Global Tax Justice – shaping the global tax base

We recognise that in order to achieve global redistribution of wealth, human development and stop environmental degradation, we need to increase tax collection globally. This needs to take a comprehensive look on the global tax base. Secondly we need to challenge our notions of global redistribution and forms of social solidarity in the current world. Global redistribution is commonly understood as development aid. The demand of campaigners for a long time has been for industrialised nations to contribute 0.7% of their GNI to development aid. However, since this demand is not met, we find ourselves debating innovative sources of financing for development aid namely global taxes. This situation is partly paradoxal, since development aid itself in my view can't bring forth development, but since we are talking of global taxes it's a major step forward. It’s an important to move towards more permanent bodies that distribute wealth globally. That’s why I’d like to talk about the global tax base, as a concept that captures the potential of taxation to redistribute wealth and act as a vehicle for global social policy.

The debate that I'm taking forward certainly has some milestones. And among them I distinguish the Landau report, which was presented to the UN last November, and the Draft Treaty on the Currency transaction tax, which is a civil society initiative to be taken up by like-minded governments. It's basing my contribution on these steps, that I start looking at what I think is a way to achieve global redistribution.

Recognising the political nature of the Landau report, I believe that it can't do otherwise than reiterate the prominent place that national sovereignty has over matters of taxation. The report, already in its executive summary notes the following: “[T]he opposition is the fact that national sovereignty is viewed as untouchable, especially in matters of taxation”. Though this is a current reality in international relations, it should not be seen as an uncritical fact. Ever since capital markets were deregulated from capital export controls, we’ve been in a situation, where national sovereignty is for sale. Literally so, in terms of major accountancy firms and legal advisers buy purposeful tax shelter legislation from offshore locations. And we can even calculate the optimal amount of national sovereignty to sell to make a point. The equation for calculating the price of national sovereignty is the following.

Revenue collected by the offshore government in offshore vehicles (levies and indirect taxes) divided by square kilometres of that particular jurisdiction. For the case of Andorra, they levied 309 million Euros of taxes in 2005, of which 219 million were from indirect taxation (consumption and service charges), resulting to two thirds of all tax revenue. So Andorra is selling a square kilometre of sovereignty for 467,900 Euros (468 square kilometres in the case of Andorra). Andorra also has a conveniently small population of only 69,500 persons, which comes up with a population density of 148 per square kilometre. As a result, the population receives public goods from the tax haven activities worth 3150 Euros per person per year. That’s enough to provide basic services, they even have public libraries and e-government in four languages, telling something about the global reach of the small tax haven. Thinking that they don’t pay any income tax, which should be around 40% on average in OECD nations, the transfers that citizens in Andorra receive, 3150 euros per year, goes quite far in providing services in such a small landlocked state in the Pyrenean mountains.

I mean it's fantastic to be able to do your tax return on-line in four different languages, I wonder why. Andorra is a non-state, a non-existent state that under the current world order is allowed to exist and can uphold absolute sovereignty. It actually is not a state, it's a co-principality, where the Catholic bishop of Urgell and president of France are the official heads of state. If Jasques Chirac really wants to act in favour of global taxation, he better put his own house in order first and mend the leaking tax bucket over in his jurisdiction. So effectively, the two of the most powerful political actors of our times, the Catholic church and the Republic of France are sponsors of global corruption.

The theory of selling sovereignty goes so that when selling sovereignty you have to sell the whole country, especially when designing a zero income tax regime. So if you think of the equation, then it only works for small jurisdictions, otherwise the population that would need to be supported through indirect taxation becomes too large. If for example a country like Argentina attempts to become a tax haven, it simply has too much sovereignty to sell at one deal to be worth it in lump sum indirect taxes. Of course setting up special export zones is a way of just selling a bit of sovereignty at the cost of increasing tax competition that in the end erodes the global tax intake.

Countries no longer autonomously decide upon our taxes, they are dictated by the market, which is made up of various actors that use sovereignty as a tool to erode the global tax base. The levels of corporate taxation globally have been decreasing in the past 20 years due to tax competition, and the pace on tax competition is coming from nowhere else than the offshore world. The result at least in the UK is that income taxes account for far more revenues than corporate taxes, from a situation where their comparative yields used to be more or less equal. The yield of the income tax has more than doubled between 1989 and 2003, where as the corporate taxation in the same period only increased 36%. In Brazil, for example, between 1995 and 2001 the employee’s income tax rate rose by 14 per cent and social security contributions by 75 per cent. Tax on profits, however, were reduced by 8 per cent over the same period. The regressive nature of Brazil’s tax regime has been magnified by a value-added tax regime that biases the tax burden towards lower income households, which pay approximately 26.5 per cent of their disposable income on VAT whilst high income households pay 7.3 per cent of their disposable income on VAT (source: UNAFISCO, Brazil). The last figure is horrendous, it means first of all that low income brackets are very poor in Brazil since they use so much of their income in food. In South Africa, the lowest 10th income bracket uses more than 30 per cent of their disposable income on food alone, so that doesn't leave much money for other essentials such as transport, housing, communications not to mention leisure. The VAT regimes around the world are hitting the poor the hardest and thus they are completely against to our view of a just system of taxation. In fact the poor are plugging the revenues needed to run a state, that the wealthy individuals and the multinationally operating corporations evade.

