Race to the top: how tax justice can help solve global debt crisis

By Lithuanian NGDO Platform

Although it may not be high on our minds these days that we’re struggling with the suffocating lockdowns, the crisis we live through will have – and is already having – a much larger effect on our lives in the years to come than we can possibly imagine. One aspect of it is the looming global debt crisis. But the good news is that there are solutions and some of them come in the form of tax justice.

What Global Debt?

Ingo Ritz, Director of Global Call to Action Against Poverty (GCAP, a network of over 11,000 civil society organisations (CSOs)), says that together with the health crisis, there is a social and economic crisis that is much more serious in low- and middle-income countries, where hundreds of millions of people lost their jobs and incomes. He says that governments need to spend on health and social protection, yet they don’t have the financial resources. One reason for this is tax evasion; another – the debt crisis.

“A new debt crisis started before the pandemic”, says Ritz. “But with COVID, it really got serious: foreign investment, tourism, most other sectors decreased dramatically, but suddenly governments had to spend more on health and social protection. So governments needed more money but had less tax income.”

In 2020, debt increased by a third in low- and middle-income countries. It rose as well in rich countries, such as Japan, the US, and the EU. But the problem is that low- and middle-income countries can’t borrow as rich countries do, and they also have to spend much higher interests and pay a lot of their income for debt repayment, so they can’t spend enough for health and social needs. “If they take new credits, which is what rich countries do, then their debt crisis will be more problematic in the future”, says Ritz. “It is calculated that more than 150 countries had already to reduce their expenditures this year. That means austerity – cut spending to comply with their financial obligations. Remember what happened to Greece and other European countries after the 2008-2009 financial crisis and the effects of the extreme austerity imposed on the people.”

GCAP’s Director explains that in the past, a more significant part of the credits came from governments in the Global North, but this picture has changed. Currently, around one third of global debt is owed to governments; another third to private lenders such as banks and investment funds; and the last third – to multinational financial institutions, such as the World Bank and the International Monetary Fund (IMF). Yet, these latter two were among those who refused to postpone debt repayment for low-income countries as agreed by the G20. Instead, they demanded that governments, including those most hit by the crisis, continue repaying their debts with money they don’t have.

A good example is the civil society-run Jubilee 2000 campaign, which called successfully for the cancellation of debt for the world’s poorest countries, which – or “owed” – huge amounts of money to the rich ones. For decades, countries used their tax income or were even forced to take on new loans to pay back the old ones together with their rising interest rates. This meant that tax money collected from their citizens was not used for their health, education, and other needs but instead went into the pockets of already rich lenders. A similar pattern is emerging today.  

While health crises affect people, their social-economic impacts on the population are tremendous. According to OXFAM, it will take the world’s poorest people up to 10 years to recover from this current crisis, whereas over the last year, the world’s billionaires got even richer than they were before. Ritz is quotes an old saying: if you owe the bank 100 dollars, the bank owns you. But if you owe the bank 100 million dollars, you own the bank.

“Private persons and companies can become insolvent and use a structured process. Countries cannot. Poor countries have to negotiate with a group of rich countries – the so-called Paris Club (now China joined the club) –  without any internationally agreed process”, explains GCAP director. “At the moment, the financial interests of the rich countries and their banks are much better protected than the rights of people in low- and middle-income countries. This is very concrete: people are dying when the health expenditures are cut. We need a mechanism to solve debt crisis, which is based on human rights.” According to Ritz, one short-term solution to create resources during the ongoing crisis is for the IMF to create new funding – the so-called Special Drawing Rights. “Just like the US and the European Central Bank, the IMF can basically print money. That is difficult to believe, but the IMF already did this during the 2008-2009 financial crisis, when US $250 million were printed,” he says. “Now a broad coalition of more than 200 civil society organistions demands US $3 trillion. The IMF proposed US $650 billion, which is by far not enough based on their own calculations.”

Another more long-term solution, and more sustainable for the future, is tax justice.

