The Cayman Islands is a favorite tax haven. Photo: Kris Fulgham/Flickr

3 ways tax justice can help close the inequality gap

10 February, 2014 | General

It was US President Benjamin Franklin who said, in 1789, "In this world nothing is certain but death and taxes." Oh how times have changed – at least for a minority. While in the past 200 years, the economic elite have not yet found a way to cheat death, they have been masterful at dodging paying their fair dues in tax.

Around $950 billion left developing countries in 2011 in illicit financial flows (more than half of which was diverted through abusive shift of profits by multinational companies to tax havens, the rest lost to corruption and theft). At least $100 billion is lost in potential tax revenues. Many of the world’s wealthiest individuals are holding $18.5 trillion offshore in tax havens. This equates to a potential loss of $156.31 billion in tax revenues.

This is a monstrous amount of invisible money lying idle. Its purpose serves only to augment the wealth and power of the top 1 per cent and increase the wealth and income gap between the remaining 99 per cent. Sadly, it’s a critical loss of vital tax revenues that governments could put to work to plug budget gaps, invest in social spending, public goods, and to provide social safety nets for those falling below the poverty line.

Systemic secrecy

Skewed tax systems that favour the wealthy, a labyrinth of tax rules open for easy exploitation, financial secrecy enabling tax evasion and money laundering sucks money up from the real economy into the hands of the 1 percent, while denying the 99 per cent their fair stake.

Andrew Norton (ODI), in an excellent opinion piece on inequality, argues the top 5 per cent in global wealth distribution has captured just under half the increases in global income in recent times. He concludes the one overriding priority to check this trend is ‘to create a global tax system which is fit for our evolving global economy.’

While the FT in its Much ado about inequality editorial, has a different take on inequality trends, it also points to taxation – to invest in public goods and services globally - as the vehicle by which to redress the harmful impacts of inequality.

Closing the gap

The power of taxation as a key tool to foster equity is not a revelation. Ecuador has brought some significant fiscal reforms to help close the wealth and income gap in the country. Increased tax revenues are sourced from a more progressive system of direct income tax, and less from indirect taxes (such as VAT) which impacts are regressive. Tax reforms, alongside other fiscal measures, have provided for a significant increase in budget allocation to health and education over the past five years. This increase in social expenditure has resulted in an overall reduction of poverty and exclusion.

There is still much progress to be made however. Moves to raise more tax revenues from the wealthiest and reduce dependency on revenues from extractive industries, such as oil are slow to materialise. As important, the government needs to continue to invest in improving the quality and coverage of public services, such as health and education, particularly in rural areas.

UK Prime Minister, David Cameron recognized that the public will not tolerate inaction against tax cheats when they face the daily challenges of austerity. In 2013, the UK showed international leadership among G8 and G20 peers by promising to deliver tax transparency and crack down on corporate tax dodging.

The G8 and G20 have made some headway, so what are the next steps needed:

1. New global rules on corporate tax dodging

In response to high profile exposés of scandalous tax dodging behaviour of transnational companies, such as Starbuck’s and Amazon, the OECD is investigating how to create new global rules to tackle some aspects of corporate tax dodging

Need steps needed: the world’s poorest countries (non OECD/G20) need a place at the negotiating table. They are currently excluded, despite being hit hardest by illicit financial flows. 

2. Public registries of company ownership

The UK has agreed to set up a public register of the real owners of the millions of shell companies, revealing the identity of the owners will help prevent crimes such as tax evasion, money laundering and corruption.

Next steps needed: The public register needs to include good quality, reliable and accessible information so it’s fit for purpose. Others governments, including UK tax havens, other EU countries, as part of the negotiations on the new anti-money laundering directive etc, should follow the UK government’s lead. The public register should also extend to cover trusts and foundations. 

3. Sharing tax information between countries

New commitments around sharing tax information between countries have been made. G8 and G20 countries have agreed develop an international standard for the automatic information sharing between all tax authorities. Additionally, many tax havens have signed the international convention on tax matters.

Next steps needed: a new international system of automatic information exchange needs to bring benefits to all countries from the start, and importantly work towards including all countries, not only OECD or G20.

More than rhetoric needed

Granted important steps on paper have been taken. But frankly, so far progress adds up to little more than rhetoric. Brave international political leadership is needed to accelerate momentum and create a global tax system that helps redistribute income and wealth to invest in equitable and sustainable growth.

In 2013 the spotlight was on fighting iniquitous tax rules. In 2014, political interest cannot be allowed to fade. Success will only truly be achieved when paying your fair dues in tax is universally considered to be a source of pride, privilege and responsible behaviour.

What do you think: anything missing from this list, to help close the inequality gap? Add your comment below.


You may also like

Blog: Working for the Few: Inequality and the threat to democracy

Report: Development Finance and Inequality: Good practice in Ecuador, Rwanda and Thailand

All I want for 2014 is a challenge to extreme inequality

4 pivotal ways the EU can fight poverty in 2014

Comments

Don't let rhetoric run ahead of analysis

Strengthening tax collection and closing loopholes is important, as is having an informed public debate about the issue.  You are right, more than rhetoric is needed.

 All to often though rhetoric runs ahead of analysis, so it is hard to understand what the big numbers and issues really mean.

 As the article notes – it has been estimated (by Global Financial Integrity) that  $950 billion left developing countries in 2011 in illicit financial flows. The article embroiders this with the claim that half of this was ‘diverted through abusive shift of profits by multinational companies to tax havens’.  This is a misunderstanding of the estimate which is mainly based on trade misinvoicing between unrelated companies (the methodology used is not able to assess transfer mispricing between branches of the same company http://iff.gfintegrity.org/iff2013/explanation2013.html ).

 Similarly Oxfam estimates that $18.5 trillion of assets are held in tax havens. And adds that this money is  ‘lying idle’ offshore. As far as I can see from the calculation (http://www.oxfam.org/en/eu/pressroom/pressrelease/2013-05-22/tax-havens-private-billions-could-end-extreme-poverty-twice-over) there was no assessment of how much of this money is lying idle in bank vaults and how much is invested in businesses, infrastructure, creating products and services, employment etc… but that seems like an important question in considering its development impact (indeed the article states that this money is earning a return which could be taxed, which suggests that it is being invested in profitable activity somewhere , presumably outside of tax havens not lying idle under a mattress).

 I hope that in 2014 more serious analysis on tax and development makes it into the spotlight. The bigger question though is about investment flows.

Permalink: http://oxf.am/wee