Global Tax Reform: How and Why?

Jazz Singh
Jul 10, 2017 · 3 min read

2016’s populist campaigns embodied American dissatisfaction with the economy. By all objective measures, the U.S. economy is currently stronger than it was eight years ago. Unemployment is nearly at its “natural” level, economic growth has been steady (though not stellar), and the real estate market has bounced back. Why do ordinary Americans feel as if the economy has not benefited them? In short, it hasn’t. Millions of Americans are still under-employed or have stopped searching for employment altogether. GDP growth has not cracked 3% for three successive years — a first for any administration. The real estate market has boomed but the average American spends nearly 25% of their earnings on rent. Most significantly, income inequality has skyrocketed to levels not seen since the Gilded Age.

Stagnant wages offer one explanation for American dissatisfaction with the economy. One study indicates productivity has risen dramatically since 1973, but wages increased only slightly since then. Easing the tax burden on the middle and working class would offer some relief and possibly reinvigorate their spending power. Doing so raises two problems. First, the federal government’s budget deficit continues to rise every year with little bipartisan consensus on addressing the issue. Offering tax cuts has the potential to be beneficial but that revenue would need to be made up or services would need to be cut. This raises a second issue, a significant portion of the American electorate wants the federal government to expand its existing services or create entirely new ones. Voters flocked to Bernie Sanders because of his advocacy for free college tuition and universal healthcare. Senator Sanders’ proposal was to increase taxes on capital gains and the country’s highest income earners. The recent debates concerning healthcare show that the electorate overwhelmingly supports Medicaid expansion and protections for pre-existing conditions. Republicans are trying to sell voters on the exact opposite by cutting taxes for the wealthy and halting Medicaid expansion.

While Senator Sanders’ proposed tax increases seem intuitively fair to most Americans, they fail to consider a significant global issue. Currently, wealthy individuals and companies around the world utilize tax havens to shield their earnings from governments. Just recently, Apple’s favorable tax rate in Ireland was valued at 13 billion euros between 1991 and 2015. On August 30th, the European commission ordered Apple to pay it all back because the tech giant effectively avoided all tax on millions of sales within the EU. In April, the I.R.S. valued lost revenue from tax evasion between 2008 and 2010 at roughly $458 billion per year. The agency also faces tremendous difficulties due to low staff morale, budget cuts, and negative publicity. While a higher tax rate on corporations and the ultra wealthy would help pay for some of the programs proposed by Senator Sanders, ensuring compliance with a higher tax rate would prove difficult.

Capital flight is not an exclusively American phenomenon. As the Panama Papers illustrated (to the surprise of absolutely no one) wealthy individuals and corporations around the world shelter their earnings from governments in tax havens. The effect may not be as immediate in the United States, but the loss of potential revenue for developing economies is much more significant. Most importantly, it limits government investment in important public infrastructure. Public works projects benefit societies as a whole because they have the potential to increase productivity and the standard of living. Public education, roads, airports, and bridges attract new opportunities for economic investment both domestically and abroad.

A global tax on multinational corporations and the ultra wealthy would help prevent capital flight and possibly raise the standard of living for millions around the world. In 2015, The Organization for Economic Cooperation and Development (OECD) proposed the Base Erosion and Profit Sharing (BEPS) initiative to combat tax evasion. It recommends that governments adopt greater uniformity in their tax codes, strengthen enforcement for tax evasion, and ensure “safe havens” cannot be exploited by transnational corporations. The OECD’s policy would generate significant revenue for governments without increasing the tax burden on their less wealthy citizens.

As the United States and other large economies grapple with rising inequality, diminishing social services, and sluggish economic growth, discussions about revenue and tax policy in the United States should not omit tax evasion’s significant impact on these issues.

Jazz Singh

Written by

A person with a variety of interests. Please direct all inquiries to jazz.g.singh@gmail.com

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