Tax reform

In many ways taxation — or the avoidance or lack thereof — is the opposite side of the same coin as the most common object of corporate capture: public contracts. As corporations and other private interests capture the State to secure favorable contracts, the private sector bleeds the public sector. Similarly, corporations capture the State precisely to pay less — oftentimes nothing! — taxes, also draining public coffers. In the case of capture and procurement, corporations gain through government action; in the case of capture and taxation, they gain from inaction.

The field of tax reform — led by international organizations such as the Organisation for Economic Co-operation and Development(OECD) and CSOs such as Tax Justice Network— is rich with opportunities, recommendations, strategies, and innovations for how to eliminate tax avoidance, tax competition, and tax havens, which are prime objects of corporate capture, and increase taxation on the wealthy, as follows:

• Maximum available resources for human rights:Taxing the rich is generally a good way to raise public revenue. But is it enough? In progressive circles, increasing taxation and improving redistribution are considered insufficient; the objective is to decolonize the global tax system from a human rights perspective¹Mona Sabella, Coordinator, Corporate Accountability, ESCR-Net, Interview on 6 September 2023.. According to the Center for Women’s Global Leadership, “Advocacy of higher taxes on businesses and well-off people is often dismissed as the politics of envy. We can recast this advocacy as the politics of human rights and point to the obligations that governments have to raise revenue for realizing human rights. Framing tax reform in terms of human rights, as opposed to the private sector development that favors corporate interests, provides a new energizing discourse in which struggles for tax justice can take place. Tax policy should ideally be looked at together with expenditure policy so that we look at the relationship between the revenue and where it is spent.”

• Nuevo Pacto Fiscal:Globally, one of the most important voices for tax reform is Magdalena Sepúlveda, the former Special Rapporteur on extreme poverty and human rights and currently the founding executive director of the Global Initiative for Economic, Social and Cultural Rights (GI-ESCR). Over the past few years, Sepúlveda and colleagues at other CSOs, such as Oxfam and Tax Justice Network, have proposed a Nuevo Pacto Fiscal (or New Fiscal Agreement).

According to Magdalena Sepúlveda, “[A] change in the international tax system is urgent. Multinationals — and the super-rich who control them — need to pay their fair share of taxes. While, on the one hand, many multinational companies take advantage of every opportunity to present themselves as allies of feminist causes, on the other, they have an army of lawyers and accountants manipulating the international tax system to avoid paying the taxes they are entitled to. Many times they manage to legally hide their profits in tax havens. This translates into $200 billion annually in losses for developing countries. For this reason, at the Independent Commission for the Reform of International Corporate Taxation (ICRICT), an institution of which I am a part, we are convinced that facing the serious crisis of inequality, including gender inequality, requires reform of a significant part of the international tax system for large companies. And today there is a historic opportunity to do so.”

• Windfall taxes:These are a tax imposed by governments on certain industries when the current economic climate allows them to generate significantly higher-than-average profits. Since the Covid-19 Pandemic, unusually enormous profits are being registered in certain sectors and some States have sought to tax them more heavily. However, with few exceptions, these additional tax revenues have not gone to support the economic, social, and cultural rights of those affected by corporate practices. Among the handful of interviewees that were familiar with windfall taxes, to a person each of them recommended that they be tied to human rights outcomes.

According to Oxfam, “There is a growing body of evidence that corporate profiteering is playing a significant role in supercharging inflation, echoing fears that corporations are exploiting the cost-of-living crisis to boost profits margins — a trend dubbed ‘greedflation’ and ‘excuseflation.’ (…) Analysis by Oxfam and ActionAid of Forbes’ ‘Global 2000’ ranking shows they made $1.09 trillion in windfall profits in 2021 and $1.1 trillion in 2022, with an 89 percent jump in total profits compared to average total profits in 2017-2020. For this analysis, windfall profits are defined as those exceeding average profits in 2017-2020 by more than ten percent. (…) Oxfam and ActionAid are calling on governments to claw back gains driven by profiteering. A tax of 50 to 90 percent on the windfall profits of 722 mega-corporations could generate between $523 billion and $941 billion both for 2021 and 2022. This is money that could be used to help people struggling with hunger, rising energy bills and poverty in rich countries, and to provide hundreds of billions of dollars to support countries in the Global South.”

