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Education International

Tax Justice

published 10 June 2013 updated 10 June 2013
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Inequality, inside and among countries has been growing in recent decades. The IMF (see, “The price of Inequality”) and the OECD have expressed concern about growing inequality, which they consider to have negative effects on the economy. At the end of 2011, the OECD, in releasing its study, “Divided We Stand: Why Inequality Keeps Rising”, stated, “There is widespread concern that economic growth has not been shared fairly, and that the current economic crisis further widens the gap between rich and poor.”

Markets distribute and exchange goods and services produced by labour and capital, but they do not, left on their own, produce fairness. The financial market, the monetary infrastructure of the economy, seems to have developed a life of its own – one that is often remote from the needs of both the real economy and of real people. The combination and interaction of the two markets, in fact, generate inequality.

There are many market-related and/or political causes for growing inequality. They include weaker trade unions in many countries and shrinking coverage of collective agreements, the spread of “flexibility” legislation and practices producing precarious work, and social distortions that come from imbalances in the international trading system.

Government can offset some of this market inequality through public spending and progressive taxation. For example, public expenditures on education, health care, transport and other services provide benefits to all citizens, but particularly low and modest income households. If everyone was forced to pay for these services in prices rather than taxes, then inequality would be even greater than it is. It is also true for many public investments such as housing and other infrastructure. These programmes support and provide opportunities to those who are not wealthy.

However, equality and social justice issues are not only relevant to the expenditure side of the equation. They are fundamental to the revenue side as well. Progressive taxation, in which tax rates rise as income rises, makes the distribution of market income and riches fairer.

Where progressive income tax systems exist, mostly in OECD countries, they have remained essentially progressive with one major exception. Higher income groups and corporations have seen their share of the revenue that supports public services go steadily down in very many countries.

Wealthy individuals and corporations have gotten tax reductions and breaks, not only because they are often powerful lobbies, but because they are mobile. They can threaten to move physically, move their money or both. This mobility of capital has created an unhealthy tax competition among governments. If a government seeks to restore, even partially, earlier tax rates on those at the top, it is promptly accused of risking capital flight and destroying jobs. While the extent of this threat is debatable with strong evidence showing high tax rates are compatible with robust economic growth, governments are nevertheless skittish about testing it out for fear of capital flight.

But, the issue of tax rates for those on the top is only one problem. There are also such issues as loopholes that are usually much more available to those with large incomes than for those with modest ones. Loopholes make real taxes – the “effective” tax rate -- fall far below the “official” or statutory rates.

Another example is the preferential tax treatment of income from capital gains as opposed to income from salaries that most of us earn. Most jurisdictions set their capital gains taxes much lower than taxes on wages. This is the reason why the American billionaire Warren Buffet famously noted that he paid a lower effective tax rate than his secretary. In other words, one is much better off speculating in the stock market or clipping coupons than working. This is not only unfair, but it encourages idleness.

In spite of these negative trends, there is some hopeful movement on taxes. Regardless of whether it is prompted by concerns about tax justice or about the loss of revenue in times of austerity, some work being done by governments through the OECD on corporate taxes offers promise for change; something unimaginable when EI and the Council of Global Unions published, in December of 2011, “Global Corporate Taxation and Resources for Quality Public Services”.

Early this year, the G 20 charged the OECD with proposing ways to prevent corporations from shifting profits and avoiding taxes, much of it perfectly legal. Questions about this work, which has produced an initial report, are answered by the OECD in “Base Erosion and Profit Shifting (BEPS)”.

There are many complicated issues far beyond the capacity of anybody other than international tax experts to understand; however two examples provided by the OECD show just how global shifts distort reality. The largest foreign investor in India is Mauritius and the second largest investor in China is the British Virgin Islands. Multinational enterprises, because of their capacity to shift tax obligations across borders and through tax havens, may be paying as little as 5% in corporate tax compared with small business paying up to 30%.

Under the leadership of the Trade Union Advisory Committee to the OECD (TUAC), the best expertise that we have in trade union ranks is being pooled to try to ensure that it is not just governments and corporations (and their tax firms) that are able to effectively participate in the debate.

Even if this complex work bears good results, it will not resolve the problem mentioned earlier of competitive tax reductions for corporations. It might even increase the pressure for reductions as the effective tax bill for a lot of companies would considerably increase. The only way that the falling tax rate issues for corporations or for individuals can be effectively addressed is if governments take collective action to end this destructive competition.

Of course, there are many other tax justice issues, like the Financial Transition Tax (FTT) that has gotten off the ground even if in a limited number of major countries, although one could argue that the FTT is as much a financial speculation issue (it should slow down some of the rapid irrational trading) as a tax justice question.

People are, as they should be, outraged that so many of the most powerful and wealthiest escape paying their fair share of taxes to support the societies from which they have benefited so generously. This is particularly true today as politicians are taking a hatchet to public services and programs, claiming there just isn’t any money left to afford these basic social protections.

Sure, raising taxes on the wealthy won’t solve all the problems of inequality, even if it’s a good first step. Even if one had tax justice tomorrow, it would not relieve the general public of their responsibilities; the responsibility of supporting government would still largely fall on them. However, it would be a just responsibility; not an unfair one.

The opinions expressed in this blog are those of the author and do not necessarily reflect any official policies or positions of Education International.