How low can you go?
Regressive tax systems and resort to tax dodging mean the wealthy are not paying their fair share of taxes, explains Jomo Kwame Sundaram.
Since the 1950s, there has been a popular dance called the “limbo rock”, with the winner being the one who leans back the furthest to get under the bar. Many of today’s financial centres are involved in a similar game to attract customers by offering low tax rates and banking secrecy.
This has, in turn, forced many governments to lower direct taxes not only on income but also on wealth.
From the early 1980s, this was sought to be justified by US President Ronald Reagan’s embrace of Professor Arthur Laffer’s curve which claimed higher savings, investments and growth with less taxes.
Following a long hiatus, Laffer is now making a comeback with the recent election of Donald Trump, who has espoused a similar claim that lower taxes will lead to higher growth, lifting all American boats. It remains to be seen how President Trump will reconcile this with his promise to build and improve infrastructure in the US, which many hope will finally create the basis for the long-awaited recovery following the 2008 financial crisis and the ensuing Great Recession.
With the decline of government revenue from direct taxes, especially income tax, following Laffer’s advice, many governments were forced to cut spending, often by reducing public services, raising user fees and privatizing state-owned enterprises.
Beyond a point, there seemed to be little room left for further cuts, while governments had to raise revenue to fund its functions. This increasingly came from indirect taxes, especially on consumption, as trade taxes declined with trade liberalization.
Many countries have since adopted value-added taxation (VAT), touted in recent decades by the International Monetary Fund (IMF) and others as the superior form of taxation: after all, once the VAT system is functioning, raising rates is relatively easy.
The growth of VAT has made the overall impact of taxation more regressive as the rich pay proportionately less tax with all the loopholes available to them, both nationally and abroad.
In contrast, a progressive tax system would seek to ensure that those with more ability to do so, pay proportionately more tax than those with less ability.
Although there are many reasons for income inequality, untaxed assets have undoubtedly also increased both wealth and income inequalities at both national and international levels.
Following the Panama Papers revelations, most Western government leaders have pledged tough action against tax evasion and avoidance, especially by those using developing-country tax havens.
In the face of continued failure to deliver on the almost-half-century-old United Nations commitment by developed countries to provide development aid equivalent to 0.7% of their national incomes, then OECD Development Assistance Committee (DAC) chair Erik Solheim proposed greater tax cooperation instead.
After all, many developing countries are not devoid of financial assets, but so much has been taken out and hidden by wealthy elites in private financial institutions, especially in “offshore” tax havens.
But since most using tax havens seek assets in the rich OECD countries, the Paris-based organization has historically focused efforts on very limited matters of concern to their members. Hence, they have blocked efforts to give the UN a stronger mandate to advance international cooperation on taxation, culminating in the modest Addis Ababa Action Agenda declared at the third UN Financing for Development conference in July 2015.
As major users of such facilities themselves, many developing-country elites have been conspicuously silent in the face of the Panama Papers revelations of what they have long enabled and practised. After all, much of what is involved is publicly considered illicit, immoral and even “sinful”, even if not illegal. As Warren Buffett and the group of “patriotic millionaires” in the US have noted, the rich currently pay less in tax than most of their lowest-paid employees.
Many tax avoidance schemes are not illegal. But just because they are not illegal does not mean they are not a form of abuse, fraud or corruption.
To tackle the corruption at the heart of the global financial system, tax havens need to be shut down, not reformed.
“Onshoring” such funds, without prohibiting legitimate investments abroad, will ensure that future investment income will be subject to tax as in the US and Canada.
If not compromised by influential interests benefiting from such flows, responsible governments should seek to enact policies to:
l Detect and deter cross-border tax evasion;
l Improve transparency of trans-national corporations;
l Curtail trade mis-invoicing;
l Strengthen anti-money-laundering laws and enforcement; and
l Eliminate anonymous shell companies. (IPS)
Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.
Third World Economics, Issue No. 647, 16-31 August 2017, p16