The global tax gaps need to be looked upon, in the Landau report, a surtax on profits of multinational corporations is likely to lead in massive tax evasion, as they would simply report less profits, and find jurisdictions where such a tax would not be levied if they would decide to report any operating profits. The nature of money has changed in the world we live these days, it's no longer neatly in profits, foreign investment, or trade flows. The indicators of globalisation, for example used in the recent Finnish Trade Policy Report, are all so high due to tax evasion. Tax evasion drives up the formation of new subsidiaries, the drive of companies to become ever more multinational (criteria usually used is that over half of turnover is made abroad, which in a world of tax havens is a simple fact of 'tax neutrality'), and increases trade volumes, and foreign direct investment. Globalisation measured with such indicators is a complete hoax and should never been taken at face value.

There are 150,000 new companies formed each year in the 73 tax havens that we have identified within the Tax Justice Network. Over 50% of world trade passes through tax haven transactions, though these jurisdictions only account for 3% of global GDP. The Economist magazine also reported on 31st of January 2004 'The Taxing Battle', quoting British government sources, that internal transactions of multinational corporations account for 60% of the sum of world trade. To put it simply, multinational corporations engage in intercompany transactions, largely through tax havens, in order to evade taxes. On page 71 of the Landau report we find that while in Italy nominal corporate tax rate is 36%, and actual intake is 11%, we may wonder where the benefits of globalisation have really went. This picture that I have painted of the actual forces of globalisation, present the greatest challenge to the future of welfare societies and to the development of the poorest regions of our world, namely Africa, Caribbean and the Pacific islands where wealth is being plundered like never before.

Regulation, as we know it up until now, doesn't work. France can't simply raise it's corporate tax rate and expect those taxes to be paid. The EU can't possibly start levying a European wide corporate tax and expect complience, in a world where most of financial 'innovation' is lead by a continuous drive to escape regulation. Trusts (both charitable and just personal ones) are aptly used by financial planners and investment bankers in the major European and other capitals to divert monetary flows. What we need is more fundamental regulation, than just more rules. We need to change the rules of the game, and especially so change the way in which companies report their profits, and list all subsidiaries and all trade between them (itemised billing please). What we have is a system where the tax evaders are setting the rules, and we don’t seem to notice it, since they hide behind the national sovereignty of offshore states.

Another major initiative for expanding global taxation is the currency transaction tax organisation, a draft treaty is relaunched today to advance its birth. Where the Landau report doesn’t directly support new institutions to govern returns on global taxation, the CTTO on the other hand says that “States may decide otherwise whether the Organisation shall seek Stateship of the UN, say, in the form of, or with the governance of, a would-be Economic Security Council, as proposed by the Commission of Global Governance.” (p.6). The CTTO presupposes, being a draft emerging from civil society, that current institutions to manage and administer global tax base need to be new hybrid organisations of governments, parliamentarians and civil society: “The Assembly will be comprised of representatives from governments, democratically elected national parliaments and a sample of civil society actors chosen through a screening procedure and lottery. Each government has one representative.” (p. 5) Such institutional innovation for new taxation initiatives is crucially needed, though certainly we need to convince like-minded governments to take up our demands to make it a reality. What the institutional innovation should consider is the comprehensive erosion of the tax base in all of it's forms, and try to seek the most effective long term solutions. In this respect I think the CTTO and new accounting rules proposed by Richard Murphy (available at www.taxjustice.net) are the two leading proposals for safeguarding the tax base.

I’d like to be able to make a pie chart mapping out these different compositions of the global tax base, but drawing that up is not an easy task since knowledge of the potential of global taxation is only now being worked upon. I could however state that the three components 1) national erosion through neo-liberal tax policies such as the VAT; 2) untapped potential of global taxes, the areas of taxation that fall in between national or offshore jurisdictions or on territories without sovereign claims (such as international air space and high-seas; 3) global tax evasion and tax competition which comprise the offshore phenomenon, and neo-liberal policies of promoting tax competition especially in the poorest of the countries to supposedly attract more investment.