- Created on Friday, 30 June 2017 07:04
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(Edited Image Courtesy: OECD)
The Organization for Economic Cooperation and Development (OECD) & certain similar entities want to market globalization with a human face. They want to do this by changing capitalism with socialism as the front engine of globalization train.
They want to tax more rich persons and companies in varied ways. For them, progressivity of taxation is the need of hour. This proposal has been mooted with the belief that globalization has led to reduced progressivity of taxation at the top end & created inequalities.
The trade-off between high rates of taxes and tax evasion is no longer the issue for global policy makers. Nor is the impact of high taxes on capital investment and jobs creation.
“Re-design our tax systems to reduce inequality and promote inclusive growth,” says OECD Policy Brief captioned ‘Time to Act: Making Inclusive Growth Happen’ released on the eve of two-day OECD Ministerial Council Meeting (MCM) that concluded on 8th June.
It says: “Progressive taxation is a key pillar of redistributive fiscal policy and has an important role to play in mitigating the advantages bestowed by inherited wealth and assets. The design of tax incentives also has important implications for how our economies grow and how the proceeds of that growth are shared out”.
It remains to be seen whether progressivity in taxation would remain a wishful idea or an achievable one keeping in view government propensity to attract capital through attractive tax packages.
Before elaborating progressive taxation proposals, we should take an overall view globalization.
According to OECD’s update on inclusive growth prepared for MCM, global economic integration has been a source of prosperity for many years, but is coming under growing political pressure partly due to uneven sharing of the benefits of growth. It is perceived as one of the causes of increased inequalities and a source of disempowerment for individuals and communities.
It says that capital flows and global economic integration have also increased the difficulty for governments in taxing mobile capital income, with possible detrimental effects on inclusiveness.
A World Bank report titled ‘Globalization backlash’ shares a similar concern. Released in April this year, the Report observes that pressures against international trade are mounting. The negotiation of mega-regional trade agreements stalled, the number of protectionist measures has increased, and existing agreements may be reconsidered.
The Report notes: “Recent political developments suggest that for many people in advanced economies globalization has gone too far. The vote for Brexit in the UK, and the election of Donald Trump as US President, have been interpreted as signaling a further shift against the international trade architecture built over the last few decades”.
According to United Nations Conference on Trade and Development (UNCTAD), the most commonly used index to gauge globalization trends -the ratio of the value of world trade over global GDP (GWP) - indicates a decline in economic interdependence. This index stalled at about 30 percent between 2011 and 2014. This level was first reached in 2007. The index fell by about 4 percentage points in 2015.
UNCTAD’s report titled ‘Key Indicators and Trends in International Trade 2016-A Bad Year For World Trade?’ says: “Many other indexes presented in this report are suggesting a reverse in the fortunes of international trade”.
In a Statement captioned ‘Making Globalisation Work: Better Lives For All’, MCM observed: “We recognise the importance of strong government-business-unions-civil society dialogue to help tackle the challenges of globalisation and digitalisation, and spread the benefits more widely to foster inclusive growth”.
MCM added: “We acknowledge that barriers arising from both tax policy and administration can negatively impact trade and investment. We encourage further work to improve tax certainty, including the prevention and efficient resolution of crossborder tax disputes. We continue to support and target assistance to developing countries in building their tax capacity. We look forward to an interim report on the tax challenges of the digital economy by the next MCM”.
Apart from undertaking tax reforms to attain equity, a set of proposals have been mooted by OECD and International Monetary Fund (IMF) separately to make globalization work for all.
The proposed reforms include including enhancing government spending on welfare of poor people and rewriting norms of globalization to prevent certain countries and cartels rigging the system for their benefits.
It is now politically correct to rationalize & justify ever-growing resentment against globalization, which has facilitated enhanced flow of capital, labour, technology and goods & services across the globe.
“Globalisation is not a destiny to which we must yield without demur,” stated Chancellor Angela Merkel last week at the ‘G20 Africa Partnership’ conference. The challenges of globalization would figure at forthcoming G20 summit.
According to a document titled ‘Priorities of the 2017 G20 Summit’, “What fears and challenges are associated with globalisation, and what can we do to address these? How can we safeguard inclusiveness and ensure that the fruits of prosperity and growth are distributed fairly”?
