Matt’s Links: War on climate change, international corporate tax agreements

War on climate change (Wade Davis, The Globe and Mail): The global economic recovery from the Great Recession remains weak and climate change presents a global threat that will require significant investments to overcome. These circumstances provide an interesting parallel to WWII and the aftermath of the Great Depression. In the 1940s, allied powers made big, all-hands-on-deck investments and overcame both major challenges of the time. The U.S., for example, invested 40% of its GDP in the war effort, and this investment has been credited by many economists with restoring aggregate demand and returning the economy to full employment.

The Intergovernmental Panel on Climate Change (IPCC) estimates that an investment of only 1% of global GDP annually (~$800 billion) over the next two decades is sufficient to transition to 80% renewable energy and keep greenhouse gas (GHG) concentrations below 450 ppm (the limit scientists suggest as being needed to avoid catastrophic and irreversible damage). For comparison, this is half of the stimulus investment rate agreed to by the G20 countries in the the immediate aftermath of the Great Recession. In Canada, 1% of GDP investment would amount to just over $18 billion annually; in the U.S., it would be just under $170 billion annually. Given the integration in the global economy, stimulus would surely be synergistic across countries – having a greater positive impact in each country the more countries participate.

With COP21 coming to a head in Paris, there is still an opening for a large coordinated stimulus commitment aimed at adopting and developing low-carbon technologies and infrastructure. So far, there have been some spending commitments on renewable energy – including $10 billion from 20 countries (including the U.S., China and India), added onto the $100 billion annually until 2020 the OECD agreed to in 2009 in Copenhagen – but these commitments are still small relative to what’s needed. The International Energy Agency estimates that actual (as opposed to committed) global spending on low-carbon and climate-resilient infrastructure is only about 5% of what’s needed to avoid catastrophic climate change impacts.

International agreement on corporate taxes (Toby Rogers, Social Science Research Network): A new study from the Canadian Center for Policy Alternatives (CCPA) found that periods with high corporate tax rates and high public spending were periods of highest growth, arguing that corporate tax cuts are bad for economic growth. Other studies however (e.g. by the OECD, and by Price Waterhouse Coopers for the federal Dept. of Finance) have estimated the marginal effects of corporate tax on economic growth to be negative. How do we make sense of this apparent contradiction?

While it may be tempting to wonder if some of the studies are bending their inferences to suit their political leanings, anyone who’s familiar with the Prisoner’s Dilemma should also be able to see how both perspectives can be (and I suspect probably are) simultaneously right. Low trade barriers create a race to the bottom, in which any country – taking the corporate tax rates of other countries as fixed – is made better off by lowering its corporate tax rate; but all countries are better off if they all have high corporate tax rates (and high public investment) than if they all have low corporate tax rates. This was the conclusion of a 2013 study by Toby Rogers, a PhD candidate at the University of Sydney and a former UC Berkeley Masters student under Robert Reich – the U.S. Secretary of Labor under Bill Clinton.

If corporate taxes do indeed represent a Prisoner’s Dilemma, what’s the solution? In similar games, you can get socially beneficial cooperation by punishing defection from other players. For this reason, Rogers suggests it may be time for a binding international agreement on corporate taxes. Interestingly, he notes that such an agreement would likely not need to include all countries – just the largest economies (the OECD plus the BRICS) – and that this type of international cooperation on tax policy would not be entirely without precedent. Both the OECD and the European Union agreed on terms of reference in the late 1990s to avoid ‘harmful tax competition’. However, these agreements were not legally binding and had only modest success. Unfortunately, Rogers also notes that the increasing influence of money in the politics of most major economic powers does not bode well for the adoption of ambitious, legally binding agreements to raise corporate taxes. But those concerned with rising income inequality, crumbling infrastructure, and an underfunded war on climate change can dare to dream…

One thought on “Matt’s Links: War on climate change, international corporate tax agreements

  1. Pingback: Academia’s conservative problem | The Tête-à-Tête

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