International

Davos Chief’s Call for Higher Taxes, More Regulation Would Mean Less Prosperity

Klaus Schwab, founder and Executive Chairman of the World Economic Forum, addresses a news conference ahead of the Davos annual meeting near Geneva, Switzerland, January 14, 2020. (Denis Balibouse/Reuters)
No, the system that has brought the developed world amazing growth, health, education, and prosperity has not run its course.

Klaus Schwab, the founder of the World Economic Forum, which famously meets every year in Davos, Switzerland, is advising a “Great Reset” of economic policy as a way of recovering from the effects of the COVID-19 pandemic and addressing climate change. This will require that we “reconsider our collective commitment to ‘capitalism’ as we have known it” (scare quotes in the original), and acknowledge that consumers are allegedly more interested in corporate-sponsored social-welfare programs than in buying goods and services at a reasonable price.

In a much-read commentary recently published by Project Syndicate, Schwab rightly praises the massive advantages in wealth and human well-being achieved since the end of the Second World War, but then refers to the policies that have made them possible as “shibboleths” that “need to be re-evaluated.” He uses the term neoliberal to label the policies he thinks needs to be changed, and which is, apparently, synonymous with “free-market fundamentalism.” Neoliberalism may have brought the developed world amazing growth, health, education, and prosperity, but apparently all of that has run its course.

But do neoliberal policy priorities such as low taxes and limited government really need to be ushered out the door? Schwab claims that free-market fundamentalism has “triggered a deregulatory race to the bottom,” which suggests that the major economies of the world are operating under some kind of laissez-faire anarchy. This will come as puzzling news to scholars of government regulation.

The Competitive Enterprise Institute’s Wayne Crews, for example, has been publishing an annual report on the cost of federal regulation in the United States for over 25 years, and his findings show the opposite. Even with a small, but welcome, decline in new regulations issued during the Trump administration, the lumbering, inertial mass of the regulatory state continues to grow; in numbers of rules, budgets of enforcement agencies, and total economic cost on Americans. The 2020 edition of Crews’s report “Ten-Thousand Commandments” finds that costs are as high as they have ever been, at over $1.9 trillion a year, or over $14,000 per U.S. household.

The same could be said of tax receipts, which Schwab claims have been the subject of “ruinous” competition between international taxing authorities. Putting aside the implied assumption that we should all want higher tax rates and collections, taxation in the United States in no way reflects the big-government bias of critics such as Schwab. For decades we have been informed that heartless austerity measures have starved essential government services of necessary revenue. But whatever is wrong with such services, it’s not a lack of total revenue.

The percentage of gross domestic product collected by the U.S. federal government in taxes has been an extremely stable average of about 17 percent during the post-Second World War era that Schwab focuses on. It was almost 20 percent in 2000, and hit a recent low of around 14.5 percent in 2010 (it was 16.2 percent in 2019.) Federal income tax rates in the U.S., contrary to much left-leaning criticism, are actually quite progressive. Tax receipts thus decline significantly following recessions, which disproportionately hit wealthy households who pay the majority of federal income taxes. There may be a number of problems in how this revenue is currently being spent and by whom, and how much deficit spending Congress already engages in, but that’s an argument for government reform and spending restraint — not raising taxes.

The fact that recent economic history does not comport with his views, however, only addresses half of the problem. Schwab, along with many influential thinkers who have decided that we all need to “re-examine” capitalism, is right to warn that a misinformed reaction against neoliberal policy among the voting public could cause the “ideological pendulum” to “swing back toward full-scale protectionism and other lose-lose economic strategies.”

However, by libeling the spectacular success of the market economy and global trade, he’s feeding the anti-liberal reactionaries as much as anyone. If elected officials around the world decide to spend more tax money on vaccines or climate-change research, as Schwab and his fellow critics insist, they can certainly do so. They just can’t ignore economic and political reality along the way.

Taxpayers are going to expect a reasonable order of priorities when their money is spent, and the same is true of profit-seeking investors. The global regulatory cartel that technocrats such as Schwab envision — a system of supranational policymaking that insulates politicians and CEOs from the demands and expectations of their most important constituents — is exactly the course of action that will end the “neoliberal revolution,” and with it, the prosperity that it creates.

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