Changing norms in global tax governance

Andrew Baker - Faculty Professorial Fellow, SPERI

Richard Murphy - Professor of Practice in International Political Economy at City University

This second element is a far more difficult enterprise in both intellectual and practical political terms.  In a recent contribution to this enterprise we defined social purpose as a systemic vision of the good economic system, drawn from empirical analysis and normative reasoning.  Scholars have often neglected questions of social purpose, partly because normative theory is unfashionable in many social science disciplines, but also of course because the size of the task and degree of intellectual imagination required is daunting.  It’s also the case that in political and policy terms there is a shortage of agents with either the capacity, or willingness, to interrogate rigorous empirical analysis, and translate it into answers to more ethical questions about the kinds of economic and financial systems we should be trying to create.

The challenge is to work out how to connect these two requirements through the design of specific governance mechanisms and processes.  Our contribution to the reglobalisation project is driven by such an approach.  We have created a new prototype policy framework for evaluating tax systems on a multilateral basis – tax spillover assessments.  We sought to create something with transformatory potential that could produce new norms and principles as a cornerstone of international tax governance.  At the same time, we recognised the need for something that is politically realistic and speaks to the concerns of a range of voices and institutions.  As such, our proposal consciously combines reformist and potentially transformatory elements.

The framework is a response to the shortcomings of recent global tax governance initiatives. The Base Erosion and Profit Shifting (BEPS) initiative, launched by the G20 under the auspices of the Organisation for Economic Cooperation and Development (OECD), began the process of implementing country-by-country reporting (CBCR) and Automatic Information Exchange (AIE).  BEPS should make easier the task of appraising which multinational corporations pay what taxation on the basis of what economic activity is taking place where.  In turn, it potentially increases corporate accountability and probably will make systematic tax planning and avoidance activities more difficult.

However, corporate behaviours are only part of the equation of contemporary tax injustice. Threats to fiscal sovereignty and self-determination brought about by aggressive tax competition amongst states in the setting of rates and the offering of various reliefs is not dealt with by BEPS.  For this reason we see the problem of tax competition and the-race-to-the-bottom dynamics produced by competitive cutting measures as a first-order challenge that needs to be addressed as a pre-requisite for any transition to a hypothetical post-neoliberal order.

In 2014 an International Monetary Fund (IMF) analysis showed that tax spillovers – by which is meant the negative effects that one country’s tax policies can have on others – were especially harmful for developing countries when it came to cuts in corporation tax.  A one-point reduction in corporation tax in all countries would reduce a typical country’s corporate tax base by 3.7 percent.  Revenue loss from spillovers in a sample of countries using a gross operating surplus calculation was found to be 5 per cent overall, but 13 per cent in non-OECD countries!  This econometric analysis showed without doubt that spillovers are real and contribute both to race-to-the-bottom dynamics and the erosion of fiscal policy space and economic performance in developing countries.  Unfortunately, the IMF analysis also contained warnings about the difficulty of using its econometric models to generate accurate estimates of specific national or country-level spillover risks and vulnerabilities.

Nevertheless, the Fund’s analysis sparked the attention of many development non-governmental organisations (NGOs), which took the view that country-level spillover assessments were indeed needed to highlight how tax policies in developed countries were harming developing countries.  As a result, in 2017, we began discussing what such a framework for assessing tax spillovers on a country-by-country basis could look like with Oxfam and Action Aid.  We then went on to design an evaluation framework, presented in detail in an article in Global Policy.

Put simply, the spillover analysis that we proposed comprises a primarily qualitative reporting and grading exercise.  It goes beyond analysing the international effects of corporation tax to provide more comprehensive assessments of how different taxes and administrative practices either reinforce or undermine one another.  Harmful spillovers can, in this respect, be domestic as well as international.  Accordingly, our framework assesses tax systems and the spillovers (which they both generate and to which they are also vulnerable) in their entirety.  Most importantly of all, it uses insights from the international relations literature on benchmarking to select a minimally normative goal of minimising and preventing harm to others.  In other words, it is a practical version of what Andrew Linklater calls an international moral harm convention.  The core aim is to identify bad performance in which the pursuit of aggressive tax competition, designed to attract investment and capital from elsewhere, not only generates harmful effects for others, but may also undermine other aspects of the tax system of the country engaging in such competition.

Spillovers are increasingly recognised as a major problem in the international tax system by multilateral agencies, with the United Nations, IMF, World Bank and OECD all recognising their existence.  The most prominent development NGOs now favour spillover assessments, citing our research in their policy calls.  As indicated, the overall aim of our framework is to encourage norm change in international tax governance by, first, identifying spillover risks and then attaching reputational risk to bad spillover performers found to generate harmful effects for others.  Capturing the problematic nature of such policies more effectively and attaching stigma and peer pressure to harmful tax competition can conceivably make such policies less internationally acceptable and thus ultimately help to redefine international tax norms.

We accept that this sounds ambitious, but given the appetite for instituting national spillover assessments in some sort of multilateral process amongst international organisations and established NGOs, as well as growing recognition in key quarters that minimising harmful spillovers should be a priority, we believe that it is not unrealistic politically.  It is, for sure, a more gradual and intermediate step than some other more radical proposals, such as the creation of an international tax authority, unitary taxation (a tax on a corporation’s global income followed by apportionment to states according to a specified formula), or minimum corporation tax rates.  But it would at least constitute a decent start along the long road to changing norms in global tax governance.

Needless to say, such transformational norm change is still some distance away in the real world. The race-to-the-bottom in the Anglosphere countries appears at the moment to be gathering momentum, rather than abating. According to the IMF, Trump’s corporation tax cuts will have significant spillover costs for developing countries.  In the UK, we learnt during the Tory leadership election contest in the early summer that tax cuts for corporations and top earners continue to be seen by many members of the political elite as perfectly respectable mainstream policies with few accompanying downsides.  In such political contexts spillover assessments remind us that a change in approach and norms is not only required, but also achievable – if we want to do it.

Read the other blogs in this series here, here, here, here, here, here and here.