evidence for this claim? Put simply, the fact that pro-capitalist nations such as America are more successful than pro-socialist nations such as Venezuela. But this isn’t just about efficiency, it’s about outcomes. It’s about the fact that capitalist societies are the ones that drive forwards the new innovations that make our lives easier (iPhones), more empowered (Amazon), and longer (new medical treatments). These things flow from the capitalist bargain of innovation that offers reward to the innovator and valued service to the consumer.
As I say, the Left has a big problem. Not only will its agents be unable to prevent capital movement away from high-tax domiciles, but the social benefit argument favors capitalism. Of course, it’s up to conservatives to make that case!
