Wayne Swan: Tax avoidance impoverishes us all. Fighting it requires challenging the powerful

few days before Christmas, in the full light of an Australian summer, the Australian tax commissioner published the tax details of 1,500 large corporate taxpayers which showed a staggering one-third of these companies paid no tax in 2014.

This transparency measure was part of a wider package of ground-breaking legislation passed by the Labor government in 2013 aimed at exposing rampant corporate tax minimisation and evasion.

Some 125 years prior, in 1888, British historian James Bryce said, “sunlight kills many of those noxious germs which are hatched where politicians congregate.” This sentiment was later distilled by US Supreme Court Justice Louis Brandeis who noted that “sunlight is said to be the best of disinfectants”. So it ought to prove with the release of the tax details of these 1,500 companies.

The UN and OECD estimate that globally the cost of multinational tax evasion and avoidance amounts to as much as US$240bn annually. The figure seems conservative, considering the wide range of evidence emerging from developed economies like Australia.

The Australian data gives a sense of the scale of multinational tax avoidance in a large developed economy; in 2013, nearly half of all foreign companies with total revenues of A$21.2bn paid zero tax.

The release of this data follows six months of public debate sparked by a parliamentary investigation on corporate tax avoidance. Two of Australia’s largest global mining companies, BHP Billiton and Rio Tinto, were exposed for aggressive transfer pricing activities costing the public billions of dollars in revenue. When global companies seemingly as respected and large as these operate in this cavalier way, it compromises the integrity of the social contract and green lights others to follow in their tax avoiding footsteps.

Across the Pacific a similar debate has been rumbling in the United States. It was triggered again in late November when Pfizer announced plans to escape its United States tax obligations by merging with Irish company Allergan and shifting its headquarters to Ireland, which has a significantly lower tax rate.

It is very clear from international evidence gathered through the OECD’s Base Erosion and Profit Shifting (BEPS) process that some foreign-owned companies, in the words of the Australian tax commissioner, are “overly aggressive in the way they structure their operations”.

As Gabriel Zucman noted in The Hidden Wealth of Nations: The Scourge of Tax Havens:

55% of all the foreign profits of US firms are now kept in tax havens … its cost is enormous – $130 billion a year for US firms alone.

The scale of this lost revenue has been known for some time and this is why the London G20 summit in 2009 launched an assault on tax havens, declaring “the end of banking secrecy”. Since that time, as Zucman laments, the amount of money held in tax havens has actually increased by 25%.

A progressive tax system for corporates and individuals is central to the capacity of nations to fund their own growth. It is one of a number of structural reforms required to lift living standards across the developed and developing world. Rampant tax evasion torpedoes this central platform of inclusive growth and is now a structural cause of growing global inequality.

Unless there is concerted global action to protect the revenue bases of both developed and developing economies, the Sustainable Development Goals (SDGs) developed by the United Nations are unachievable. There is going to be a long and difficult road for the UN to travel between its current SDG aspirations and implementation of practical policy over the next 15 years. It will require strong and committed governments with credible fiscal and monetary policies and the political willpower to take on some of the largest multinational companies.

The BEPS process is an important part of the response as are the recommendations of the International Commission on Corporate Tax Reform chaired by José Antonio Ocampo. But neither of these are enough to deal with the lobbying power of the large corporates intent on maintaining the status quo.

In solving this problem, political leaders should never underestimate the power wielded by those who are the economic beneficiaries of politically-inspired inequality. Some plain speaking is required; starting with the obvious point that tax avoidance or evasion on such a grand scale impoverishes us all. When companies fail to pay their fair share of tax, revenue must be found elsewhere – from other businesses or individual taxpayers. The billions of dollars extracted are forever lost to health or education or infrastructure investment that improves the lives of people across the community, but is also vital for productivity growth and so ultimately supports the bottom line for businesses.

There must be a debate about the ethics of this behaviour. As many prominent business leaders have said to me, there is a stark contrast between the esteem in which the boards of these participating companies expect to be held and their actual behaviour. The reputations of the boards who have approved these practices and those who have provided advice should be on the line. Corporations are not ends in themselves. The corporate veil should not hide the moral responsibility of those who run them and the decisions taken in their name.

Nowhere is the impact of these practices more pronounced or enduring than in the developing world. If rich G20 countries like Australia have not been able to effectively tax large corporates and wealthy corporate interests, how much more difficult is it for emerging nations to put in place progressive tax systems? The IMF has estimated that developing countries lose three times as much revenue as OECD countries. If they can’t get progressive tax systems in place, their capacity to fund affordable health and education is minimal.

The implementation of a progressive tax system means challenging power elites. There is deep institutional resistance to more inclusive forms of growth over and above acceptable levels of poverty. It is led by multinational mining companies profit-shifting out of resource-rich countries, IT companies paying tax in not a single jurisdiction, and tobacco companies trying to buy licences for their poisonous trade. The list is long and deep.

The sunlight applied to corporate tax behaviour in Australia is a ray of hope, as are the recommendations from the International Commission on Corporate Tax Reform, but these are only the first steps. What is now needed is a substantial political and economic debate about how rampant tax evasion sabotages the SDGs and why progressive taxation is so critical to securing strong inclusive growth with rising living standards for all.