W ith a quarter of a million people on the streets of London protesting against the UK budget cuts, and with the US government days away from a potential shutdown, social divisions over fiscal policy are deepening. It is not hard to see why. Both the US and UK have had a profound shift of income distribution from the poor and the middle-class to the rich in the past 30 years, yet the fiscal adjustments are dominated by sharp cuts on public services combined with reductions on corporate tax rates. The social contract is under threat. Only international co-operation can solve a runaway social crisis in many high-income countries.
The political and economic forces tearing our societies apart are very powerful. The rise of globalisation, and especially the entry of China and India into the world markets, has driven down wages of low-skilled workers while giving new opportunities for investments. The pre-tax income of the top 1 per cent of households has soared, from 10 per cent of household income in 1979 to 21 per cent in 2008 in the US, and from 6 per cent in 1979 to 14 per cent in 2005 in the UK.
With capital globally mobile, each government aims to attract mobile capital by cutting corporate taxation relative to others. The rich doubly benefit: by the underlying market forces of globalisation and by their governments’ policy response.