Why the fight for tax justice is a global struggle

Why the fight for tax justice is a global struggle

The IMF estimates the total annual global loss of tax revenue due to tax avoidance by transnational companies at more than US$600 billion; US$200 billion of this affects developing countries.

(cc Flickr/Sergey Klimkin)

This article was first published on 3 October 2019.

By redistributing inequalities between and within countries, neoliberal globalisation has created winners and losers. As former World Bank Lead Economist Branko Milanovic has shown, the main winners of globalisation are the emerging middle classes of Asia, China in particular, and the world’s wealthiest people, who have benefited from a significant increase in earnings. The losers are the middle classes of industrialised countries and the poorest populations of the least developed countries whose incomes have tended to stagnate.

After declining for several decades, social inequalities have risen again in the majority of industrialised countries following the neoliberal shift of the 1980s. The growing economic insecurity of the middle classes, which represent the majority of the working population – and therefore of voters – in industrialised countries, has encouraged the rise of national-populism and an assault on the foundations of liberal democracy. The “losers of globalisation” who have been seduced by national-populist rhetoric tend not to be the poorest members of society, who often abstain from electoral participation, but are rather the middle classes living in small cities in deindustrialised regions, whose wages have increased less than the national average and who fear downward social mobility.

While progressive tax policies can reduce inequalities, the social injustice that fuels the resentment felt by the losers of globalisation has been exacerbated by tax injustice.

An empirical study of the evolution of tax policy in 65 industrialised and emerging countries between 1980 and 2007 published in the American Economic Review shows that globalisation has increased the tax burden on the middle classes and reduced taxation on higher incomes and corporate profits. The increased mobility of companies and higher income earners brought about by globalisation has led governments to offer increasingly favourable tax policies in order to attract them. To compensate for this, governments have increased taxes on middle-income workers who are less mobile.

In order to attract investments, governments are in a race to outdo one another with the lowest possible tax rates. For example, the average corporate tax rate in the Eurozone decreased from 35 to 22 per cent between 1995 and 2018. In the United States, the Trump administration implemented a tax reform in December 2017 that lowered the corporate tax rate from 35 to 21 per cent. Average global corporate tax rates decreased from more than 40 per cent to less than 25 per cent between 1980 and 2015. At this rate, they will hit zero by 2052.

The top marginal rate on personal income tax fell by an average of 40 per cent in the OECD countries between 1981 and 2017. In the United States, the Reagan administration lowered it from 70 per cent to 28 per cent before the Clinton administration increased it to 39 per cent. In the United Kingdom, it was reduced from more than 90 per cent to 40 per cent under Margaret Thatcher’s government. A similar trend took place in continental Europe – in France, for example, the top marginal tax rate decreased from 75 per cent to 41 per cent between 1980 and 2010.

To compensate for the decrease in revenue resulting from reduced corporate income taxes and top individual tax rates, governments have increased taxes on the middle classes and increased VAT, a tax borne by consumers, in other words, by the population as a whole.

The challenge of tax evasion

This tax injustice is further exacerbated by tax evasion, which primarily benefits transnational corporations and higher individual earners. The information provided by whistleblowers on offshore activities published by the International Consortium of Investigative Journalists (OffshoreLeaks, LuxLeaks, SwissLeaks and the Panama Papers) has alerted public opinion to the tax evasion industry that deprives countries of significant resources and deepens social inequalities.

The amount of financial assets held by individuals in tax havens is estimated at US$5.6 trillion, about 10 per cent of the world’s GDP. The global loss of tax revenue due to tax evasion by the richest one per cent, which accounts for the vast majority of individual tax evasion, is estimated at US$200 billion a year. Financial assets held in tax havens are extremely concentrated, with nearly 80 per cent owned by the richest 0.1 per cent and 50 per cent by the richest 0.01 per cent.

Adding this offshore wealth to that declared in surveys or tax returns would significantly increase the richest 0.01 per cent’s share of the national wealth of most countries, by 4 to 5 per cent in Scandinavia and between 30 and 40 per cent in France, the United Kingdom and Spain, for example.

In other words, when the hidden offshore income of the top earners is taken into account, inequalities are found to be much higher than those indicated by official statistics.

Close to 40 per cent of annual corporate profits are declared in tax havens. The fragmentation of production chains encouraged by globalisation has allowed transnational companies to artificially report profits through subsidiaries located in tax havens in order to avoid paying taxes in the countries where these profits were actually generated. This results in a loss of close to 20 per cent of corporate tax revenues in the European Union and 15 per cent in the United States.

The IMF estimates the total annual global loss of tax revenue due to tax avoidance by transnational companies at more than US$600 billion, including US$200 billion for developing countries.

Restoring balance through tax justice

Globalising tax justice would reduce inequality, address democratic fatigue syndrome and free up resources for investment in ecological and social transition.

In order to restore balance between the taxation of income from work and from capital, as well as between the middle classes and higher income earners, the income of all physical persons, whether from labour or capital, must be globalised and taxed at the same progressive rate. Increasing the top marginal rate and introducing a progressive wealth tax would also help to curb the excessive concentration of wealth. Putting a stop to tax evasion, which mainly benefits the very wealthy, also requires establishing a multilateral mechanism for the automatic exchange of tax information, as well as introducing a public register of the true beneficiaries of companies in order to stop the fraudulent transfers of offshore savings through front companies.

Stopping the race between countries to offer the lowest possible tax rates to companies requires the introduction a global minimum corporate tax rate. In order to end tax avoidance by transnational companies, they must also be required to publish a detailed report of their activities by country in order to tax the profits of all multinational groups and distribute them amongst the countries where the activities have actually taken place.

While such measures have been initiated or are under discussion within the European Union and the OECD, there is still a long way to go and actions must be taken on a global scale. For this to happen, it’s important that citizens who are increasingly affected by the economic and political consequences of tax injustice be informed and mobilise.

Policymakers have to be called out on these issues by citizen movements, such as the one launched in Belgium by the National Centre for Development Cooperation (CNCD-11.11.11), an umbrella organisation for Belgian development NGOs, and the Tax Justice Network, to make tax justice a reality on a national, European and global level.

This article has been translated from French by Brandon Johnson