Mitt Romney’s income taxes have become a major issue in theAmerican presidential campaign. Is this just pettypolitics, or does it really matter? In fact, it does matter – and not just forAmericans.

A major theme of the underlyingpolitical debate in the United  States is the role of the state and the needfor collective action. The private sector, while central in a modern economy,cannot ensure its success alone. For example, the financial crisis that beganin 2008 demonstrated the need for adequate regulation.

Moreover, beyondeffective regulation (including ensuring a level playing field forcompetition), modern economies are founded on technological innovation, whichin turn presupposes basic research funded bygovernment. This is an example of a public good – things from which weall benefit, but that would be undersupplied (or not supplied at all) were weto rely on the private sector.

Conservativepoliticians in the USunderestimate the importance of publicly provided education, technology, andinfrastructure. Economies in which government provides these public goodsperform far better than those in which it does not.

But public goods mustbe paid for, and it is imperative that everyone pays their fair share. While there may be disagreement aboutwhat that entails, those at the top of the income distribution who pay 15% oftheir reported income (money accruing in tax shelters in the Cayman Islands and other tax havens may not be reportedto US authorities) clearly are not paying their fair share.

There is an old adage that a fish rotsfrom the head. If presidents and those around them do not pay their fair shareof taxes, how can we expect that anyone else will? And if no one does, how canwe expect to finance the public goods that we need?

Democracies rely on aspirit of trust and cooperation in paying taxes. If every individual devoted asmuch energy and resources as the rich do to avoiding their fair share of taxes,the tax system either would collapse, or would have to be replaced by a farmore intrusive and coercivescheme. Both alternatives are unacceptable.

More broadly, amarket economy could not work if every contract had to be enforced throughlegal action. But trust and cooperation can survive only if there is a beliefthat the system is fair. Recent research has shown that a belief that theeconomic system is unfair undermines both cooperation and effort. Yet,increasingly, Americans are comingto believe that their economic system is unfair; and the tax systemis emblematic of that sense of injustice.

Thebillionaire investor Warren Buffett argues that he should pay only the taxesthat he must, but that there is something fundamentally wrong with a systemthat taxes his income at a lower rate than his secretary is required to pay. Heis right. Romney might be forgiven were he to take a similar position. Indeed,it might be a Nixon-in-China moment: a wealthy politician at the pinnacle ofpower advocating higher taxes for the rich could change the course of history.

But Romney has notchosen to do so. He evidently does not recognize that a system that taxesspeculation at a lower rate than hard work distorts the economy. Indeed, muchof the money that accrues to those at the top is what economists call rents,which arise not from increasing the size of the economic pie, but from grabbinga larger slice of the existing pie.

Those at the topinclude a disproportionate number of monopolists who increase their income byrestricting production and engaging in anti-competitive practices; CEOs whoexploit deficiencies in corporate-governance laws to grab a larger share ofcorporate revenues for themselves (leaving less for workers); and bankers whohave engaged in predatory lending and abusive credit-card practices (oftentargeting poor and middle-class households). It is perhaps no accident thatrent-seeking and inequality have increased as top tax rates have fallen,regulations have been eviscerated, andenforcement of existing rules has been weakened: the opportunity and returnsfrom rent-seeking have increased.

Today, a deficiencyof aggregate demand afflicts almost all advanced countries, leading to highunemployment, lower wages, greater inequality, and – coming full, vicious circle – constrained consumption. There isnow a growing recognition of the link between inequality and economicinstability and weakness.

There is anothervicious circle: Economic inequality translates into political inequality, whichin turn reinforces the former, including through a tax system that allowspeople like Romney – who insists that he has been subject to an income-tax rateof “at least 13%” for the last ten years – not to pay their fair share. Theresulting economic inequality – a result of politics as much as market forces –contributes to today’s overall economic weakness.

Romney may not be atax evader; only a thorough investigation by the US Internal Revenue Servicecould reach that conclusion. But, given that the top US marginal income-tax rate is 35%,he certainly is a tax avoider on agrand scale. And, of course, the problem is not just Romney; writ large, his level of tax avoidance makes itdifficult to finance the public goods without which a modern economy cannotflourish.

But, even moreimportant, tax avoidance on Romney’s scale undermines belief in the system’sfundamental fairness, and thus weakens the bonds that hold a society together.