Tax the Dodgers

But what is tax justice? The UK-based Tax Justice Network provides this definition: “Tax justice refers to ideas, policies and advocacy that seek to achieve equality and social justice through fair taxes on wealthier members of society and multinational corporations. To this end, tax justice often focuses on tackling tax havens and curtailing corruption and tax abuse by multinational corporations and the super-rich.” Multinational corporations are estimated to shift US $1.38 trillion worth of profit into tax havens every year, costing countries 245 billion US dollars in lost corporate tax annually. Among these multinationals are many IT companies, such as Google, Amazon, and Facebook, that make enormous profits yet generally don’t pay proper tax anywhere. In 2018 US billionaires paid less tax than their secretaries, according to Tax Justice Network. They avoid it by shifting profits from the countries where they produce and/or sell their products to a so-called tax haven, i. e. a country with little or no corporate tax requirement. The process is mostly secret, and while you as a working citizen would be fined and persecuted by the government if you failed to pay your tax, the rich get away with the exact same action on a much larger scale, and most often, it is not legally considered a crime.

Maruša Babnik, networking and project coordinator with the Ljubljana-based Ekvilib Institute, explains here in an email interview why tax justice is needed and how it can be achieved. Ekvilib Institute is the first Slovenian civil society organisation that started working in the field of tax justice, with their Stop Tax Dodging project that started to be implemented in 2013.

Maruša, if you were to explain in everyday language what tax justice is, where would you start?

This is a question that comes up often, especially since our audiences usually have their own perceptions of what justice in the field of tax would be.

Tax justice that we are advocating for is for governments to repair the national and international tax rules to ensure that multinational corporations and wealthy individuals pay their share to the societies in which they operate and live without taking extra steps to decrease their tax bills. In practice, that means we are calling for increased tax transparency – e.g. for multinationals to report where they do business, how much profit they make there and how much they contribute in tax, and to disclose who owns what – and we call for the prevention of the use of tax practices that facilitate tax evasion and tax avoidance, as well as that the international rules be made by all the countries that these rules affect, which is not the current practice.

I am from Slovenia, where financial literacy is quite low, so we also focus on presenting the positive role that tax already plays or should be playing in our societies.   

Historically, what factors have caused and are still causing tax injustice? What are the main forms that it takes, and who are the main actors involved?

Tax rules can lessen inequality within countries and between countries when working in accordance with the basic purposes of taxation. However, the system – as it is set now – is broken. Countries have almost complete control of their own tax laws, which means we have a lot of national tax systems, that can and do vary from each other, developing loopholes that companies can exploit. And then there are countries that are deciding on international tax rules without including the rest of the world in their decision-making, only patching up the broken and unfair system they themselves built in the first place (in the case of OECD). The globalised world requires an effective international tax system, agreed on equal footing by all the governments.

Tax dodging is an old story with a long history, but it went in overdrive with globalisation. However, only the recent financial crisis of 2008 and tax scandals that followed (Lux Leaks, Swiss Leaks, Panama Papers…) really highlighted the scope of tax dodging to the public, at least in our parts of the world. Trying to survive with austerity measures while bailing out banks and companies, and hearing about the huge estimated amounts of profits piled in tax havens, do not go well together. However, it is yet to build up the necessary political will and to lead to real changes to the underlying causes of the problem: tax secrecy and inadequate tax cooperation between countries, to name just two.

Talking about the main actors in tax injustice – these are the governments of countries participating in the so-called race to the bottom on corporate taxation. Among them, most notably tax havens, but other countries are also participating. Since the 1980s, the global corporate tax rate fell from over 40% to below 25%. And yet, some countries are going even further to attract business – offering secrecy and adopting harmful tax practices such as special individual tax agreements for multinationals, which facilitate them to pay little or no tax (the case of Lux Leaks). The list of tax havens is much longer than the one that the EU and OECD put together, as some of the strongest tax havens are EU and OECD members, which highlights the problem of OECD proposing solutions to international rules. One of the issues is also the cross-border rules in place, which were initially developed to avoid double taxation of the same individual’s or company’s activities by two countries, however, some of these rules can also be used to facilitate double non-taxation by companies and individuals – as is the case of Apple.  

Often overlooked is the role of the intermediaries. These can include tax advisors, corporate lawyers, banks, accountants, and others offering advice and assistance to multinational corporations and wealthy individuals seeking to dodge taxes.

