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Corporations are cheating the global tax system

THERE is no gap in the architecture of globalisation more serious than the failure of nations to prevent global companies and wealthy individuals from escaping taxation through tax havens, accounting devices and pressure to bring down business tax rates.

Consider, though in a stylised form, the predicament of a middle-aged worker in the US manufacturing industry. He might put his concerns this way: "First, they told me that we were going to drop our tariffs, and I was going to have to compete with workers in Mexico and Asia who were willing to work for only US$3 or US$4 an hour. I was scared, but they told me it was for the best because more trade meant lower prices for what I buy and more opportunities for my kids in the industries of the future.

"Second, they told me that my company, where I have worked for the past 20 years, was going to outsource much of the work I do to Asia. But this, too, was for the best because, without being able to access low-wage labour, my employer would fail, and that would not do any of us any good. It didn't seem fair, but I went along.

"Now, they are telling me that there is worldwide competition for capital and America needs an attractive business environment, so a huge reduction in corporate taxes is essential. Otherwise, we will hemorrhage capital, the argument goes. Of course, if mobile corporations and cosmopolitan investment bankers pay less in taxes, people like me are going to have to pay more!

"I have had enough with the Davos international cooperation project. For me and my family, it always means getting shafted some way, so we won't get shafted worse some other way. Maybe my sneakers will cost more, but I'm voting for people who will put American jobs first, and enough with all this globaloney. If American leadership in the global economy is about whether PwC and McKinsey can operate around the world, or whether Disney gets to sue people when they plagiarise Mickey Mouse, I could not care less."

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It is easy to sympathise with this hypothetical worker. And yet, protectionism has never been a winning economic strategy, and if the United States withdraws from the global economy, we will cede influence, power and prosperity to China.

One important part of the way forward is suggested by a recent International Monetary Fund report demonstrating (to anyone able to penetrate its turgid prose) the urgency of global cooperation to adequately tax corporate income. As the world economy has become much more integrated, corporations - by pitting one country against another - have been able to push their tax rates way down. This is not smart economics as populations age and government revenue needs increase. It is not fair as inequity increases and wages lag, and it delegitimises the entire project of making the world smaller.

How much is at stake? The IMF quotes estimates suggesting that as much as US$600 billion in revenue was lost due to the lack of effective global cooperation in taxing corporate income. This works out today to nearly US$400 for every family of four on Earth and far exceeds global aid flows. The biggest losses come from companies whose business is digital - and so they manage to be everywhere in cyberspace but not physically enough in any one country to be meaningfully taxed.

What should be done? It is hard to know where to finish, but clear enough to know where to start. The leaders of all major nations need to make a clear political commitment that highly profitable corporations should pay at least a base level, perhaps 15 per cent of their reported profits, to governments around the world. They can then task their finance ministers to work out how this can best be done with the IMF and other relevant organisations. Perhaps to motivate business interests, governments could indicate that there would be no new major trade or investment agreements until a cooperative approach has been forged with respect to taxes.

The IMF has shown leadership and courage in highlighting this issue and calling for major changes. It should be relied on to drive the search for a new approach. The stakes go way beyond tax revenue to the political viability of a liberal, open global system. If tax cooperation cannot be achieved and global companies continue to flee and escape taxation, while their workers stay rooted and pay, populist nationalism will flourish and we will all be poorer. WP

  • The writer - US Secretary of the Treasury (1999-2001) and Director of the US National Economic Council (2009-2010) - is a former president of Harvard University, where he is currently University Professor

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