10 years after Lehman, it’s another mess
Published on September 19, 2018
The race to the bottom in corporate tax rates needs to stop. This is fuelling income inequality and authoritarian tendencies
Ten years ago, the global financial system was rocked by the largest crisis since the Great Depression.
On September 15, 2008, the US investment bank Lehman Brothers filed for bankruptcy after its highly leveraged housing loan portfolio finally collapsed under the weight of widespread mortgage defaults. The crisis that followed was the almost inevitable culmination of decades of lax financial regulation. 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.
Thankfully, swift, coordinated policy action driven by the G20 successfully avoided the onset of a deeper and more prolonged global recession. In the 10 years since 2008, regulators have recovered some ground. The crisis has left lasting scars on many measures of output and employment, helping them to try to rebuild a more robust global financial architecture.
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, Donald Trump slashed US corporate tax rates from 35 to 21 per cent, driving record share buybacks and CEO bonuses at the expense of wage growth for the rest of the workforce. The UK is poised to press on with its one-percentage-point per year reduction in the statutory corporate tax rate, despite already boasting the lowest rate in the G7. In India, the government had reduced the corporate tax to 25 per cent from 30 per cent in the Union Budget of 2017-18 for most of the companies.
As a group of leaders from government, academia, and civil society, the Independent Commission for the Reform of International Corporate Taxation (ICRICT), 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 civilised 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 which 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 G20 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.
Using tax havens
Further blunting the potency of fiscal policy are ongoing efforts by multinational enterprises to aggressively minimise and altogether evade their corporate tax responsibilities by using tax havens. ICRICT Commissioner Gabriel Zucman and colleagues have recently shown that 40 per cent 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 was unveiled three years ago by the Organization for Economic Cooperation and Development (OECD) and the G20, 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 permits multimillionaires and multinationals to hold 10 per cent of global GDP in tax havens foments the kind of populist backlash that allows authoritarianism to flourish. By continuing their race to the bottom on corporate tax, governments run away from their democratic responsibilities and hurtle headlong into the next global crisis.
The writer is the Former Treasurer and Deputy Prime Minister of Australia and a member of the Independent Commission for the Reform of International Corporate Taxation .