WAYNE SWAN MP
MEMBER FOR LILLEY
IT IS TIME FOR A LONDON SUMMIT MOMENT ON GLOBAL TAXATION
In April 2009 as Australian Treasurer I attended the G20 Leader’s Summit in London in response to the Global Financial Crisis. The expansionary economic policies promoted at that meeting helped prevent the Great Recession caused by the GFC from metastasizing into a second Great Depression. The summit proved that global economic cooperation can succeed, even in the face of the most severe crises.
But while an immediate cataclysm was averted, the GFC hasn’t yet been fully washed out of the global economy. Important destabilising problems remain unaddressed. A decade on, the consequences of the GFC are still being felt -- in widening economic inequality that is driving forms of populism and nativism that raise unsettling parallels with the era that followed the crash of 1929. History records that, ten years after that Wall Street meltdown, the Second World War began. According to the principle that those who fail to learn from history are doomed to repeat it, we simply must do all we can to put the GFC era behind us for good, and find a way to move the world into a new era of environmentally sustainable prosperity and political stability.
I believe the answer lies in a renewed global effort to tackle wealth and income inequality. Inequality, which narrowed for thirty years after the Second World War, has been worsening in many major developed nations since the start of the Reagan and Thatcher eras. The GFC has accelerated inequality, turning wealth and income gaps into unbridgeable chasms, alienating the working class and hollowing out the middle class, radicalising democracies across the world.
A major part of the answer lies in taxation reform. Most simply put, tax systems around the world need to become more progressive and big businesses must be made to pay their fair share of tax.
It is simply not possible to have prosperous middle class societies without a level of taxation that can deliver decent chances for everyone and sustain successful, legitimate democratic government. Without rising revenues, for instance, developing nations will never be able to meet the sustainable development goals that the United Nations set out in its 2030 Agenda. As the saying goes: Pay taxation, buy civilisation. Healthcare for all, education for social mobility, a decent social safety net for those left behind, the elimination of political and business corruption, strong public regulation of the environment – these are what a troubled world needs. They are the best weapons we have against cynicism, populism and hate-mongering.
This means defending the idea of progressive taxation. The destruction wrought to progressive tax systems across the developed world over recent decades must be reversed. The culprit is trickle-down economics, with its now familiar and destructive strategy of tax cuts for the wealthy individuals and companies, and deregulation and wage suppression for everyone else. This strategy is draining the public realm dry.
For thirty years after World War Two, progressive taxation helped drive economic growth and high living standards for all. It funded scientific research, successful industrial development, national infrastructure and universal health, education and welfare services. In Europe, the United States and elsewhere, progressive taxation gave the world decades of social peace and stability, lowering social tensions and holding at bay dangerous extremes of left and right. That stability is disappearing and phenomena like Donald Trump and Brexit are taking its place.
Three critical issues must be addressed: the proliferation of tax havens, global transfer pricing and falling corporate tax rates.
As the “Panama Papers” and the “Paradise Papers” have exposed, the global race to the bottom is being run by wealthy individuals and big corporations to denude governments of the revenues they need. As much as 11.5 percent of global GDP or $8.7 trillion is now untaxed and inaccessible to authorities in tax havens.
Financed by vested interests, countries continue to cut corporate tax rates – by five percentage points since 2008 alone. The United State, for example, has cut its corporate tax rate from 35 percent to 21 percent. There are loud calls for us to do likewise. The race to the bottom is on.
The OECD is now coming to grips with this problem, from 2015 initiating major work on Base Erosion and Profit Shifting. That work, though, is now at a critical juncture. Does it propose new marginal reforms on a broken system? Or does it look at more radical and principled solutions that can deliver a sustainable international tax architecture fit for the 21st century – tackling the core mechanism of tax evasion, which is global transfer pricing?
Over the last two years The Independent Commission for the Reform of International Corporate Taxation (ICRICT) of which I am a member of along with Joseph Stiglitz, Thomas Piketty and Gabriel Zucman among others has outlined a pathway forward. It has proposed the world should move away from the transfer pricing system towards (1) a unitary taxation of multinationals, and (2) a global effective minimum tax rate. Together these would drastically reduce the capacity and financial incentives for multinationals to shift profits between jurisdictions and for countries to cut their tax rates.
Just a few weeks’ ago 115 countries met under the auspices of the OECD in Paris discussing the future architecture of the international tax system. At this meeting the OECD outlined possible new pathways to tax multinational companies in a rapidly digitising economy.
The OECD is now contemplating some reforms that ICRICT has been arguing for. Such as a move beyond the arm’s length principle by relocating taxing rights, ensuring that countries where the actual economic activity occurs get their fair share and making sure that companies regardless of where they are physically located pay a minimum effective rate of tax globally.
Many globalised companies have no physical presence in countries that they operate in. In Paris I argued the a global tax system needs to shift from requiring physical presence to tax, to one that requires a significant digital and economic presence in order to tax. This is something that the OECD is now working on and acknowledged that the challenges of the digital economy are of increasing importance.
The time for tinkering at the edges of this problem is over. The world needs a second London Summit moment -- where G20 leaders, the United Nations, the OECD and civil society come together to plot a major demolition job on multinational tax evasion and work out new ways of helping countries to develop progressive tax frameworks for the benefit of their own people.
That opportunity is now before us.
Now is the time for continued action, It is time for “a coalition of the willing” to stand up to the vetoes and the blocking manoeuvres of powerful vested interests and introduce game-changing reforms to fix an ailing global economy ,tackle inequality and restore stability to the global political community.
The world proved it could do this in London in 2009. We must now do it again.
Wayne Swan is the former Deputy Prime Minister and Treasurer of Australia and is a commissioner on the Independent Commission for the Reform of International Corporate Taxation.
This piece was published in Crikey on Friday 1st of February 2019