Celebrity economists on the same page over tax justice

Thomas Piketty and Joseph Stiglitz are celebrity economists with a mission to bend capitalism from its liberal, deregulated, inequality-generating trajectory back towards a more social and interventionist mode.

Both published new books this month. Piketty’s Capital and Ideology runs to 1,232 pages. Stiglitz’s People, Power and Profits: Progressive Capitalism for an Age of Discontent is short by comparison, at 366 pages.

No issue is more central to their thinking than tax justice. That was what saw both men participating in a recent conference of the Independent Commission for the Reform of International Corporate Taxation (ICRICT) at the École d’Économie de Paris, where Piketty teaches.

“The profits of big global companies must be declared on a global level,” Piketty said, defining ICRICT’s goal at a closing press conference. The group wants a minimum global corporate tax of at least 20 per cent. And, Piketty said, tax “must be spread among countries according to objective criteria such as sales, the level of employment, in some sectors users, for example of digital platforms. These criteria must not be subject to manipulation.”

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Stiglitz chaired the Council of Economic Advisers in Bill Clinton’s White House, and shared a Nobel Prize for economics in 2001. He sees corporate taxation as a moral issue.

“The societal cost is enormous, because, if the richest corporations in the world don’t pay taxes, somebody else has to support the public services, or public services get cut. That is what is happening. That’s why this issue has such resonance today.”

Multinational corporations now pay less tax than before the 2008 financial crisis, and continue to transfer up to 40 per cent of profits to tax havens, according to ICRICT. Gabriel Zucman of the University of California, Berkeley, says corporate tax flight represents €350 billion in lost revenue annually, of which €120 billion is lost to the EU.

“This has terrible consequences,” says Piketty. “It’s very difficult for the rest of society and economic actors to accept they need to pay for bigger companies that are not paying their fair share. This is gradually destroying the basic social contract that makes people accept paying taxes.”

Royalties

Piketty provoked laughter when he recounted a meeting with his Paris banker regarding royalties from his previous book, the best-selling Capital in the Twenty-First Century. “The banker told me, ‘Set up a company and transfer ownership of your royalties to the company. Then when you need money you sell some shares in the company.’

“For the banker, it was obvious. Why would you pay tax? We are talking about a world where it seems perfectly legitimate for people to do whatever they can to avoid taxation.”

Prospects for fiscal justice nonetheless appear brighter than they have in a long time.

"At the G7 [in Biarritz last August], the big countries agreed on the necessity of creating a minimum tax," Stiglitz notes. The International Monetary Fund (IMF), the Organisation for Economic Cooperation and Development (OECD) and the United Nations all agree on the need to reform international taxation.

American companies are even more creative in tax avoidance than they are in creating good products

Stiglitz says the basic problem is the transfer price system, created 100 years ago to tax sales in a manufacturing economy. Goods were taxed when they crossed borders, and most transactions were between companies.

But in today’s digital world, “a very large fraction of all trade is within companies . . . You can shift the income of the company to places where there are low taxes. Companies record all their profits in low-tax jurisdictions.

"The most creative of our American companies are even more creative in tax avoidance than they are in creating good products," Stiglitz continues. "So you have, for example, Apple shifting all income in Europe to Ireland, then saying that because the control of the Irish company was not in Ireland, it doesn't have to pay taxes in Ireland either."

Stiglitz claims Ireland “is not only a tax haven. It is not a good citizen of the EU.” The Tax Justice Network, which sent representatives to the conference, ranks Ireland 11th on its corporate tax haven index, and 26th on its financial secrecy index. Its 2018 report on Ireland describes the State as “balancing a difficult tightrope between full rehabilitation of its reputation and at least maintaining its current level of foreign direct investment”.

Ireland supports the OECD’s base erosion and profit shifting or Beps negotiations, which aim to prevent large companies shifting profits to zero-tax jurisdictions.

In talks with Pascal Saint-Amans, the tax director of the OECD, Stiglitz said the ICRICT “has made it clear . . . the kind of patchwork which they are trying to do, for understandable political reasons, isn’t going to be able to address the fundamental issues we are facing. They are in an intergovernmental process where particular governments can veto their initiatives.”

‘Residual profits’

Piketty was critical of Beps. “The OECD says, ‘Yes, we must have unitary taxation, that is to say declaration of profits on a global level, to be distributed fairly, but we will do it only on residual profits and not on routine profits.’ Their definition will end up making nearly everything routine profits. It’s an enormous scam.”

The French economist was also sceptical about the OECD’s commitment to common reporting standards, which are supposed to result in the automatic transmission of information on international assets. The public are being asked to take the organisation at its word. “No one has the means to verify that information transmitted is actually used by countries’ tax administrations, and that it results in greater fiscal justice,” Piketty says.

Piketty wants governments to divulge annually to the public the amounts of individual and corporate wealth reported. “Show us how much tax is paid, how it evolves year to year,” he says, adding that he is wary of premature declarations of victory in the war on tax evasion.

“The discussions with the OECD on Beps and common reporting standards are interesting, but for us extremely insufficient.”

Piketty also fears the OECD initiative will redistribute profits from tax havens to rich countries, not to poor countries which often contribute significant labour, and where sales are made. The OECD has brought developing countries in on the negotiations, as observers. “But they have no say. We are pushing for it to be done on a more global level.”

ICRICT wants to shift tax negotiations from the OECD to the UN. In this context, corporate tax avoidance was repeatedly compared to global warming.

If an agreement is not possible at EU level, what makes you think it would be possible on a global level?

Stiglitz praised the UN’s stewardship of negotiations on climate change. “They have used a very effective mechanism where negotiations occur in different countries and the countries where each conference is located play a big role,” he said.

France organised the COP 21, which led to the Paris Climate Accord, very well, Stiglitz continued. The limitation came from US president Donald Trump's decision to withdraw from the agreement, not from the UN.

Fiscal justice

He suggests a similar system might be established for fiscal justice, “a framework where all relevant parties are there on an equal basis. You could create a secretariat like we have for climate change, where we would develop the expertise, and the secretariat would represent all countries, not just developed countries.”

Stiglitz says a global, unitary corporate tax would not require massive new bureaucracy. “There is a lot of exchange of information, so you don’t have to have a super tax authority. With the exchange of information, you have a basis. These corporations typically stay within the law . . . Each country will levy the tax.”

A reporter from the economic daily Les Échos noted that the EU’s attempts to arrive at a common corporate tax base or CCTB failed because member states did not want to sacrifice a degree of sovereignty. “If an agreement is not possible at EU level, what makes you think it would be possible on a global level?” she asked.

Piketty predicted the end of the EU’s requirement for unanimity on fiscal matters.

“This will have to be changed,” he said. “At some point, you have to realise you are not going to have unanimity to get rid of unanimity. Therefore, you should move with whoever wants to move . . . We have to be pragmatic and not wait for unanimity to make progress. This might imply sanctions or appropriate measures towards those who don’t want to co-operate.”

Piketty criticised French president Emmanuel Macron's so-called Gafa tax because it is imposed only on digital companies, not all multinationals. (Gafa is the French acronym for Google, Apple, Facebook and Amazon). But Stiglitz repeatedly praised the French initiative, which is set to bring €400 million into French government coffers this year.

France charges a 3 per cent tax on digital companies with a global turnover of €750 million, of which €25 million is in France. “Paris has shown that, contrary to fears, it is possible to act on the national level,” Stiglitz said.

Stiglitz also believes that a just international corporate tax regime could be established rapidly if, for example, Democratic senator Elizabeth Warren is elected president of the US in 2020. "Once the US position changes, it will be very hard for others to resist," he said.