WAYNE SWAN. Ten years after the crash, tax competition threatens global economies and democracies.

Ten years ago, the global financial system was rocked by the largest crisis since the Great Depression.

On September 15, 2008, the US investment bank Lehman Brothers filed for bankruptcy after its highly leveraged housing loan portfolio finally collapsed under the weight of widespread mortgage defaults. The global economy lost its nerve, and hundreds of thousands of individuals lost their jobs, their homes and livelihoods.

The loss of potential output in advanced economies over the next several years was the equivalent of wiping the German economy off the map. The crisis that followed Lehman Brothers’ collapse was the almost inevitable culmination of decades of lax financial regulation.

Thankfully, swift, coordinated policy action driven by the G20 successfully avoided the onset of a deeper and more prolonged global recession. In the ten years since 2008, academics, pundits and policymakers have tried to rebuild a more robust global financial architecture – one that can circumvent a regulatory race to the bottom of the kind that precipitated the crisis.

Fighting deeply entrenched vested interests that are pulling for still-greater financial deregulation, regulators have recovered some ground. Despite the early remedial efforts of the G20, the crisis has still left lasting scars on many measures of output and employment, ensuring that at least some moves to roll back regulations that would weaken financial systems have been roundly rejected.

While the pace of regulatory repeal may have slowed, a parallel race to the bottom – in corporate tax – has accelerated. And its consequences threaten to be just as long‑lived as the fallout from the financial crisis.

The trends are troubling. In late 2017, Donald Trump slashed US corporate tax rates from 35 to 21 per cent, driving record share buybacks and CEO bonuses at the expense of wage growth for the rest of the workforce.

The UK is poised to press on with its 1-percentage-point per year reduction in the statutory corporate tax rate, despite already boasting the lowest rate in the G7. Canada, which reduced corporate rates at a similar clip between 2000 and 2011, is under renewed pressure to bring them down further.

And in Australia, two days after the conservative government’s longstanding but deeply unpopular policy to cut tax rates for big businesses failed to pass the Senate, the right wing of the party deposed the country’s Prime Minister.

As a group of leaders from government, academia, and civil society, the Independent Commission for the Reform of International Corporate Taxation (ICRICT), of which I am a member, is convinced that ending the race to the bottom on corporate tax is a matter of global urgency. Tax is not only the price we pay for a civilised society, or the quid pro quo levied on the private sector for the provision of public infrastructure and a healthy and well-educated workforce. Tax is also an essential safety valve which allows democratic governments to curb the power of unelected corporate leviathans – some of which now boast a net worth higher than the GDP of some G20 economies.

The race to the bottom on corporate tax robs governments not just of revenue, but also of one of the most powerful policy tools to reduce inequality and promote distributions of income and wealth that are fairer and more conducive to ongoing economic growth.

Further blunting the potency of fiscal policy are ongoing efforts by multinational enterprises to aggressively minimise and altogether evade their corporate tax responsibilities by using tax havens.

ICRICT Commissioner Gabriel Zucman and colleagues have recently shown that 40 per cent of multinational profits, or $600 billion, are shifted to tax havens each year. For advanced economies, recovering their tax base from tax havens might be harder, costlier and lengthier than simply reducing headline rates, but it is essential.

The package of reforms for the global tax system known as the Base Erosion and Profit Shifting Project, which were unveiled three years ago by the Organization for Economic Cooperation and Development (OECD) and the G20, is one step in the right direction, but it is far from sufficient.

For the ICRICT, the fairest and most effective approach is for multinationals to be taxed as single firms doing business across international borders. Global profits and associated taxes could then be allocated according to factors such as the sales, employment, and resources used by the company in each country, rather where they locate their head offices and claim their Intellectual Property. This global reform would strike a considerable blow for tax justice.

Without global responses such as these, economies can falter, and democracies fail. The lopsided society that encourages a race to the bottom and permits multimillionaires and multinationals to hold 10 per cent of global GDP in tax havens is toxic for democracy and foments the kind of populist backlash that allows authoritarianism to flourish. By continuing to run the race to the bottom on corporate tax, governments run away from their democratic responsibilities and hurtle headlong into the next global crisis.

