Push to tax the rich gathers pace as OECD moves on the corporate sector

Finally, some (reasonably) good news: after years of negotiations, 136 countries have reached an agreement to tackle corporate tax evasion.

The deal brokered in Paris on Friday has two “pillars”. The first involves taxing a slice of the world’s largest multinational companies’ profits based on where their sales occur, which aren’t so easily siphoned off to tax havens. The second is a global minimum corporate tax rate of 15%. If properly implemented, these measures would make “jurisdiction shopping” far less practicable and lucrative.

It’s not a perfect deal, partly due to last-minute horse-trading to win over recalcitrant low-taxing countries. The 15% rate is lower than many had recommended, and the words “at least” were dropped to appease evasion-enabler Ireland, stalling momentum for increasing the rate in coming years.

Nonetheless, it represents a step toward a fairer global tax system and a diplomatic win for Joe Biden and the OECD, whose leader Mathias Cormann is clearly training for an Olympic medal in ideological backflips on his Parisian sojourn.

The rich are still aboard the gravy train

It was an opportune week for the clampdown, as the International Consortium of Investigative Journalists (ICIJ) also dropped its Pandora Papers investigation. The leaked tax files revealed more high-profile names who stash their assets offshore in low-tax jurisdictions, including Shakira, Ringo Starr and Tony Blair.

The glaring problem, however, is that many of these technically-legal-but-ethically-shoddy transfers won’t be caught by the Paris deal. Nor would they be much affected by proposed domestic reforms, such as barring evasion-enabling companies from government contracts and finally setting up a proper corporate ownership register.

That’s because many rich-listers aren’t moving companies they own to the Cayman Islands; they’re moving personal savings into Swiss bank accounts, buying Luxembourgian real estate and docking their yachts in Bermuda. It’s not higher rates of corporate tax they’re trying to evade; it’s taxes on inheritances, gifts, capital gains and other forms of personal and family wealth.

The lack of a comparable global deal on personal riches is unsurprising — after all, ICIJ revealed 35 world leaders and numerous politicians use these very instruments to swindle their own countries’ coffers of vital funds.

Biden and Scholz propose taxing wealth — and the rich skip town

The inability of the international community to coalesce around even the most basic personal wealth tax standards leaves a gaping hole, as rich people are showing an increased appetite to opportunistically move their wealth across borders.

For instance, many wealthy Germans have spat the schnuller and moved their savings to Switzerland since it became clear the Social Democratic Party would win the recent election. Incoming Chancellor Olaf Scholz has pledged to introduce a wealth tax, slugging the rich not only for the wealth they gain each year but for excessive reserves too.

Hopefully, such capital flight will encourage Scholz to use Germany’s power as Europe’s largest economy to seek a European Union agreement to bring relevant tax rates into closer alignment.

Across the North Atlantic, the Biden administration is negotiating with Congress to increase the capital gains tax to finance his mammoth spending bill. Many ultra-wealthy families clearly foresaw such post-COVID redistribution, however, with attempts to relocate themselves or their assets to countries like Singapore jumping significantly in 2020. One advisory firm saw the number of calls from high-worth US-based clients surge 206% last year.

Towards an international agreement

A Paris-like global agreement on personal wealth taxes is unlikely. Let alone the progressive dream of a global tax on capital, as proposed by economist Thomas Piketty in his magnum opus Capital in the Twenty-First Century and reiterated in his new book hitting shelves this month.

The biggest problem is far greater policy divergence between countries. Nearly all countries tax companies at some level, and widely loathed mega-corporations are easier targets to unify against. But wealthy individuals have proven better able to influence domestic politics in some places, while others have told their local capitalists to carry more water for the team, leaving countries with little in common to agree upon.

Some European countries levy substantial inheritance taxes on wealthy families, whilst Australia remains an OECD outlier by not having one at all. Meanwhile, capital gains are often taxed similarly to labour income in Europe, but Australia taxes investors 50% lower than workers.

But it’s not inconceivable that nations who tax personal fortunes similarly, particularly in Europe, could collaborate on minimum standards. They may even institute a “top-up tax”, like that contained in the Paris agreement, whereby people who shift large sums to low-taxing country could have the windfall seized by their higher-taxing home states.

At least then, nations who seek to tax fortunes would face lower threat of an upper-crust exodus. And it’d offer Australia an easier path if our political class ever outgrow their craven reluctance to tax capital responsibly — our local robber barons couldn’t rush the family silver offshore.