Oxfam recommends that governments:

1. “Introduce one-off solidarity taxes on billionaires’ pandemic windfalls to fund support for people facing rising food and energy costs and a fair and sustainable recovery from COVID-19. Argentina adopted a one-off special levy dubbed the ‘millionaire’s tax’ and is now considering introducing a windfall tax on energy profits as well as a tax on undeclared assets held overseas to repay IMF debt. The super-rich have stashed nearly $8 trillion in tax havens”.
2. End crisis profiteering by introducing a temporary excess profit tax of 90 percent to capture the windfall profits of big corporations across all industries. Oxfam estimated that such a tax on just 32 super-profitable multinational companies could have generated $104 billion in revenue in 2020″.
3. “Introduce permanent wealth taxes to rein in extreme wealth and monopoly power, as well as the outsized carbon emissions of the super-rich. An annual wealth tax on millionaires starting at just 2 percent, and 5 percent on billionaires, could generate $2.52 trillion a year —enough to lift 2.3 billion people out of poverty, make enough vaccines for the world, and deliver universal healthcare and social protection for everyone living in low- and lower middle-income countries.”

• Externalities:Taxation should also focus on companies that produce externalities, such as those that contribute to the climate crisis or pesticide companies. The idea is to pay extra so that governments have specific funds for clean-up and remedy.

• Eliminate the carried interest loophole:In Runaway Train, Empower wrote, “One of the most lucrative legal loopholes involves carried interest in the U.S. tax code. Wealthy Wall Street investment firms — such as private equity and hedge funds and their general partners — pay a lower percentage of taxes than school teachers or truck drivers. These firms charge limited partners high fees to manage their money but classify the fees received as ‘capital gains’ and not income, which allows them to pay a lower rate. By paying taxes on the profit from the sale of an investment, these firms and their general partners incur the capital gains tax rate of 20% instead of the ordinary income tax rate of 37% for [high-net-worth individuals]. Scholars estimate that the annual tax revenue lost from the carried interest loophole amounts to 18 billion USD.”

• REITs and housing taxes:We must close the tax-free provisions for Real Estate Investment Trusts (REITs) worldwide. Empower also stated that, “As of 2020, REITs existed in nearly 40 countries. While they are framed as policy instruments for resolving the housing shortage or implementing development priorities, in practice, the asset management organizations that invest in them receive unprecedented freedom and tax benefits from this form of pooled capital”.

According to The Shift, we must also impose a small tax on the sale of residential properties over a certain percentage (targeted taxes), whose revenue should go to affordable housing, addressing homelessness, etc. Moreover, we should impose a vacant home tax whereby every property owner must fill out a form annually to declare if their property is inhabited. If uninhabited, the money would go to an affordable housing fund. In Barcelona, the local government took this one step further and can expropriate properties with 2+ years of vacancy and force them to rent to essential workers during the Pandemic, for example.

• Global tax policymaking:Due to the corporate capture of the OECD — mostly through the revolving door between corporate executives and OECD staffers —, in particular the Committee on Fiscal Affairs and its business advisory groups, advocates may consider how to move the center of global tax policy to the U.N. Tax Committee,a space that is arguably more democratic and less captured (at least on this issue). Another idea is to consider a more prominent role for the U.N. Principles on Responsible Investment Tax Reference Group.

• Reform the Arm’s Length Principle:The arm’s length principle is meant to ensure that companies with multiple entities in various jurisdictions are compliant with tax laws and do not unfairly benefit from transactions between affiliated entities. However, in the practice, corporate accountants and lawyers manipulate it to avoid double taxation. This guiding rule of global accounting allows companies to use transfer pricing to move profits from one jurisdiction, say in the Global South, to another in the Global North with a significantly lower tax burden.

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