Fixing our broken international tax regime
An international tax organization, although a radical proposition, is needed to ensure global justice.
Offshoring and tax rarely makes front-page news. After Sunday’s release of 11 million documents revealing shady fiscal practices, touted as the biggest data leak kind in history, suddenly the nexus of international tax and political corruption are in the spotlight. From Russian President Vladimir Putin to Iceland’s Prime Minister Sigmund Gunnlaugsson, 72 world leaders are implicated by the so-called Panama Papers. Offshoring and multinational tax planning and avoidance are not necessarily illegal. After all, the law privileges form over economic substance. Still, the fallout from the release will have enormous political consequences.
Tax is at the heart of the social contract, and the global corporate tax system is broken. The Panama Papers present a crucial opportunity to seriously debate the state of the international tax regime. Tax base erosion has been prominent several decades, although it has received relatively scant attention. Since the 1980s, a period which saw the rise of global mergers and acquisitions in leading capital markets, the United States and other large democracies have received diminishing corporate tax receipts.
Why? Tax sovereignty has induced ugly state policy competition. On the supply side, national corporate tax rates have plummeted, illustrating a real race-to-the-bottom. On the demand side, multinational enterprises take advantage of elective corporate residency, and fictive corporate planning structures such as the Double Dutch Irish Sandwich. Moreover, the complex architecture comprised of thousands of bilateral double tax agreements offer innumerable opportunities for corporate treaty shopping, planning and avoidance. The system is needlessly complex. Welcome to the era of stateless income.
Albert Einstein once said, “the hardest thing in the world to understand is the income tax.” Both the big picture and technical details of international tax policy are rarely debated in the mainstream. Technical discussions take place within the domain of an insular network of experts and practitioners. Many of its members are private lawyers beholden to corporate interests. Policy has been captured. This ought to change.
Since 2012, global corporations have been the object of public scrutiny for their tax efficient practices. Since, scandals involving Facebook, Starbucks, Google and Amazon ratcheted tax cooperation to the top of the global agenda. In many cases, global companies pay little to no domestic income tax. As a result, a conservative estimate published by the OECD suggests that global tax avoidance may cost up to $240 billion a year. Tax experts also argue our system of foreign tax credits amounts to a subsidy from wealthy to developing nations. In the context of growing income inequality, the distributive implications of tax policy demand public debate and concerted political action. More research is urgently needed to quantify the precise social costs of base stripping.
What is being done so far? Launched at the Group of 20 Summit in Los Cabos in June 2012, the Base Erosion and Profit Shifting (BEPS) initiative is an attempt to address gaps in the international tax regime. Under OECD auspices, political cooperation and policy is focused around fifteen action items. The BEPS initiative is groundbreaking to the extent it proposed a multilateral instrument, and global framework for information-sharing and dispute resolution. However, the other action items are a laundry list that has been on the global agenda for some time.
The prognosis for global cooperation is not good. Unlike other domains of global economic governance, such as financial regulation, the U.S. has considerably less bargaining power in international tax negotiations. Compounding the problem is the dysfunctional state of congressional politics.
While the White House released, in 2012, the President’s framework for reforming the U.S. business tax system by simplifying the tax code, the executive’s hands are tied. Even if an epochal global agreement were reached, the panoply of divergent interests on Capitol Hill will stall or prevent implementation.
Information sharing is a particularly thorny issue. Based on recent statements by Senate President Orrin Hatch and House Speaker Paul Ryan, it is apparent any agreement involving information disclosure would invite staunch opposition from the leadership of the Senate Foreign Relations Committee and the House Ways and Means Committee.
Compounding the complications of American domestic politics, international cooperation is a fixed-pie fiscal contest. A multilateral agreement is likely to produce mock compliance by states or outright failure. Already, participants in the BEPS initiative are pursuing unilateral measures to ensure tax competitiveness.
The U.S. Treasury admonished the United Kingdom, traditionally a staunch U.S. ally in international affairs, for taking unilateral actions to maintain tax competitiveness. Ireland is also moving to introduce refundable research and development credits while modernizing its holding company regime. The European Union has also taken swift action, in some ways overtaking the U.S. and OECD-led process.
People have rightfully lost faith in the international tax regime. Corporations are islands of conscious power in global waters plagued by unconscious cooperation. Tax base erosion and corporate profit shifting are an existential threat to the viability of our social democracy. Recently, Dr. Thomas Rixen argued that a competent global authority is needed to monitor and enforce tax compliance.
An international tax organization, although a radical proposition, is needed to ensure global tax justice. My own research suggests tax authorities need increased policy-making independence to support this project.
The status quo is unacceptable. Prime Minister Justin Trudeau’s growing international celebrity, together with Canada’s image as an honest broker, could go a long way in global economic negotiations. Not only could an international tax organization preserve the integrity of our public finance system. Carefully designed, an organization could ensure global economic justice between north and south.
The American Revolution turned on the phrase “no taxation without representation.” When it comes to stateless income, the problem seems to be no taxation at all.