Time for Tax Justice

Tax Wars - A race to the bottom
Tax “competition” or more precisely tax wars is the process by which countries or even cities use tax breaks and subsidies to attract investment or hot money (TaxJusticeNetwork). States often cut taxes on wealthy individuals and/or corporations and then try to make up the difference by hiking taxes on poorer sections of society or by cutting public spending. At the global level, this process is a race to the bottom. Leading to a rise in inequality and erosion of democracy. At the national level all evidence shows that it is a mistake to try and create a “competitive” tax system for two major reasons. First, tax competition bears no economic relation to competition between firms in a market. Using the term competition obfuscates the reality of governments waging tax wars, to the detriment of labor. Second, tax is not a cost to an economy but a transfer within it. Tax cuts for corporations provides subsidies to them at the expense of public spending on roads, courts, education or health care etc. Even if cutting taxes does attract investment, the evidence being weak, it attract exactly the wrong kind of investment i.e. the flighty kind with few productive linkages to the rest of the economy. 

Tax Havens
The financial system, and many large corporations working within it, has since at least the 1980s total global reach. The international tax architecture has not adapted to this reality. Offshore financial centres and tax havens are fully integrated into the global financial system and large shares of trade and capital movements are channelled through them. Using tax havens is now “normal” business practice in most large firms and banks. According to the Financial Secrecy Index (FSI) an estimated $21 to $32 trillion of private financial wealth is located, untaxed, in tax havens around the world. The FSI reveals that the world’s most important providers of financial secrecy (= tax havens) are not small islands as many suppose, but some of the world’s biggest and wealthiest countries (see chart). In a press release about the latest United Nations Trade and Development report 2014 UN officials stated that: “A large proportion of illicit financial flows – which make use of all kinds of mechanisms for circumventing judicial and regulatory oversight – goes through offshore financial centres, based in “secrecy jurisdictions”. Approximately 8–15 per cent of the net financial wealth of households is held in tax havens, mostly unrecorded. The resulting loss of public revenue amounts to $190−$290 billion per year, of which $66−$84 billion is lost from developing countries, equivalent to two thirds of annual official development assistance". This statement have major implications for both tax and aid policy. 

Data: Tax Justice Network
Audit Firms

The world's four largest audit firms - PwC, KPMG, Ernst & Young and Deloitte - are central architects of corporate tax evasion and offshore financial secrecy according to a review of court cases, government records and secret offshore files uncovered by the International Consortium of Investigative Journalist (ICIJ). These four companies have worldwide operations and they employ more than 700,000 people and cash in revenues of more than $100 billion a year. Much of their top leadership is based in the United States and Britain. All of these companies have been involved in fraud but always gotten away with only paying penalties, i.e. no criminal charges, because of the new "too big to fail" philosophy among corporations and governments (ICIJ, November 5, 2014). There is no evidence of this being the case. In Luxembourg, internal company documents reviewed by ICIJ show that PwC has helped Pepsi, AIG, Apple, Amazon, HSBC, J.P Morgan, Lehman Brother, SEB, Cargill, Citygroup, Tele2 group, IKEA and other corporate giants from around the world to slash their tax bills by billions of dollars through secret deals (ICIJ database). These deals may be legal or not (TaxJusticeNetwork) but we won't know until they have been tried in court. Now commentators are speculating that Jean-Claude Juncker may lose his post as EU Commission President since he was prime minister in Luxembourg during the time the deals were struck. The EU commission has tried to downplay this new leak, but Danish MEPs are calling for an independent investigation (Euractiv)

Tax Justice Debate
In Europe
Governments should be able to finance public spending required by their citizens for a more secure and prosperous life. Taxing the wealthy and corporations is key to mobilizing domestic fiscal revenue. Without it governments run the risk of becoming dependent on aid or debt which restricts policy. The economic and financial crisis in Europe and elsewhere has raised awareness and frustration among leaders and the public on the issue of tax dodging and its cost to public goods and services. This awareness has, however, not yet led to changes to the underlying causes of the problems, including the lack of transparency and effective tax co-operation between governments. The debate about corporate taxation can be understood in light of statistics on tax collection in the EU-28 countries. The latest figures from Eurostat show that in all EU Member States, taxes on capital make up the smallest share of tax revenue compared to labour and consumption (see chart below). A recent report "Hidden profits: The EU's role in supporting an unjust global tax system 2014" from Eurodad showed that practices facilitating tax evasion by transnational corporations and rich individuals are widely used in the EU, in some cases so governments can claim to be "tax competitive". The study also showed that many European countries have a large number of tax treaties with developing countries that often push down the taxation levels on financial transfers out of developing countries, thus creating tax loopholes for transnational corporations. Spain, the UK and Sweden have negotiated the biggest reductions in developing country tax levels, despite several studies proving the negative effects these treaties can have on developing countries (Eurodad, 2014).
Sources of tax revenue in EU-28.
Source: Eurodad (2014) 
In Sweden
Corporate tax rates in Sweden are average compared with other countries in the EU. However, a proportionally higher part of the total tax revenue in Sweden comes from labour, while the part that comes from capital is much lower than the average. 13% of the total tax revenue comes from capital, while the average in the EU is 20.8% (Eurodad, 2014). Unlike most countries, Sweden neither taxes inheritance, gifts nor net wealth (SVT, 2014). In an effort to bring money hidden in tax havens back to Sweden, a special "tax amnesty" has meant that the number of people voluntarily reporting wealth hidden in foreign accounts has increased. During 2013 more than 2000 individuals chose to repatriate their wealth to Sweden from various tax havens. Although this amnesty is estimated to have given some SEK 1.7 billion to the state treasure since 2010 these measures are not uncontroversial. Many people object to rich individuals committing tax crimes and getting released from penalty while low-income people have to pay. The former Swedish government stated that countering tax dodging was a high political priority but in spite of this they were not supportive of obligatory regulations on the EU or international level. There is an ongoing debate in Sweden regarding tax avoidance in publicly financed companies in the welfare sector. An examination made in 2014 by the newspaper Dagens Nyheter showed that the five largest healthcare provider corporations, with joint profit of SEK 1.2 billion, only paid SEK 26 million in tax. The chart below rates Swedish policy in regards to tax treaties, and standards applied, with developing countries. The overall result shows a downward trend
GREEN= The government uses UN Model when negotiating tax treaties, YELLOW= The position is unclear, the government does not systematically apply one specific model (UN or OECD), and RED= The government applies the OECD Model that does not ensure effective anti-abuse clauses. Source: Eurodad, 2014


Out of the ashes into the fire

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