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Column: Corporations cheat the global tax system

  • International Monetary Fund (IMF) Managing Director Christine Lagarde speaks at a news conference, during the World Bank/IMF Spring Meetings in Washington, Thursday, April 11, 2019. (AP Photo/Jose Luis Magana)



For The Washington Post
Monday, April 15, 2019

There is no gap in the architecture of globalization 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 stylized form, the predicament of a middle-aged worker in the U.S. 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 $3 or $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 labor, my employer would fail, and that would not do any of us any good.

“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.

“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.”

It is easy to sympathize 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 delegitimizes the entire project of making the world smaller.

How much is at stake? The IMF quotes estimates suggesting that as much $600 billion in revenue was lost due to the lack of effective global cooperation in taxing corporate income.

This works out today to nearly $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 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 percent 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 organizations.

Perhaps to motivate business interests, governments could indicate that there would be no new major trade or investment agreements until a cooperative approach had 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 going forward 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.

Lawrence H. Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama from 2009 through 2010.