Profits and income are shifted ‘offshore’ and the tax base is thereby eroded. Tax ‘havens’ offer either secrecy or low rates and this lures money into their country. Other states then follow suit and this creates competition for the remaining tax base.
I have taken an interest in this issue since it is a hugely important one for anyone who believes in progressive taxation (basically anyone other than hard-core libertarians). Companies and wealthy individuals have been increasingly manipulating their assets and income streams to fall through the gaping holes in the international tax ecosystem. This means that often those who should be paying the most in tax actually pay less than many (and in some extreme cases pretty much all) ‘regular’ taxpayers.
The conference speakers did at various points mention some of the problems that beset any attempt to respond to these problems. Indeed there are many apparent reasons for pessimism, after all, why should national governments care about international tax avoidance? Each state is interested in attracting investment from abroad and they can use their taxation system as a means to make themselves more attractive. Each state has a national interest in competition.
Furthermore, there are ideological and elite-interest barriers. There has been an ideological shift against taxation in recent decades with the rise of neo-liberal thinking and the view that taxation is an unfortunate thing that gets in the way of market outcomes. Furthermore, the people who make the laws around the world are usually wealthy individuals or depend upon the wealthy elite for political patronage. This means that politicians will generally not act against international loopholes unless they are either very principled or the public pressure is such that they have to.
A final problem, which was mentioned at the conference, is that different countries would have very different interests when it comes to choosing what the tax base should be. Some countries (the UK, US and Germany) would benefit more if the relationship of a company to different states gives great weight to the location of the headquarters. However, other states may benefit from giving more weight to sales or the location of staff.
Nevertheless, I remain optimistic that things will improve. Firstly, many states have agreed to go along with the outcome of the BEPS process, whatever that may be, and the outcome will be presented relatively soon. Some of the speakers expressed doubts that this would be so straightforward; once the outcome is known some countries may realise that the outcome is not to their liking.
Businesses seem unlikely to be keen since they are usually run by the wealthy for the wealthy. However, a point that was made is that businesses require consistency, and the absence of global agreement on business taxation may result in constant changes. Furthermore, states may occasionally seek to generate a substantial amount of revenue by adding a large charge or tax. Businesses may not try to use their influence to undermine global agreements if they believe the alternative might be worse.
Finally, the reason I would suggest that there is hope is that states will prefer an international tax system that provides them with something rather than nothing. If the tax base keeps on being eroded and there are fewer and fewer tax revenues over which states can compete then states will have little to lose by signing up to agreements. The question is then whether the states are acting in favour the wealthy international elite or in the interest of the vast majority of their citizens. Eventually I would expect citizens to get fed up of feeding of the smaller and smaller scraps left by an international class of wealthy individuals who would be increasingly wealthy and increasingly offshore. At some point regular ‘onshore’ people would have little nothing to lose from having a revolution, of whatever kind takes their fancy.
The above points indicate that there are many factors pushing towards and pulling against international tax agreements. This makes it very difficult to predict what will happen and when. I certainly don't plan to guess. However, my feeling is that something will happen, and we can only hope it will be soon and that it will be effective. I have set out my own proposals for a way to tax international individuals, and the approach could be modified to apply to business taxation as well. In my next post I will briefly explain this.
