Issues in Interdisciplinarity 2020-21/Power in policy-making

Introduction

Wealth distribution by percentile in the United States

In 2014, Oxfam came to a shocking conclusion: The 85 richest people in the world owned as much wealth as the poorest half of the entire world population. This report sparked a recurring debate about wealth inequality and how to effectively redistribute wealth. The strongest economy of the world, the U.S.A. do not set a good example for other economies in this regard: data has proven the growth of wealth inequality in the US since the 1970’s and has been further rising in recent years. Redistributive Policies are vital theories and concepts in the economical and political world to reduce inequality and to find a sustainable way of development, with a fair trade-off between growth and equity. One major issue in the design of redistributive policies is the conflicting influence of economists and political scientists on policy-makers. These policies differ in nature, but one constant tool used for reallocating wealth has been taxation. However, the extent to which taxation should be used as a tool for redistributing wealth has caused a divergence in opinions between economists and political scientists. On the one hand economists see taxes as one way of solving problems of market failure,but remain cautious on the effects on economic growth. On the other hand, political scientists focus on the social aspect of taxes, which should be used to provide financial stability, in order to build an inclusive society. From where stem these diverging opinions on wealth redistribution and why does economical influence appear to have the upper hand in this debate?

The US corporate tax: a focus on growth or on redistribution

Economists argue that a decrease in corporate investments may occur when firms face higher corporate tax-rates. This prevents potential further growth of the labour demand, leading to higher productivity, employment and an increase of the Gross Domestic Product (GDP) . A lower corporate tax thus benefits the US economy by increasing economic competitiveness and capital investment, linked to an expansion of the corporate tax base and living standards across the country. Thus, in order to prevent a reduction of the GDP due to the possibility of offshoring to countries where the corporate tax rate is lower (Cayman Island and Singapore) than in the home country By keeping low corporate taxes, tax neutrality is facilitated, allowing  decisions not to be based on taxes but rather on other economic reasons . An example of how a reduction in corporate taxes is beneficial to the economy is the ’Tax Cuts and Jobs Act of 2017 9. The previous 35 percent federal corporate tax did not exploit all the economic opportunities because the new corporate tax of 21 percent is expected to become a more powerful tool in boosting the economy . Thus, the overall wealth of the country would increase, enhancing general welfare along with it .

‘A crude distinction between Economics and Politics would be that Economics is concerned with expanding the pie, while Politics about distributing it’ . In the 1970s, growth was prioritized, which led to ‘the growing concentration of income-generating assets in private hands’and to a reduction of the total revenue of governments. The corporate tax, which is one way for the government to collect revenue, is used to redistribute wealth and correct market failures. However, to which extent political action must be taken to equilibrate economic exchanges has been largely discussed. The moral political concept of distributive justice defined as the “study of the morality of the distribution of economic goods and services” , is a key concept of J.Rawls’ theory . It states that without knowing our initial birth conditions, anyone would choose a fair distribution of wealth. How citizens think about wealth redistribution and equity nowadays is mostly due to their own sociocultural perception of poverty. For example, Americans have a strong belief in the principle of meritocracy; being rich only depends on your willingness whereas Europeans see poverty as an economic scourge where high corporate taxes would rebalance the injustice.

The meritocratic belief of Americans is not always reflected in their public policies. As citizens generally dislike passing laws calling for new taxes, politicians rarely tend to use tax policy as an advantage for their electorate and consequentially, the established tax system mainly designed by lawyers and economists, is never questioned. In comparison to investments in other public services, the effects of taxation on the individual are hard to grasp. This incertitude allows knowledgeable persons of interest to step into the discussion on law implementation and subsequently leads to the creation of more flexible laws for high-income groups. Big corporations are one group that hugely benefit from this. As taxation is a burning topic in our society, elected governments will prefer inaction to please potential future voters rather than explain how raising certain taxes could be beneficial to a large proportion of its electorate .

Conflict of power between economics and political science

The campaigning process in the United States to become senator or representative amounts to a concerning sum spent to endorse candidates. In 2020 the total amount spent on congressional campaigning alone is estimated at more than $7 billion.  Thus, candidates do not have sufficient funds for their own campaigns (except if they are extremely wealthy), and rely on donations to support them. By providing substantial funds, donors can give a competitive advantage to a candidate by raising his/her public visibility through ads, campaign events and fundraising for more donors.

This implies that wealthy stakeholders, including big corporations, can lobby their way into policy-making, by sponsoring their prefered candidates with substantial funds. The American campaign system can therefore be compared to a market, where buyers invest in certain candidates, hoping to get returns on their investments through beneficial policy-making. Taking this economical approach to the problem, shows how donors use economic principles to shape tax policies: they use power in form of resource dependency, by solely funding candidates with shared economic beliefs.  

As for any other policy issue, the power that political scientists can exert, to convince candidates to propose higher or lower taxes as part of their agenda, is to raise public awareness about the issue. This will build a strong electorate for a candidate advocating for higher or lower taxes. Hence, political science uses the overt dimension of power: power as decision-making. It enhances collective knowledge about the issue to the electorate, which in turn influences the candidates because it elects them.

We mentioned the difficulty of explaining how raising taxes can be beneficial for most voters, which would lead to power as resource dependency dominating over power under the form of knowledge.

Conclusion

We have demonstrated that in the US, the pure aspiration for economic growth does not benefit everyone. The involved lobbying of big corporations in tax policies has led to the debate being centered around economical implications instead of also considering political dimensions. Within a political process, it leads us to be aware of inequalities through awareness-raising-campaigns. Finally, providing more unbiased platforms, where the benefits and limits of taxation are explained, could provide a stage for economists and political scientists to present their views in a more collaborative manner and mitigate their conflict.