Wayne Swan is the Former Treasurer and Deputy Prime Minister of Australia and a member of the Independent Commission for the Reform of International Corporate Taxation (ICRICT).

print
This entry was posted in Economy, Politics. Bookmark the permalink.

2 Responses to WAYNE SWAN. Ten years after the crash, tax competition threatens global economies and democracies.

  1. Very interesting article …Key phrase :Global profits and associated taxes could then be allocated according to factors such as the sales, employment, and resources used by the company in each country…

    Ultimately a change to Turnover testing/ taxation and Sales tax and better control of new technologies and the internet(pos) and a more interactive taxation is
    becoming unavoidable with corporations and the global stuff of tax avoidance and the shrinking base see
    http://members.iinet.net.au/~gfh_eco/gfh20/gfh20eco4.php
    Or economics and technology see
    http://members.iinet.net.au/~gfh_eco/gfh20/gfh20eco5.php

    However Corporate finance and taxation is only one viewpoint of economics the other less “globalist” viewpoint is to observe it from the point of view of local jobs in the context of people and businesses or business and people and offshoring and outsourcing.

    The paradox is that in this process printed money by the main central banks has found new hands in developing countries to absorb inflation. Founding new hands to absorb immediately the printed money was the only exception to creating inflation according to Maynard Keynes but ultimately jobs drive the economy the budget does not create jobs good policies do.
    It should not hide the fact that people and economics and keeping all hands at work with an ageing population living longer is the other side of the coin how are we implementing policies for incremental retirement etc…
    This the more recent trend in our gig economy, the other viewpoint people and businesses vs business and people which can also be viewed in the context of multiple but more specific bilateral trade agreements vs multilateral trade agreements…more later or in postings.

    Finally the article did not mention the role of derivatives in the GFC 1.0, the shortcoming with BIS and governments concerning the need to reinstall some form of Glass Steagall and a system of logging and clearance to enable control and taxation of Derivatives see
    http://members.iinet.net.au/~gfh_eco/gfh20/gfh20eco3.php

    Francois Humbert
    Studied at Curtin University when Rob Galliers(Journal of information Systems) was the head of school business and admin.

  2. Peter Wilson says:

    It is good that a body at an international level is looking to how to try and control the corporations at a level across nation states…tax is one crucial area, but corporations are undermining democracy in more than the area of tax …..while we are discussing global responses to the abuse perpetrated by multinational corporations let us also look to change the corporations laws that create corporations at an international level. Corporations only exist as a legal entity and the laws that create them must include additional personal legal obligations on CEOs and Directors. Directors and CEO’s must have an equal legal obligation to not only increase the value, profits and returns to shareholders but also they should be required to do this equally in a way that sustains the environment, strengthens the communities in which they operate, respect human rights, create fair, safe and equitable employment conditions for their employees etc…the legal obligation on Directors and CEO’s to increase profits must be equal to that legal obligation that requires them to do that while ALSO sustaining and the environment, for example. These equal, legal, obligations on CEOs/Directors must be written into the corporations laws so that these additional legal requirements are directed on to the CEO’s and Directors PERSONALLY and have the same force as the obligation to maximise value. These people must be forced, within the corporations laws, to operate with obligations to society, the environment, not just to the market and to a narrow group of shareholders. The existing corporations laws encourage exploitation on all fronts to maximise profits…often the excuse for immoral and abusive corporate behaviour is that the CEO/Directors are obliged to make decisions to enhance corporate value….this is unacceptable when the extractive and exploitative actions of corporations destroy the environment, communities, and the rights of citizens and workers….Maximising the value of these other requirements must be written into the personal legal obligations of CEO’s and Directors within the legislation that establishes the corporation in the first place. No longer can these other requirements be add-ons in other legislation as if they are separate and in competition with the requirement to make profits. The expectation in the Corporations Legislation that CEOs/Directors are to maximise profits MUST be equal to the expectation that they will make decisions that sustain the environment, don’t pollute, honour human and workers rights etc

Comments are closed.