SANE Views

Vol.7 No.20, 01 August 2007

WHOSE TAXES ARE YOU PERSONALLY SUBSIDISING?

Margaret Legum

I am told that in Canada South Africans are looked down upon as poor tax payers. Canadians think it is right to pay taxes. Whereas, they think, South Africans think tax is a sort of game in which the taxman is pitted against the citizen, who is perfectly justified in seeking to avoid paying.

If you think the topic of tax is essentially unpleasant, technical or boring consider the following. Africa loses about $100 billion a year in lost tax revenue as a result of legal tax dodging by rich people and corporations, who constitute about 1% of the world’s population: that loss is five times more than we get in aid. Think what could be done with that money in terms of education, health, transport infrastructure and so on. And think how much less we ordinary tax payers might be paying if they paid their full whack.

Tax dodging happens through companies registering in tax havens, where tax is small or non-existent and money flows are allowed to be secret. It is also about multi-national countries mispricing transactions within the company so that ‘profits’ end up where tax is lowest. It is mostly legal and facilitated by the world’s top earning legal companies, with the epicentre in London.

Developing countries as a whole lose some $500 billion in this way. Britain itself loses enough each year to fund all its pensions, abolish student fees and send 0.7% of its GDP to meet the Millennium Development Goals. Tax Us If You Can, published with the London-based New Economics Foundation two years ago, gives details worldwide, and can be consulted at www.taxjustice.net

Accountable government is universally accepted as the key condition for democracy and development. And tax is the nexus between government and citizen. Government must be funded: we do that with taxes. In return we want to see the effect in terms of service delivery. Tax is the price we pay for decent governance. We cannot have one without the other. When that relationship fails we get street violence instead of votes. Tax evasion is a moral crime against society, because it interferes with our essential relationship with government

All that may seem rather high-mindedly obvious. How many people know the extent to which we ordinary citizens subsidise very rich people and corporations, who can avoid paying tax by using perfectly legal mechanisms? They are not treated as criminals or fugitives from justice. They pay a fortune to tax lawyers and accountants, who save them several fortunes by making use of shadowy world of tax havens and transfer pricing.

The international Tax Justice Campaign, set up to create a global network to end this bias to the rich, held its first South African seminar in June, the African Chapter having been launched in Nairobi in January. SARS was not there, though it echoes SARS’ persuading the citizenry that paying tax is the right thing to do.
The trouble is that SARS has to operate within a global competitive market in which giving special tax treatment to foreign investors is thought essential for growth. Every government – indeed even every regional government – competes with every other to offer companies tax and other deals, so that they will create employment in their fiefdom.

Low tax and tax holidays, freedom to register off-shore and to maintain secrecy about accountancy practices are among the demands multinational companies make to encourage their investment. ‘The eventual demise of corporation tax is quite likely’, according to Oxford University’s Business Taxation Centre.

That power to influence governments simply by threatening to leave creates theories that suit rich companies and individuals but have no basis in fact. One of these is that low taxes and inequality of income is good for growth, while high taxes that redistribute income stultify economies.

Research over time shows the reverse to be true. The highest taxed countries – notably the Scandinavians and parts of western Europe – are the most income-equal and also have the most dynamic, stable and innovative economies. Whereas the US, countries that use the American model, have wide income disparity, widening poverty, huge national and individual debt and extremely poor public education, health and other infrastructure.

One government – Norway – is breaking ranks. It has published ‘Closing the Floodgates’ about escaping tax. It supports the Tax Justice Network’s call for the International Accounting Standards Board (IASB) to develop an international Financial Reporting Standard. It would ensure that all governments know where all companies work, where they pay tax and how much, which use tax havens and exactly how trade within companies is priced.

It would make the whole process more transparent and democratic – in theory the objective of the free market. It would also enable us to know more about trade and its effect.

So far the IASB has refused to create that financial reporting standard, preferring to accept the existing American Accounting Standard - which is so slack that even that government is considering changing it.