BIn the 1980s there was a New York hotelier named Leona Helmsley. What made her famous was her 1989 tax evasion trial, during which her housekeeper testified that she had once uttered the immortal phrase: “We don’t pay taxes, only little people pay taxes.” While this may seem evidently true today, it was not then. Helmsley was sentenced to 16 years in jail. He finally turned 18 months old. The fact is that he served time for not paying his taxes.
The latest attempt to crack down on people who don’t pay their fair share, unveiled by the G7 finance ministers this week, suggests a return to the times when we really expected people to pay their taxes. But all may not be what it seems.
In the years since the Helmsley trial, governments around the world actively enabled tax evasion by individuals and corporations (which is illegal) by vastly increasing the reach of tax evasion (which is legal). I first realized this in 2010, when paid more taxes than General Electric. This year, I paid more in income taxes than an entire Microsoft subsidiary through corporation tax.
But it’s not just about corporations. Earlier this week, the American nonprofit investigative news site ProPublica He showed us that it is the billionaire class that pays the least. My effective tax rate in the US, where I live, is just over seven times that of Elon Musk and 240 times (not a typo) that of investor Warren Buffett. Jeff Bezos reported such a low income who qualified and claimed the child tax credit in 2011.
In the early 1990s, governments began to accept an argument about capital mobility, taxes, and welfare states: In a world of global capital, investors will seek the best returns they can get globally. If those returns are reduced by “distortions” such as taxes, investment will flow to countries that tax less. Consequently, those costly and expansive welfare states that neoliberal economists had always targeted had to disappear. Financing them by taxing the rich and corporations would reduce investment and employment, according to the story.
The governments of the Organization for Economic Coordination and Development (OECD) used this argument to reduce taxes on both individuals and corporations. The UK corporate tax rate fell from 34% to 19% between 1990 and 2019, while the US rates fell from 35% to 21% during the same period. But instead of those reductions that led to an explosion in investment in both countries, investment levels actually fell as the tax savings realized were taken as gains and pushed into asset markets. In the UK, gross fixed capital investment it fell from 23.5% of GDP in 1990 to 17% in 2019. In the US, it fell from 23.5% to 19%.
While they completely failed to promote investment, what these changes established was ruinous tax competition between states. Countries “optimized” their tax regimes to the point where they became the central business model of the state. Ireland (via a 12.5% rate), Latvia (acting as a conduit for Russian capital flight), and the UK (with its opaque property markets and tax havens) are just the most obvious examples. On the other side of the Atlantic, Panama and Belize could be added as tax havens and the states of Delaware Y Nevada for corporate shell companies.
But it wasn’t just corporations: governments did the same to individuals as well. Recently, Rand Corporation examined what income would look like in the US if the country hadn’t spent decades changing taxes and regulations to benefit the rich. Median earnings in 2018 were $ 50,000. They “could have been” $ 92,000. Changing taxes and regulations to benefit the higher-ups effectively cost the average American worker $ 42,000 a year in 2018.
However, the tax bias only tells us part of the story. As the ProPublica data details, the reason why “only little people pay taxes” is because we can’t avoid them. The rich can do it, mainly because income from wages is taxed, while income from loans is not. Consequently, if you are extremely wealthy, you can pledge your assets (stocks, shares, houses, works of art) as collateral against loans that you can live on, tax-free. You can then take your extra tax-free cash from these loans and use it to buy more assets, to get more loans, effectively paying off the loans after death with a tax protection trust, avoiding taxes even after you’ve reached the grave. .
For corporations, the tax reward is even more generous. Residing in low tax havens and hiding your real property is easy. Truly illegal but hardly prosecuted crimes such as “smurfing” (structuring transactions to maintain a minimum value) and money laundering in the real estate market (getting a shell company to buy a building to hide income) are settled alongside strategies legitimate such as intracommunication. Firm transfer pricing (where different parts of a business sell inputs to each other so the central tax office can report a loss), state-enabled investments (where a business reduces its taxes by changing its nationality), and “sandwich” taxes (where companies can move extraterritorial royalties through countries that do not have tax withholdings). Together, these cost countries between $ 500 billion and $ 600 billion a year in lost revenue.
Given all of this, it is encouraging to see the United States back at the table with the OECD fighting “grassroots erosion”, the G7 agreeing to a minimum global corporate tax rate of 15%; the UK actually proposes raising corporate taxes, and the Biden administration uses the ProPublica leak to advocate higher individual taxes for the super-rich. But should we trust them to actually do it?
The offers on the table look good as long as you don’t look too closely. That 15% rate applies only to companies that have profit margins greater than 10%. How easy is it for a company to play with its margins? Very easy. Also, words are cheap. Recall that David Cameron promised in 2010 that he would raise taxes on banks to pay bailouts from the financial crisis. That never happened. This time, right after signing the G7 agreement, Chancellor Rishi Sunak sought exemptions for the City of London from the G7 taxes he had just signed. Meanwhile, Biden may never get the G7 deal in Congress, and the EU will surely return to “fiscal probity” through spending cuts rather than tax increases.
Polls show a decline in confidence in governments around the world and a growing sense that the economy is a rigged game. Both are not exempt from justification. Governments led us into this low-tax burrow, and now they promise to be the ones to get us out of it. Given who finances your parties and your campaigns, I’m not going to hold my breath for new Helmsleys to show up on the dock anytime soon.
Mark Blyth is a political economist at Brown University. He is the author, with Eric Lonergan, of Angrynomics
George is Digismak’s reported cum editor with 13 years of experience in Journalism