Taxing for a New Social Contract
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- Authors: Alex Cobham
- Published: March 1, 2022
The four Rs of tax and the case for renewal
- The “four Rs of tax” are presented as central to fixing broken tax rules and rebuilding government accountability.
- The four functions emphasized: revenue, redistribution, repricing of public goods and public “bads,” and representation.
- Representation is highlighted as the most important R: “Paying tax is the glue in the social contract.”
- Direct taxes (on income and profits) are identified as most important to strengthening political representation; indirect taxes (consumption) are less salient and thus weaker in fostering tax citizenship.
Empowered by tax: effects and inequities
- Effective taxation:
- provides revenue and redistribution for public services and infrastructure;
- allows repricing of public goods and public “bads” (example: public health costs of tobacco consumption);
- bolsters representation, enabling taxpayers to hold governments accountable.
- Paradox: lower-income people and households are almost always the most heavily taxed as a share of their gross income, yet are actively disempowered.
- Cause of regressivity:
- the great majority of tax paid by lower-income households is in the form of indirect taxes;
- consumption accounts for a greater share of income for these households, so consumption taxes fall more heavily on them.
- Indirect taxes are less salient and therefore weaker in supporting accountability and the social contract.
- Lower-income households disproportionately include people more likely to struggle for representation: headed by women; people living with disabilities; racialized and marginalized ethnolinguistic groups; LGBTIQ people.
- People in these groups are more likely to be excluded from formal government systems and to miss out on public services and fiscal transfers while contributing disproportionately through indirect taxes.
- When tax systems fail to deliver representation, they compound political and economic inequalities and weaken the social contract for the marginalized.
National obstacles and international failures
- Domestic political incentives are misaligned: short-term popularity and electoral success encourage lower and less salient indirect taxes rather than medium- and long-term strengthening of the social contract via direct taxes.
- The pandemic revealed both state capacity to act and deep inequalities in who benefited, creating public demand for universal public services and social security.
- Extreme wealth inequalities intensified during the pandemic; these imply responsibility for meeting new tax obligations lies with the wealthy.
- International tax rules limitations:
- OECD’s latest proposals “still do not require the taxation of multinational companies where their economic activity takes place.”
- They “still do not prevent the anonymous ownership of assets and income streams”—central to individual tax abuse, corruption, and illicit financial flows.
- The Tax Justice Network’s “ABC of tax transparency”:
- A: automatic exchange of financial information;
- B: beneficial ownership transparency (public registers for companies, trusts, partnerships, other legal vehicles);
- C: country-by-country reporting to ensure accountability for multinationals where business activity and declared profits differ.
- Progress noted:
- originally these ideas were dismissed, but “just 10 years later the Group of Eight confirmed support for automatic exchange arrangements and for country-by-country reporting” and the Group of Twenty adopted all three in principle.
- Delivery remains patchy; OECD mechanisms for international exchange systematically exclude lower-income countries from cooperation benefits.
Global inequalities and quantified losses
- International failures create stark inequality in the global distribution of taxing rights: lower-income countries are denied effective taxation of economic activity and wealth 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 of multinational companies amount to some $483 billion a year.
- Framing: “some $483 billion a year—or enough to vaccinate everyone in the world three times over.”
- Distribution of losses:
- Greatest absolute losses are suffered by OECD member countries.
- Greatest losses as a share of tax revenues or public health budgets are borne by lower-income countries—many former colonies—translating into forgone public services and human development, including many thousands of needless deaths.
- Responsibility:
- Some of the richest countries—OECD member states and their dependent territories—are responsible for the great majority of tax losses suffered by others.
- Analytical metaphor: a Venn diagram of four overlapping circles—countries made wealthy by imperial conquest; countries with greatest historical responsibility for the climate crisis; countries benefiting most from unfair global taxing rights; countries that hoarded COVID-19 vaccines and IP. The overlap highlights recurring policy choices and the need to change underlying dynamics.
Rethinking fiscal policy and policy measures
- Political space may exist, in the pandemic’s shadow, for significant tax policy changes to fight inequality.
- Noted consensus across diverse groups (tax justice activists to the World Economic Forum’s Global Future Council on the New Agenda for Fiscal and Monetary Policy) on measures including:
- wealth taxes (example: adopted by Argentina);
- excess profit taxes on companies that collected huge unearned revenue during pandemic lockdowns (example cited: Amazon).
- Global-level recommendations from the high-level UN Financial Accountability, Transparency and Integrity (FACTI) panel:
- 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);
- adoption of the proposal for a Centre for Monitoring Taxing Rights to provide consistent data and analysis on tax abuse suffered by, and facilitated by, each country.
- Policy imperative: combine new progressive tax policies with domestic and international transparency measures to strengthen the four Rs and enable renewal of the social contract at all levels of per capita income.
- Without such measures, necessary responses to the pandemic and the climate crisis and the curtailing of unnecessary inequalities are unlikely.
Source: Taxing for a New Social Contract — Alex Cobham, F&D Magazine, March 2022.
Content in this bundle
- الضرائب والعقد الاجتماعي الجديد
- Taxing for a New Social Contract
- La fiscalité en faveur d’un nouveau contrat social
- Налогообложение в целях нового общественного договора
- Impuestos para un nuevo contrato social ● Finanzas y Desarrollo ● Marzo de 2022
- 通过征税建立新的社会契约