## Taxing for a New Social Contract ## Source details **Canonical URL:** [Taxing for a New Social Contract](https://www.imf.org/-/media/files/publications/fandd/article/2022/march/cobham.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fandd/article/2022/march/cobham.pdf.md) - [Structured JSON version](/-/media/files/publications/fandd/article/2022/march/cobham.pdf.json) --- ### Empowered by tax - Effective taxation provides revenue and redistribution, ensuring states can deliver quality public services and infrastructure while curbing inequalities. - Tax enables repricing of public goods and public “bads” (such as the wider public health costs of individual tobacco consumption); any climate response that requires changing the price of carbon or other emissions will depend on this. - The “four Rs of tax” central to analysis and policy: revenue, redistribution, repricing, and representation. - Representation: paying tax is the glue in the social contract; the share of tax revenues in government spending is consistently associated with improvements in the quality and integrity of government and with the reduction of corruption. - Direct taxes (on income and profits) are most important to strengthening political representation; indirect taxes (consumption taxes such as value-added taxes) are more regressive and less salient to taxpayers, undermining tax citizenship. - Lower-income households are almost always the most heavily taxed as a share of gross income because consumption accounts for a greater share of their income; they also tend to be politically disempowered and less represented. - Marginalized groups disproportionately included among lower-income households: women-headed households; people living with disabilities; racialized and marginalized ethnolinguistic groups; LGBTIQ people. - These groups are also more likely to fall outside formal government systems, missing out on public services and fiscal transfers while contributing disproportionately through indirect taxes. - Where tax systems fail to deliver representation, they deepen political and economic inequalities and weaken the social contract for the already marginalized. ### National obstacles, international failures - Domestic political incentives prioritize short-term popularity and electoral success, encouraging lower and less salient indirect taxes that annoy voters less, which conflicts with the need for more salient direct taxes to strengthen accountability over the medium and long term. - The pandemic revealed the state’s capacity to act and the deep inequalities in who benefited, creating public demand for universal public services and social security and justifying longer-term tax measures. - International tax rules and the OECD’s latest proposals still do not require the taxation of multinational companies where their economic activity takes place. - International rules still do not prevent anonymous ownership of assets and income streams—central to individual tax abuse, corruption cases, and illicit financial flows. - The Tax Justice Network’s “ABC of tax transparency”: - A: automatic exchange of financial information so home tax authorities are aware of overseas bank accounts. - B: beneficial ownership transparency through public registers for companies, trusts, partnerships, and other legal vehicles. - C: country-by-country reporting to ensure accountability for multinationals when there is a divergence between where they do business and where they declare profits and pay tax. - Progress has been substantial: initial ideas once dismissed became supported in principle by the Group of Eight and later the Group of Twenty. However, delivery remains patchy. - OECD mechanisms for international exchange of financial information and privately held country-by-country reporting systematically exclude lower-income countries from cooperation benefits. ### Global inequalities - International failures cause stark inequality in the global distribution of taxing rights; lower-income countries are denied effective taxation of economic activity and wealth accrued in their jurisdictions, with direct human consequences. - The State of Tax Justice 2021 estimates combined global revenue losses from cross-border tax abuse by people with undeclared offshore assets and by multinational companies amount to some $483 billion a year—or enough to vaccinate everyone in the world three times over. - Greatest losses in absolute terms are suffered by OECD member countries, but the greatest losses as a share of tax revenues or of public health budgets are borne by lower-income countries, many of them former colonies. - These losses translate directly into forgone public services and forgone human development—including many thousands of needless deaths. - Some of the richest countries—OECD member states and their dependent territories—are responsible for the great majority of the tax losses suffered by others. - To deliver on the four Rs requires confronting underlying global inequalities and the consistent choices by powerful countries to prioritize immediate perceived self-interest. ### Rethinking fiscal policy - The pandemic may have created political space for significant tax policy changes to fight inequality. - There is broad consensus—from tax justice activists to the World Economic Forum’s Global Future Council—on the need for measures including wealth taxes (such as that adopted by Argentina) and excess profit taxes on companies that collected large unearned revenues during the pandemic. - The UN FACTI panel final report recommended: - A UN tax convention to ensure consistent transparency and to create a globally inclusive intergovernmental body to set tax rules (long supported by the Group of 77). - A Centre for Monitoring Taxing Rights to provide consistent data and analysis on the tax abuse suffered by, and facilitated by, each country (a proposal adopted from the Tax Justice Network). - For the countries most responsible for global harm, simply allowing the damage they do to be seen would be an important step toward accountability and toward reestablishing their social contract with the world. - Policymakers need to combine new progressive tax policies with domestic and international transparency measures to strengthen the four Rs of tax and enable meaningful renewal of the social contract across countries at all income levels. - Without such measures, necessary responses to the pandemic, the climate crisis, and the reduction of unnecessary global inequalities are unlikely to occur. *Alex Cobham, “Taxing for a New Social Contract,” March 2022, Finance & Development.* --- _Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/march/cobham.pdf_