Tax is a crucial part of the story of global injustice. Unfortunately, many people hear the word tax & recoil – it seems dense, boring & perhaps a topic best left to the ‘experts’! This guide will help you understand just what tax is, why it is so important, what global trends threaten fair tax collection, & what might be done to help solve tax injustice globally. Read on for the short version, & keep note of the sentences written in red. These are questions or reflective prompts to help you dive deeper into what you’re learning about!
So what do we mean by tax? A tax is a compulsory contribution made by people in a country to the state of that country. Taxes are also paid by businesses, again to the state. In general, the state then decides how to use the tax to ‘defray’ or mitigate some of the expense of running the country. Importantly, tax isn’t a transaction. One person or business cannot say to the government, “I gave you ___ in tax, & I now want a road/hospital/street light in return”. It is not an exchange, rather it is a duty that we all pay. It has even been described as the price paid for having a government!
Specifically though, tax has a number of functions, & surprisingly, not all are directly related to the impact of the extra money that the state has at its disposal. These functions can easily be remembered with the handy mnemonic – ‘the 4Rs of taxation’. Firstly is revenue. This funds essential public services that are critical for the smooth functioning of a country, like education, healthcare, transport infrastructure etc. This revenue allows governments to plan into the future, something not always possible with aid or grants. The second function of tax is to redistribute wealth in order to reduce inequality in society & protect those most vulnerable & in need. However, redistribution can be done in more or less just ways, & this depends on how progressive or regressive the tax system is. The third function of tax is in the repricing of goods, whereby social ‘bads’ might have an extra tax put on them, & social ‘goods’ might get tax relief. What might an example of a social ‘bad’ be? & a social ‘good’? Finally, tax can actually increase the extent to which citizens feel represented by their elected representatives, & so can actually encourage democratic participation. Think about it; if you pay tax to an authority, but that authority does not listen to your views about what is needed in your community, what might happen…? That’s right, they may not get your vote again! It’s in their interest to listen to you, & one of the reasons you get a say is because you pay tax. This unwritten agreement between citizens & elected decision-makers is what’s known as the social contract. Finish the anti-British slogan at the time of the American Revolution, “_________ without ___________ is tyranny!”
Tax is a key tool for ensuring what is known as ‘distributive justice’, meaning that the benefits & burdens of social cooperation (e.g. tax) are shared fairly. But why is this important? Distributive justice is important because ensuring global justice requires that all states have the capacity to secure a just distribution of advantages between their citizens. However, because of the global tax rules & in particular the exploitation of loopholes in tax systems, many governments are prevented from having enough revenue to meet the needs of their citizens. & it’s not just that the tax rules prevent many governments from receiving their fair share of tax, it is also that the lack of tax revenue triggers a self-reinforcing cycle, whereby state institutions such as those to collect tax are degraded so much over time by insufficient tax revenue, that the task of collecting tax becomes increasingly difficult! This has knock-on effects on all of the public services that governments need to provide to their citizens in order to ensure human rights are not breached. Can you think of some human rights that could be negatively impacted without sufficient revenue to provide public services?
The story doesn’t end there however. Reflect on what governments might do if they foresee a deficit in their balance sheet. In these situations, they may continue to cut their spending on public services, or even increase taxes on the everyday person, for example Value Added Tax or VAT which is the same for everyone regardless of their incomes (it is ‘flat’). Now consider who may be more impacted by cuts to public services, & by increases in ‘flat’ taxes? That’s right; those already poor & vulnerable, & even women & girls, especially if extra VAT is placed on sanitary products, something which has happened frequently.
It does not stop there however. We must ask, what role does the global financial system have to play in this scenario? You may think that in situations where human rights are at risk, global organisations would swoop in to support countries in need. Well many ‘International Financial Institutions (IFIs) do, such as the WB & IMF. Can you find what these acronyms stand for? Individual countries can also help. However, most of this financial support is given in loan format, rather than as grants, or aid, or even interest free loans. What is the difference between a loan & aid or grants? & with the IFIs, they have actually used the threat of withholding financial support in the form of loans as a way to promote certain ways of doing things economically around the world. For example, ‘tied’ to this support are conditions around removing trade barriers, increasing VAT, reducing taxes on foreign investors & more. There are some reasons for this; such as remaining neutral towards business, not hindering competition, & leaving companies with as much profit as possible so that this profit either flows down into our pockets or is transformed into higher wages, better machinery etc. However, these assumptions do not hold when put under the microscope. This suite of policy ‘recommendations’ is called the tax consensus. & this is one intersection where debt avenue meets tax lane…
The fundamental problem is that our global financial system is replete with loop holes & escape hatches, like a giant game of snakes & ladders. Not even 100 years ago, companies were fixed to where they had a factory, their raw materials, their employees. But today, companies are complex, with many tentacles stretching out all over the world. A company’s headquarters might be in country A while raw materials accessed from countries B & C & manufacturing happens in country D. The world is not a single country, & tax laws differ across borders. ‘Aggressive’ tax planners & ‘creative’ accountants exploit these mismatches in rules to allow companies to shoot up a ladder, bypassing fair rules, or to use an escape hatch (research what ‘capital flight’ means), leaving to somewhere more favourable when the rules no longer suit them. As a result, instead of companies competing for market share, we increasingly see countries competing with one another on tax laws in order to attract investment, resulting in a ‘race to the bottom’ on corporation tax.
This tax dodging can be legal (called tax avoidance) or illegal (called tax evasion). Do you think something that is legal is always ethical or moral? Shockingly, this tax dodging costs developing countries more than they receive in aid. Corporate tax is more crucial in these countries than Global North countries because in the Global South, a large portion of the population don’t make enough money to earn tax. If multinational corporations (MNCs) paid their fair share of tax in these countries, it could make a huge difference.
There are some solutions however, which if implemented would make a significant difference & help to alleviate global poverty by giving fiscal sovereignty back to developing countries. One solution is for tax authorities around the world to automatically share information about what’s in bank accounts in their countries with other relevant countries. This prevents companies & wealthy individuals from hiding their money in tax havens, where tax rates are very low. Another solution is to uncover the person at the head of companies that actually benefits from owning the company. Many people are surprised to learn that companies can actually pay people to be the public face of their company, so that the real owner stays hidden. This needs to change, & the names of the beneficial owners (who have to be human!) need to be made public. Next, companies with many tentacles (subsidiaries) should be taxed as if they’re one company, not many. Finally, the UN should be responsible for global tax regulation, not the OECD. This is because the OECD is actually more so a club of rich countries, whereas the UN is the only global institution where governments participate as equals. Surely this is then the best forum with which to determine global action to reduce inequality.
