PHM-Exch> Progressive Taxation for Our Times

[Claudio Schuftan]

As developing countries struggle to cope, they are being set back by
conservative fiscal policies once imposed by rich countries. Instead, they
need bold policies for enough relief, recovery & reform.

Jomo <https://jomodevplus.substack.com/people/8370734-jomo>



By Jomo Kwame Sundaram <http://www.ipsnews.net/author/jomo-kwame-sundaram/>

*KUALA LUMPUR, Malaysia, Sep 21 2021 (IPS) *- As developing countries
struggle to cope with the pandemic, they risk being set back further by
restrictive fiscal policies. These were imposed by rich countries who no
longer practice them if they ever did. Instead, the global South urgently
needs bold policies to ensure adequate relief, recovery and reform.

*Bold fiscal responses needed*
Governments must mobilise and deploy resources sustainably and fairly,
consistent with the Sustainable Development Goals (SDGs). With rich
countries’ refusal to help more, adequate government financing is crucial.

Taxation is typically a more sustainable, effective and accountable way of
raising government fiscal resources. But the pandemic has imposed
extraordinary demands requiring massive urgent spending.

National authorities can generate fiscal resources in two main ways, by
collecting revenue or borrowing. Government borrowing
<http://www.ipsnews.net/2021/08/central-banks-must-address-pandemic-challenges/>
is
generally needed as revenue has been hit by the slowdown.

Massive fiscal resource mobilization and appropriate spending are needed to
contain the contagion and prevent temporary recessions – e.g., due to
lockdowns – from becoming debilitating protracted depressions.

Fiscal policy involves both government resource generation and spending.
But developing countries have been far more conservative in spending
compared to the rich. The latter have introduced much bolder relief and
recovery packages.

In the short, medium and long term, both government spending and taxation
must be progressive. Much depends on how revenue is raised and spent.
Hence, both taxation and expenditure need to be considered.

*Taxes less progressive now*
Governments must quickly develop progressive ways to finance massive
spending needed to protect both lives and livelihoods. Over the last four
decades, many governments reduced progressive direct taxation, instead
embracing regressive indirect taxes.

Higher tax rates on the wealthy made direct taxation progressive. The
regression was mainly due to lobbying by powerful elites, including foreign
investors. The influential Washington-based Bretton Woods international
financial institutions led such advocacy
<http://www.ipsnews.net/2017/10/world-bank-must-stop-encouraging-harmful-tax-competition-2/>
.

Incomes of the wealthy are mainly from assets, rather than wages, salaries
or payments for goods or services. But tax rates on the highly paid, as
well as property, inheritance and corporate incomes have declined in most
countries.

Wealth is often untaxed, or only lightly taxed at lower rates. New rules
<http://ipsnews.net/2017/10/mounting-illicit-financial-outflows-south> now
allow assets to be moved and hidden abroad. Depending on how one estimates,
between US$8–35 trillion is held offshore, obscuring wealth concentration
and inequality.

Taxation can reduce existing inequalities, but rarely does so despite the
widespread presumption that taxes are progressive overall. Worse, most
state spending is regressive, little mitigated by highly publicised social
spending.

Difficult to measure, pandemic impacts on various inequalities vary
considerably. Nevertheless, the vicious cycle connecting economic
disadvantage with vulnerability has worsened disparities.

*Ensure progressive taxation*
To be equitable, taxation must be progressive. More equitable tax systems
should get more revenue from those most able to pay while reducing the
burden on the needy. Wealth taxes are the most progressive way to raise
revenue while also reducing inequalities.

Direct taxes on wealth and incomes are potentially progressive.
Progressively higher rates and exemptions for the poor can ensure this. Low
rates on investment income and assets – such as property, wealth and
inheritance – can be increased. Besides reducing inequalities, these can
finance progressive spending.

Taxing windfall and excess profits is not only publicly acceptable, but can
also raise considerable funds. Some corporations and individuals have
benefited greatly during the pandemic, e.g., US billionaires have
reportedly become over a trillion dollars richer over the last year and a
half.

In the longer term, progressive taxation means less reliance on indirect
taxes – such as sales or consumption taxes, including value-added, or goods
and services tax – which burden those with lower incomes much more.

Tax evasion by the wealthy must also be deterred. Companies using tax
havens to pay less can be penalised, e.g., by disqualifying them from all
government and state-owned enterprise contracts. Tax systems can thus be
made more progressive by improving design and with strict, equitable
enforcement.

*Equitable recovery?*
Ensuring
<https://www.cesr.org/sites/default/files/Brief%203%20Progressive%20Tax_.pdf>
equitable
recovery requires urgent systemic reforms. Although unlikely to yield much
more revenue in the near term due to the economic slowdown, introducing
such reforms now will be politically much easier.

Taxation can transfer fiscal resources from the wealthy to the needy. Those
living precariously, including those now at risk due to the pandemic and
its broad impacts, urgently need help. But financing relief and recovery
provides liquidity, averting protracted economic contraction and stagnation.

Some pandemic relief spending in many countries has been ‘captured’ by the
politically well-connected, as political elites and their cronies seize the
lucrative new opportunities. These compromise not only relief and recovery,
but also reform efforts.

When relief and recovery are treated as temporary ‘one-off’ measures, they
are unlikely to address pre-pandemic problems, including inequities.
Governments should instead use the crisis to advance SDG solutions for both
the medium and long-term.

*Multilateral cooperation needed*
International cooperation can help, but the rich countries’ Organization
for Economic Cooperation and Development (OECD
<http://ipsnews.net/2019/10/oecd-tax-reform-proposal-better>) has long
focused on addressing offshore tax evasion to secure more revenue for
themselves.

A decade ago, it broadened its attention, but continued to insist on its
own leadership at the expense of developing countries. It has thus
effectively blocked multilateral tax cooperation for decades, ignoring the
UN’s strong mandate from various Financing for Development and other
summits.

Equitable international tax reforms remain urgent. But these have been
undermined by earlier reforms encouraging cross-border flows of funds,
enabling illicit financial flows from developing countries.

Although unlikely to yield much revenue for some time, US Treasury
Secretary Janet Yellen’s global minimum corporate income tax proposal
deserves strong qualified support.

Developing countries need to ensure that transnational companies are better
taxed, instead of the current G7 proposal for a low rate. Revenue should be
distributed according to where both production and consumption take place
instead of just where sales occur.

Effectively checking tax abuses also requires access to financial
information and common, equitable and transparent rules, not those imposed
by the rich. But such outcomes can only be achieved through UN-led
multilateralism with developing country governments participating as equals.
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