Progressive Taxation for Our Time—Global Problems

  • Opinion by Jomo Kwame Sundaram (Kuala Lumpur, Malaysia)
  • Inter Press Service

Bold tax responses needed

Governments must mobilize and deploy resources sustainably and fairly, in line with the Sustainable Development Goals (SDGs). With rich countries refusing to help more, adequate government funding is critical.

Taxation is generally a more sustainable, effective and responsible way to increase government budgetary resources. But the pandemic has made extraordinary demands that require huge urgent expenditures.

National authorities can generate fiscal resources in two ways: by collecting income or by borrowing. Government loans is generally needed as revenues have been affected by the slowdown.

Massive mobilization of fiscal resources and appropriate spending are needed to contain the contagion and prevent temporary recessions – for example due to lockdowns – from turning into debilitating long-term depressions.

Fiscal policy includes both government resource generation and expenditure. But developing countries are much more conservative in their spending than the rich. The latter have introduced much bolder help and recovery packages.

In the short, medium and long term, both government spending and taxes should be progressive. Much depends on how the revenue is raised and spent. Thus, both taxes and expenses must be taken into account.

Taxes now less progressive

Governments must develop fast-moving ways to fund the massive expenditures needed to protect both lives and livelihoods. Over the past four decades, many governments have reduced progressive direct taxes and instead embraced regressive indirect taxes.

Higher tax rates on the wealthy made direct taxes progressive. The decline was mainly due to lobbying by powerful elites, including foreign investors. The influential Washington-based Bretton Woods international financial institutions led such advocacy.

The income of the wealthy comes primarily from assets, rather than wages, salaries, or payments for goods or services. But in most countries, tax rates on high earners, real estate, inheritance and business income have fallen.

Wealth is often untaxed, or only lightly taxed at lower rates. New rules now allow assets to be moved abroad and hidden. Depending on how one estimates, between US$8-35 trillion is held offshore, obscuring the concentration of wealth and inequality.

Taxes can reduce existing inequalities, but rarely do, despite the widespread assumption that taxes in general are progressive. Worse, most government spending is regressive and little dampened by widely publicized social spending.

Difficult to measure, the effects of pandemic on different inequalities vary widely. Nevertheless, the vicious circle linking economic disadvantage with vulnerability has magnified inequalities.

Provide progressive tax

To be fair, the tax must be progressive. Fairer tax systems should get more revenue from those who can afford the best while reducing the burden on the needy. Wealth taxes are the most progressive way to increase income while reducing inequality.

Direct taxes on wealth and income are potentially progressive. Gradually higher rates and exemptions for the poor can ensure this. Low rates on investment income and assets – such as real estate, wealth and inheritance – can be increased. These can not only reduce inequality but also finance progressive spending.

Taxing windfalls and excess profits is not only publicly acceptable, but can also generate significant funds. Some companies and individuals have benefited immensely from the pandemic, with US billionaires reportedly getting more than a trillion dollars richer in the past year and a half.

In the longer term, progressive taxation means less reliance on indirect taxes — such as sales or consumption taxes, including value-added taxes, or goods and services taxes — which tax people with lower incomes much more.

Tax evasion by the rich must also be prevented. Companies that use tax havens to pay less can be punished, for example by disqualifying them from all contracts with public and state-owned companies. Tax systems can thus be made more progressive by improving design and by strict, fair enforcement.

Just recovery?

provide fair recovery requires urgent system reforms. While these are unlikely to bring much more revenue in the short term due to the economic slowdown, it will now be much easier politically to implement such reforms.

Taxes can transfer fiscal resources from the rich to the needy. Those living precariously, including those now at risk from the pandemic and its wide-ranging impacts, urgently need help. But financing emergency relief and recovery provides liquidity and prevents long-term economic contraction and stagnation.

Some pandemic relief spending in many countries has been ‘captured’ by the politically well-connected, as political elites and their cronies seize the lucrative new opportunities. These compromise not only relief and recovery, but also reform efforts.

Treating relief and recovery as temporary ‘one-off’ measures are unlikely to address prepandemic problems, including inequality. Governments should instead use the crisis to advance SDG solutions for both the medium and long term.

Multilateral cooperation needed

International cooperation can help, but the Organization for Economic Cooperation and Development of the Rich Countries (OECD) has long focused on tackling offshore tax evasion to generate more revenue for itself.

Ten years ago, it broadened its focus, but continued to push for its own leadership at the expense of developing countries. So it has effectively blocked multilateral tax cooperation for decades and ignored the strong UN mandate from several Financing for Development and other summits.

Fair international tax reforms remain urgent. But these have been undermined by previous reforms that encouraged cross-border money flows, allowing illicit flows of money from developing countries.

While unlikely to generate much revenue for some time, US Treasury Secretary Janet Yellen’s proposal for a global corporate tax minimum deserves strong qualified support.

Developing countries should ensure that transnational corporations are taxed better, rather than the current G7 proposal for a low rate. Income should be distributed based on where both production and consumption take place rather than just where sales take place.

Effectively controlling tax abuse also requires access to financial information and common, fair and transparent rules, not those imposed by the wealthy. But such results can only be achieved through UN-led multilateralism, in which the governments of developing countries participate as equals.

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© Inter Press Service (2021) — All rights reservedOriginal source: Inter Press Service

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