US economy

Tax justice is yet to hit the richest ‘citizens of the world’

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“Taxes are what you pay for a civilised society,” said American Supreme Court justice Oliver Wendall Holmes in 1927. The topic, always relevant, became even more so last week as the US Supreme Court heard opening arguments in Moore vs United States, a case that will examine whether the mandatory repatriation tax of 2017, which required corporations to pay a one-off tax on deferred foreign profits, is legal.

Readers may remember that the MRT aimed to capture some of the trillions in offshore profits from big US companies ahead of a lowering of the corporate tax rate, coupled with an ending of the country’s “worldwide” taxation principle. This system had encouraged American multinationals to hold profits overseas, where rates were lower than the then 35 per cent US levy, and to avoid potential double taxation by not repatriating their earnings. Today, US companies are subject to a 21 per cent rate and no longer pay additional tax on foreign profits to the government.

The question for the Supreme Court is whether taxing unrealised earnings is legal. The plaintiffs — an American couple who had to pay $15,000 on unrealised gains in an Indian manufacturing business as part of the 2017 tax — and many conservatives are hoping the court says no.

But overturning the MRT would also make it hard for Congress to impose a wealth tax, which the Democrats are pushing for; and it would open a Pandora’s box of litigation in the US, where such a ruling would upset existing tax rules.

Some conservative justices such as Amy Coney Barrett seem wary of the plaintiff’s arguments, perhaps because they don’t want to upset the status quo. And the ruling won’t come for some time. But the case underlines the difficulties of how we think about tax justice after decades of globalisation and technological transformation have allowed large corporations and wealthy individuals to play a zero-sum game of tax arbitrage and avoidance.

Not only can the global rich still pick from among the most favourable international tax structures, but the economic shift from manufacturing to services to information has made it ever easier to park wealth offshore. After all, factories are harder to hide than, say, patents or data.

The recent EU Tax Observatory’s Global Tax Evasion Report contains a particularly startling chart that profiles profit shifting by US multinationals between 1975 and 2022. While American companies booked almost no revenue in tax havens in the late 1970s, they book more than half their profits in such regions today.

There was a bit of a downtrend after 2017, but profit offshoring picked up again after that and remains more or less flat at about 50 per cent. Only a small share of those profits can be justified by any real on-the-ground business. And while the US stands out, foreign profit offshoring to tax havens as a whole has been around 35 per cent since 2015.

The global minimum tax of 15 per cent on multinationals agreed by 140 nations in 2021 should have helped with this — but the US and many other rich nations have yet to implement or enforce it properly. What’s more, the list of loopholes has grown, reducing revenue and providing continued incentives for companies to send profits offshore.

Rich individuals benefit from plenty of loopholes of their own. Global billionaires pay between zero and 0.5 per cent of their wealth on average, according to the report. They may hide less offshore (thanks to increased exchange of international bank information) but they still use domestic real estate holdings and shell companies to avoid individual income tax.

No wonder across-the-board wealth taxes and even land taxes are increasingly being discussed in many rich countries. The ability of rich companies and individuals to use complex legal structures to outmanoeuvre national regulators cries out for simple, blunt rules. 

But it also requires increased global co-ordination. The rich are now less moored to countries and tax jurisdictions than they were in the past. That makes it difficult for any single country to solve the issue of tax evasion alone. I know plenty of rich, liberal elites who believe themselves to be “citizens of the world” but, very often, such claims to care for all mean that they actually don’t contribute much to any particular country or community. 

This has become a new and disturbing trend among the world’s wealthy. In his new book, As Gods Among Men, Bocconi University economic historian Guido Alfani outlines how in the past, rich individuals contributed more to the common good in times of war, famine, plague and financial disaster. Today, that sense of shared responsibility is gone. Despite the financial crisis, the pandemic and war in Ukraine, neither tax rates for — or contributions by — the global rich to individual nation states are increasing significantly.

Part of this may be about too much private money in politics, a particular problem in the US (and a growing one, following the 2010 Citizens United case which overturned century-old campaign finance laws). It may also be about the delinking of wealth and place in a post-global world. Whatever the case, the crises of the moment — from climate change to conflict to reskilling the workforce — require more tax revenue. If we don’t all pay our fair share, we may find society increasingly uncivilised.


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