Berlin Declaration - ideas and consequences

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Although it is focused on three areas of public policy, the main economic theme of the Declaration is global inequality, and the political theme is the rise of the right. Since the early 1980s, income and wealth inequality has decreased globally, but has increased within individual countries (especially within the US, Russia, and India) due to tax cuts, deregulation, and market liberalization. Global inequality today resembles the level of inequality in the early 20th century. Despite economic progress that has improved general well-being (which is often cited as an argument by market economists), global inequalities remain high, similar to the level they were at during the era of Western imperialism.

Inequalities also conditioned the political subtitle of the declaration "Bring back the people" (Winning back the people). The goal, then, is to reverse the intellectual trend from the sixties and seventies - which brought Margaret Thatcher and Ronald Reagan to power in 1979, respectively. in 1980. Their governments pursued economic policies derived from neoclassical economics (which we pejoratively call neoliberalism today), which relied on the concept of market efficiency. About ten years later, this kind of economic policy resulted in the "Washington Consensus", which inspired government policies almost all over the world, especially the former communist economies, which began the transition after the fall of the Berlin Wall in 1989. As some recent studies on Eastern Europe show (Krastev and Holmes 2019, Mitchell Orenstein 2021, Arandarenko and Pavlović 2023), it was this economic policy that deepened inequalities and led to the rise of authoritarian right-wing forces in these countries after 2000.

THE LAST DINAR

In order to restore citizens' trust, the Declaration proposes a change in redistributive, environmental and regulatory policies. What specifically is proposed? The redistributive policy should be carried out through three tax reforms: the introduction of a synthetic income tax, the introduction of a progressive wealth tax and the introduction of an inheritance tax. These topics have been debated in the political-economic literature for a long time, and the main argument is that current national tax systems favor the better-off, which deepens economic inequalities between people.

Synthetic income tax refers not only to income in the narrower sense, but also to all other forms of earnings, which can arise from shares, inheritance and ownership (especially over real estate of any kind). In many systems, the tax system does not recognize all these forms of income as earnings and therefore does not tax them, and such incomes are mostly earned by better-off members of society.

The Declaration proposes to tax wealth (and not just income) at a progressive rate. This means that those who own more have to pay more tax both in absolute and relative terms. The reverse is also true, the poorer have to pay less, both in absolute and relative terms. If you own real estate, you pay tax on the ownership, not just on the income that can be derived from its use.

The justification for this kind of tax reform stems from the utilitarian assumption that the last dinar earned by a rich person is less valuable than the first dinar earned. At the same time, the extra dinar you would give to a poor man is worth much more to him. The redistribution of that last dinar from the rich to the poor increases the overall well-being in society.

A progressive tax rate also means that the poor are exempted from a large part of the tax burden. Consider a typical example from Serbia. It is not the same when you burden a person who earns 10 and 200 euros with the same tax rate of 2.000 percent. The twenty euros of tax that you have to pay when you have a low income significantly affects your budget, which mostly goes to the most basic things for survival. If you are poor, that 20 euros can literally mean less food or clothing. Conversely, if you have 1.800 euros left in your household budget after paying taxes, you will have enough left over for a luxury vacation, a down payment on an apartment, or a nice car.

The tax reform is particularly related to inheritance, which has so far shown the greatest resistance to taxation, and which, according to recent research in the political-economic literature, has been singled out as one of the most important factors of economic inequality. An inheritance tax would limit the transfer of wealth from generation to generation, reducing inequality and ensuring a fairer distribution of resources in the long term.

RICH CRITICISM OF THE POOR

The declaration also talks about climate change, in a way that may surprise some leftists. A comprehensive climate policy is proposed, which mainly boils down to fairer taxation of carbon emissions and significant investment in infrastructure, especially at the global level, in poorer nations. Developing countries should receive financial and technological support for a green transition that would not jeopardize their economic growth.

The investment proposal is easy to understand. States should encourage public spending for the green transition, as the costs of the transition are still high and the private sector is reluctant to bear the costs of the transition. This especially applies to poorer nations (say, African economies), which use "outdated" technology for economic growth. Wealthier nations are now criticizing the governments of these countries for polluting the environment, ignoring the fact that their economies have been doing so for over 100 years. Rich nations have, among other things, achieved high growth rates thanks to the use of polluting technologies. After 100 years of experience using technologies that have brought the planet to its current stage of pollution, it is not moral to blame pollution on those who are just starting to do it.

But there is another aspect of environmental pollution that the declaration mentions in one sentence, but whose elaboration can be found in the 2022 Global Inequality Report. The current tax policy by which governments try to reduce carbon emissions hits the poor more than the better off. In France, for example, the 2018 carbon tax hike hit low- and middle-income households, who rely on cars for their daily commute, the hardest. These groups have fewer alternatives and therefore bear a greater financial burden of reducing pollution. Conversely, wealthier individuals living in cities have access to less polluting transportation.

It is similar with green subsidies. They often benefit wealthier individuals more than low-income groups. For example, subsidies for electric vehicles or the construction of "green houses" are more accessible to the upper classes, who can afford high initial investments. Low-income groups, limited by the lack of financial resources for start-up costs, do not have access to these subsidies.

All these tax reforms are derived from the egalitarian idea of ​​equality of opportunity (equality of opportunity), which is that all people, barring their free decisions to live the lives they want, must have similar resources for leading their lives. The argument for a fairer distribution, which includes inheritance, essentially comes from political philosophy, not economics. It is unfair that some people get an advantage in life because of inherited wealth because it does not reflect the principle of merit. Inheritance is, in fact, arbitrary in a moral sense. If, say, two children have similar abilities and talents, fairness requires that they have approximately equal life chances. Inheritance distorts these chances, while inheritance taxation and wealth redistribution help ensure equality of opportunity.

Finally, a word or two about the signatories of this declaration. There are some well-known egalitarian political economists, who have advocated for tax reform in public for a long time (Saez, Zuckman, Milanović, Piketty), economists of the heterodox economic school (Danny Rodrik, Marijana Mazzukato, Mark Blyth, Adam Tuz), but also some world-famous economists whose names have long been associated with the neoclassical school of economics (Oliver Blanchard, Pascal Lamy, Jean Pisan Ferry, etc.). The presence of the latter group perhaps best speaks to how much the economic discourse has already begun to change.

The author is a full professor at the Faculty of Political Sciences in Belgrade