It has become commonplace, in most documents produced by multilateral institutions, to call for a “regulated globalization” to correct the effects of free trade, and particularly the constant increase of inequalities within countries. Free trade has indeed reduced inequalities between countries (this statement is true only if China is taken into account, that country representing nearly 15% of global GDP; China aside, inequalities between countries have hardly decreased at all). Inequalities within countries constantly increase, especially if we consider absolute rather than relative inequalities. [2]
For some, this phenomenon may be explained by free trade itself, which forces participating countries to increase their competitivity. In a context where investment is chronically weak and gains in productivity very small, business competitivity increasingly depends on labor costs: by shrinking wages, businesses, or countries, retain the competitivity that is threatened by competition with extremely low-wage countries (particularly in the South). This competition is all the fiercer when production involves low-skilled labor (the textile sector, for instance, or toy manufacture). And yet we see that the specialization of Southern countries in low-skilled, low-paying activities (while Northern countries specialize in high value added activities requiring highly skilled labor... the famous “up-market stretch”) is giving way to “full-spectrum” production, going from factory work (textile, industrial) to innovation in domains as varied as aeronautics, space, automobile, pharmacy, and advanced technologies (specialized steels, robotics, etc.) once exclusively Northern. This “catching up” puts pressure on Northern economies, facing competition that makes light of traditional assignments.
Under these conditions, cost competitivity, especially labor cost, is the only card to play. In other words, lowering wages, particularly of less-skilled workers, who are competing most closely with generally less-skilled Southern workers. In Europe, wage deflation is encouraged by the “structural” reforms promoted by the European Commission as part of the responsibilities laid out for it by such treaties as the Stability and Growth Pact and the European Semester reform (the Sixpack and Twopack of 2011 and 2013 respectively), [3] allowing Brussels to place States “under programme,” of which wage deflation is an essential point.
What “regulation” can States use to correct the negative impact of globalization and fight inequality, or at least limit its growth, in such conditions? The OECD, WTO, and IMF call upon States and redistributive policies to correct the deleterious effects of free trade. The attentive reader will immediately grasp the fallacy: in a free-trade world, any “expense,” direct or indirect, raising production costs, whether a tax on production (investment or fixed capital included in revenue), on profits, or social security payments raising labor costs, reduces economic competitivity and may thus be counterproductive. A wealth tax or inheritance tax is thought to have a deterrent effect. Only general taxation, distributed [indifferently] over the entire population, remains. VAT or any other social security payment on the order of the CSG (contribution sociale généralisée, introduced by France’s Juppé government in 1995 to finance national healthcare expenses through taxation).
These policies have their limitations, because they weigh relatively more heavily on poorer households and their return may be weakened when their rate increases (they have a directly depressive effect on consumption, and particularly on the consumption of poorer households, which save little and consume at home: their spending behavior is thus absolutely essential to national economies). To these remarks, we must add that VAT is very difficult to collect in countries whose economy is essentially informal: merchants who are supposed to collect and return it to the tax administration are rarely registered and do not fulfill the obligations incumbent on the formal sector. In such countries, wealth inequality is often considerable, and taxes weigh heavily on wage-earners and civil servants. Most tax revenue comes from taxes on multinational businesses’ exports—but such businesses benefit from a very favorable tax rate, and even that may be avoided by strategies such as transfer pricing or tax havens. Often multinational businesses are concentrated in the primary sector (extraction of primary materials, such as minerals or hydrocarbons) and employ little local labor. Capital flows caused by activity in the sector most exposed to competition allow financial intermediaries (banks, investment funds) to derive income from capital. This sector is followed by a cohort of small service suppliers (particularly in real estate). Except for the latter, mining or financial businesses employ little available labor. The formal sector most often employs, in Southern countries (low or intermediate revenue), only 10 to 15% of the economically active population (i.e., those employed or potentially employable). Taxation is often considered illegitimate by the population, for the simple reason that it rarely sees any benefit from it (failing public services, corruption). Redistribution involves only a small number of people, salaried employees and those entitled to certain rights (a social security card, for instance), from which most of the population is excluded.
Governments are not eager to expand their tax base, because they benefit from the informal economy, including sectors with very low hourly productivity (small shops, etc.), to obtain a kind of general consent to low or zero-value tax rates, which apply to individuals as well as to juridical persons. This is a general mindset that accepts as legitimate tax exemptions benefiting the rich and big businesses. Meanwhile, informal employment, untaxed and not subject to social security payments, supplies cheap services to the elite.
Generalized fiscal competition is intrinsically related to free trade: unable to protect its production against imports of products whose production cost is low, and on condition of being able to export, in return, equally cheap products, taxes on production, social security contributions, or any other form of taxation (of revenues or inheritance) are seen as handicaps. High revenues, on the other hand, are considered necessary to the national economy according to “trickledown economics.” Despite economists’ denials, [4] this fairytale is still maintained by international institutions (WTO) and liberal economists (eg. Hernando de Soto). The WTO attributes inequality to technological innovation (which deprives low-skilled labor of work): automation certainly contributes to this general trend, and argues for a taxation system adapted to capital. Given the increasing share of automation and algorithms in value creation and production processes, it would be reasonable, from our point of view, for robots to pay a universal contribution to a “lifetime salary” to each individual, without correlation to salaried employment, which is destined to extinction. Provided that measures are adopted in order to allow flow control (of capital, goods, and services) and protection of those economic spaces which will be the first to implement such reforms. Redistributive policies cannot be reestablished and expanded unless they are part of a strategy of protection for internal markets wherein collective preferences (for saving, consumption, redistribution, etc.) translate onto the economic level, without having to be justified or requiring economic partners to adopt identical policies. Protections of this nature must be extended as cultural specificities which, without being exclusive, require coordination and mutual assistance. Perhaps one day redistributive policies will be part of every society, in the name of a universal notion of acceptable levels of economic (income and inheritance) inequality. In the meantime, nothing must prevent more egalitarian societies (like ours [5]) from protecting the bases of their social cohesion, so that in fact “social distinctions—and particularly economic inequalities—are based only on general utility,” as the founding fathers of our Republic wished.