Tax Justice Is a Matter of Power, Not Ethics

Tax avoidance and evasion can thus be tackled only if corporate and individual wealth taxes are reformed in tandem. And here we are at the crux of the matter: taxes are only as just as the economic and social systems they finance.

*Andrea Binder [2014] is a Gates Cambridge Scholar at the University of Cambridge doing a PhD in Politics and International Studies. Picture credit: zirconicusso and

This week got off to a rough start for the global super-rich. Leading newspapers around the world, including the Indian Express, Le Monde, Haaretz, the Guardian and the Financial Times, opened this Monday with the largest data leak in banking history. 'Swiss Leaks' disclosed information about how HSBC, the world's second biggest bank, helped rich individuals to avoid taxes and launder money. If they were unlucky, celebrities and politicians could read their names in the morning news next to those of drug dealers, arms traders, terrorists, dictators and their kin.

The amount of money piled up in secret accounts of HSBC's Swiss arm is staggering. The American fashion designer Diane Halfin von Fürstenberg, for instance, allegedly held $6.3mn in her anonymous HSBC accounts. Most likely this money was out of reach for the US treasury. This is just one example that shows that "capital is back - but capital taxes not at all," as Gabriel Zucman, researcher at the London School of Economics, puts it. He estimates that the well-to-do's of the world keep $7.6tn, or eight per cent of global individual wealth, in tax havens. As a result, states collectively miss out on $147bn tax revenue annually. This amount equals the 2012 rescue package for Greece. No wonder Swiss Leaks provoke a moral outcry against the tax dodgers. Indignation was also all around after Offshore Leaks and China Leaks in 2013 and the Luxembourg Leaks in 2014, all made public by the International Consortium of Investigative Journalists (ICIJ). Yet, the moral club, as much as it is appropriate, will get us nowhere. For the core of the problem is the distribution of influence between business, government and employees, not the misconduct of a greedy elite. The issue at stake is power, not ethics.

Broken trust

Don't get me wrong, no tax system will work without moral behaviour and trust. If the trust is broken, society will become impossible - just think Greece. Or go back in history to the 14th to 16th centuries, when taxation has been a deeply conflictual, indeed violent issue between the nascent modern state and its citizens. However, situating the root causes of tax avoidance and evasion in power rather than in ethics leads us to fundamentally different policy prescriptions, for those holding power rarely share it because of moral suasion. Feminists can tell you a thing or two about that.

Real change in tax justice only comes if we change the rules rather than beg for compliance. Taxation and the distribution of state revenue are the central point where the interests of the state, business and employees intersect with each other. Taxation helps to balance the interest of businesses to accumulate capital with the interests of employees to get fair pay, have stable jobs and social security. Depending on how the state designs tax policies, they further the interests of one group over those of the other. Taxation redistributes power.

We can see this mechanism at work in two different historical phases: During the so-called Western post-war consensus (1950 to 1985) and the neoliberal area (1985 until today). The post-war consensus between businesses and employees was forged by Western governments against the backdrop of the Cold War. Western workers accepted capitalism - and hence the dominant position of capitalists - in return for an extensive social welfare state and comparably high wages. This phase was characterised by historically low levels of inequality in Western societies. From the mid-1980s onwards, the post-war consensus eroded in light of the international integration of financial markets and rapidly growing cross-border trade. Liberal economic policies reinvigorated growth and were combined with tax policies that favoured businesses, particularly the large and internationally operating ones.

Even the Organisation of Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF), two organisations hardly known for their socialist legacy, shout it from the roof tops that this second phase is characterised by alarmingly high levels of inequality. The publications of the IMF and the OECD provide evidence on how the tax policies of the past 30 years favour capital over labour. Take the corporate income tax rates. In the 1980s they ranged from 48 per cent in poor to 38 per cent in industrialised countries. By 2013, the corporate income tax rates had fallen to 28 and 22 per cent respectively. As a result, corporate taxes contribute today nine per cent to the OECD states' overall tax revenues. Taxes on personal income (both from wages and capital gains) amount to 25 per cent of the total. General and specific consumption taxes and social security contributions, which are disproportionally paid for by labour, make up 57 per cent. In short, labour pays currently the biggest share of the tax man's bill.

Government sanction

The real scandal behind Swiss Leaks and Luxembourg Leaks is not that rich people and corporations use tax havens to avoid taxes. The scandal is that governments are allowing them to do so. Despite the mobility of international capital, corporations and the wealthy operate within the confines of the law. So, while rich individuals and businesses can use tax havens to "play states off against each other, [the] remedies lie in a state's own hands", Helen Thompson, a political economist at the University of Cambridge, points out in a publication from 2006.

Yet, governments largely did nothing, despite all the rhetoric about the "crackdown on tax havens". The data that ICIJ used for Swiss Leaks has been available to the governments of France, Greece, the United States, Great Britain, Australia, India, Germany and others since 2010. In the past five years some governments asked individuals to quietly settle the bill; others sued a handful of the tax dodgers. Overall, however, the data has neither been systematically analysed, nor have governments tried to effectively address the underlying tax avoidance schemes.

One of the challenges in tackling tax avoidance and evasion among the bold and the beautiful is that the legal distinction between the income of the corporation and its owners is weak. Governments design tax laws that help businesses to remain internationally competitive. The rationale is that the government trades tax revenue for economic growth and employment resulting from successful business activities. However, since the legal distinction between the business and the business(wo)man is blurry, the tax laws that governments design to support their corporations also benefit the entrepreneur. This is why rich individuals who can afford the respective lawyers, tax advisers and fees prefer to retain their wealth in corporate structures. Tax avoidance and evasion can thus be tackled only if corporate and individual wealth taxes are reformed in tandem. And here we are at the crux of the matter: taxes are only as just as the economic and social systems they finance.


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