It adds: “We must not allow globalisation’s positive impact on prosperity to be diminished by isolation and protectionism”.
As put by Ms Merkel, “We have adopted the motto, ‘Shaping an Interconnected World’, for our G20 Presidency. The G20 Summit will take place in Hamburg. We have chosen a maritime image – a reef knot – as the symbol of our Presidency. The harder you pull on it, the better it holds. It symbolises the ties between our countries”.
Coming back to taxation, tax progressivity varies from country to country. Governments have different political and socio-economic considerations in balancing redistribution of income through high rates of taxation and through social welfare schemes such as supply of subsidized food and fuel & subsidized provision of loans to farmers, small industries, etc.
OECD’s march towards enhanced tax progressivity would be constrained by President Trump’s recent package for phased reduction in both corporate and personal income tax rates.
As it is, the enhanced movement of capital across countries has created competition among countries to reduce taxes to attract capital in different sectors.
Can OECD convince its member countries notably the US to avoid tax reductions and the resulting tax sops competition?
If OECD can’t facilitate a broad consensus against tax incentives competition, then the prospects of enhancing tax progressivity become weak.
OECD’s ‘Key Issues Paper’ (KIP) prepared for MCM notes that many possibilities exist for restoring some of the lost progressivity in tax regimes. International cooperation on the taxation of mobile tax bases can also aid inclusive growth.
The Paper says: “Should individual countries favour greater tax progressivity at the domestic level, the recent move towards the automatic exchange of financial account information for tax purposes between tax administrations gives them greater room for manoeuvre to revisit the way they tax savings at the individual level and shift some of the capital income tax burden from the corporate to the individual level”.
According to the Paper, other measures could include increasing the progressivity of the personal income tax (PIT), introducing or increasing taxes on capital gains, levying recurrent taxes on the market value of immovable property and introducing or increasing recurrent taxes on net wealth.
Another option is to remove regressive tax exemptions, such as the common practice of offering mortgage interest tax relief. The fact that labour tends to be taxed more heavily than capital not only directly contributes to inequality but also implies a higher tax burden on SMEs, since small firms tend to have more labour-intensive production processes than large firms.
The Paper suggests: “The burden of labour taxation could be eased by unifying general taxation and social security contributions. This also has the potential to improve incentives for both labour supply and demand. Earned income tax credits at lower incomes can also improve progressivity of the system and encourage labour force participation”.
According to IMF Policy Paper (PP) titled ‘Fiscal Policy and Income Inequality’ issued during January 2014, raising progressivity also requires reconsideration of tax deductions. Many economies adopt various tax allowances in their PIT related to children, education, housing, health insurance, commuting and charitable donations. Some accrue disproportionately to the rich, such as deductions for mortgage interest. This is because households with high incomes are more often homeowners, and tax relief is often granted in the form of deductions, which are worth more at higher marginal tax rates.
Noting that tax expenditures result in revenue forgo, PP says: “In many countries, these might not be subject to the same public scrutiny as ordinary public spending, especially when the governments do not publish a tax expenditure review. Tax expenditures should undergo to the same cost-benefit analysis as spending measures. Some, but not all, tax deductions might well be justified on the basis of their implications for equity and efficiency, such as deductions for charitable giving.”
OECD Policy Brief suggests: “Bolster global governance of tax policy”. It says that Multinational companies' (MNCs') capacity to engage in arbitrage between different tax jurisdictions exacerbates the trend in shifting the tax burden from capital to labour.
The signing of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base erosion and profit shifting (BEPS) should create conducive environment for phased reduction of tax incentives.
BEPS prevention & progressive taxation proposal can work only the Governments define globalization as creating a level playing field for all factors of production and for all countries.
As put by KIP, “a policy response is therefore urgently needed to make globalisation work for all and avoid prompting a damaging retreat from economic openness. But such a response is only likely to succeed if it goes beyond trying to ‘fix’ aspects of globalisation that are the subject of discontent. It should be framed in the context of a new policy narrative based around the concept of inclusive growth”.
published taxindiainternational.com on 27th June 2017