What are the obstacles associated with achieving tax justice that you identify?

The first step towards achieving tax justice is transparency. It is essential that decision-makers and the public know about the current practices in order to address appropriately and effectively what is broken. Therefore, the public needs to be able to see, for example, who owns what, which multinational is operating in which country under what name, how much they earn there, and how much they contribute to that society in taxes.   

There are three solutions we have been advocating for in terms of transparency. Firstly, Automatic Exchange of Information between tax authorities. Although this is already in place, some countries, especially the ones where tax authorities have less capacity, are excluded. Second, we are calling for the implementation of a Beneficial Owners register, which would show who actually owns what (beneficial owners are natural persons behind legal owners that can also be companies). The EU addressed this in the Anti-money laundering directive, but its implementation is lacking. However, as the #OpenLux scandal demonstrated not long ago, registers provide actual results – the information came out from Luxembourg’s register of beneficial owners. Our third proposed solution is Country by Country Reporting – public disclosure of large companies’ business information on a country by country basis. Here, reports would include, among other things, what country a multinational enterprise is present in, how much profit they make, how many people they employ there and lastly, how much they are contributing in taxes. Something similar is already mandatory for EU banks.

As I said, tax secrecy is only the first obstacle. Apart from that, we need governments to start promoting progressive tax systems, built on the understanding that tax policies can have either positive or negative effects on inequalities within the country and between countries. Countries must stop the race to the bottom, in which they compete among themselves by lowering corporate tax rates or introducing harmful tax practices that facilitate corporate tax avoidance.   

And finally, tax justice cannot be achieved without true international decision-making on tax matters. All countries are participating on equal footing, one that is fair and transparent and open to observers. This is far from how international tax matters are being discussed for the past 60 years and more.  

Through your work, what perceptions of tax justice have you noticed among the public?

One of the first lessons we learned was that we need to start from the very basics: what tax is, why we need it and what it pays for. Then explain the national tax system so we are all on the same page before we start discussing more complex issues. That doesn’t mean that the public has no knowledge about taxation, far from it. But tax is something that is not being discussed or taught – not in schools, not at home. So the second lesson we learned was: tax is a personal matter. The result of that is that people have a limited view of the system, which then informs their understanding of it and their perception of what tax justice would be.

So it’s not hard to understand why you can hear a public school teacher saying that taxes should be cut and at the same time that their salary is too low, and telling you how they buy things from companies known for avoiding taxes; or why a public servant believes that we should give a break to tax avoiders since they built what they have with their own hands. No person is an island, as they say. And that is even more true in a country with public healthcare, public education, and other public services and infrastructure.

What tools are available for people to fight tax injustice in their countries both in the Global North and in the Global South?

It is the same as fighting on a policy level – the first step is transparency or, in other words, being well informed and informing others. Be aware of taxes around you; watch, listen, read, question, and discuss tax avoidance and tax justice with others. Another level is to send questions and demands to policymakers, join initiatives – sign petitions, spread the word through the communication channels you use. Join the global movement for tax justice – there are different initiatives and tools available in the Global North and the Global South. One example is the very recent WeMoveEurope petition to stop tax dodging. Question the companies you are buying from. Support public reporting of company data on a country by country basis as this gives countries with weaker capacities to monitor economic activities and collection of taxes a chance to gain vital information to close possible loopholes and collect taxes.

This way – as well as through publications by researchers and investigative journalists – the fight for tax justice was brought to the political arenas in many countries, as well as on the international level. However, there is still a lack of political will in the countries that are currently making international tax rules. Therefore public pressure must continue and grow stronger.

Is tax justice even possible in the current financial/capitalist system that we live in?

Tax justice is not only possible but needed for the current system not to implode. Without redistribution of wealth through progressive taxes, we will continue to see wealth being concentrated among the very few. Regressive taxes such as VAT (which were also introduced to counter the decrease in corporate income taxes and wealth taxes) additionally increase the inequalities, further diminishing the consumer power of people whose wages are already stagnating, having long-term effects on public services and infrastructure used by people and the companies themselves, all in the name of short-term profit maximisation. The current financial and capitalist system is not sustainable without putting in place some limitations – one being a fair tax system.

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