Corporate tax cuts are bringing the global economy back to 2008
By Wayne Swan
Ten years ago, the global financial system was rocked by the largest crisis since the Great Depression.
On Sept. 15, 2008, the U.S. investment bank Lehman Brothers filed for bankruptcy after its highly leveraged housing loan portfolio finally collapsed under the weight of widespread mortgage defaults. The global economy lost its nerve, and hundreds of thousands of individuals lost their jobs, their homes and livelihoods.
The loss of potential output in advanced economies over the next several years was the equivalent of wiping the German economy off the map. The crisis that followed Lehman Brothers’ collapse was the almost inevitable culmination of decades of lax financial regulation.
Thankfully, swift, coordinated policy action driven by the G-20 successfully avoided the onset of a deeper and more prolonged global recession. In the 10 years since 2008, academics, pundits and policymakers have tried to rebuild a more robust global financial architecture – one that can circumvent a regulatory race to the bottom of the kind that precipitated the crisis.
Fighting deeply entrenched vested interests that are pulling for still-greater financial deregulation, regulators have recovered some ground.
Despite the early remedial efforts of the G-20, the crisis has still left lasting scars on many measures of output and employment, ensuring that at least some moves to roll back regulations that would weaken financial systems have been roundly rejected.
While the pace of regulatory repeal may have slowed, a parallel race to the bottom – in corporate tax – has accelerated.
And its consequences threaten to be just as long?lived as the fallout from the financial crisis.
The trends are troubling. In late 2017, U.S. President Donald Trump slashed U.S. corporate tax rates from 35 to 21 percent, driving record share buybacks and CEO bonuses at the expense of wage growth for the rest of the workforce.
The U.K. is poised to press on with its 1 percentage point per year reduction in the statutory corporate tax rate, despite already boasting the lowest rate in the G-7.
Canada, which reduced corporate rates at a similar clip between 2000 and 2011, is under renewed pressure to bring them down further.
And in Australia, two days after the conservative government’s long-standing but deeply unpopular policy to cut tax rates for big businesses failed to pass the Senate, the right wing of the party deposed the country’s prime minister.
As a group of leaders from government, academia and civil society, the Independent Commission for the Reform of International Corporate Taxation, of which I am a member, is convinced that ending the race to the bottom on corporate tax is a matter of global urgency.
Tax is not only the price we pay for a civilized society, or the quid pro quo levied on the private sector for the provision of public infrastructure and a healthy and well-educated workforce. Tax is also an essential safety valve that allows democratic governments to curb the power of unelected corporate leviathans – some of which now boast a net worth higher than the GDP of some G-20 economies.
The race to the bottom on corporate tax robs governments not just of revenue, but also of one of the most powerful policy tools to reduce inequality and promote distributions of income and wealth that are fairer and more conducive to ongoing economic growth.
Further blunting the potency of fiscal policy are ongoing efforts by multinational enterprises to aggressively minimize and altogether evade their corporate tax responsibilities by using tax havens.
ICRICT Commissioner Gabriel Zucman and colleagues have recently shown that 40 percent of multinational profits, or $600 billion, are shifted to tax havens each year.
For advanced economies, recovering their tax base from tax havens might be harder, costlier and lengthier than simply reducing headline rates, but it is essential.
The package of reforms for the global tax system known as the Base Erosion and Profit Shifting Project, which were unveiled three years ago by the Organization for Economic Cooperation and Development and the G-20, is one step in the right direction, but it is far from sufficient.
For the ICRICT, the fairest and most effective approach is for multinationals to be taxed as single firms doing business across international borders. Global profits and associated taxes could then be allocated according to factors such as the sales, employment and resources used by the company in each country, rather where they locate their head offices and claim their Intellectual Property.
This global reform would strike a considerable blow for tax justice.
Without global responses such as these, economies can falter, and democracies fail. The lopsided society that encourages a race to the bottom and permits multimillionaires and multinationals to hold 10 percent of global GDP in tax havens is toxic for democracy and foments the kind of populist backlash that allows authoritarianism to flourish.
By continuing to run the race to the bottom on corporate tax, governments run away from their democratic responsibilities and hurtle headlong into the next global crisis.
Wayne Swan is the former treasurer and deputy prime minister of Australia and a member of the Independent Commission for the Reform of International Corporate Taxation.
A version of this article appeared in the print edition of The Daily Star on September 17, 2018, on page 7.