March 20, 2014
Europe is running the risk of a lost generation. Hit by growing economic inequality and poverty, governments are failing to provide good quality public services and to close the gap between the rich and the poor. As public outcry increases, it should become clear to European Union leaders meeting in Brussels today and tomorrow that unfair tax policies are at the centre of this discontent.
It is a shocking indictment of the system that the 85 richest people on the planet own as much money as the world’s bottom half. This fact is no less emblematic than in Europe where the top 10 richest people have a combined wealth of €217bn. This is more than the 2008 EU stimulus package introduced to supposedly create ‘all-inclusive’ growth when the economic crisis kicked in. Six years on, nearly one in four Europeans are at risk of poverty and the situation is set to worsen due to the impact of austerity policies.
With such eye-opening statistics, it is hardly surprising that public support – both in the developed and developing world – for fairer income distribution has seen a dramatic increase, as the International Monetary Fund pointed out last week. The IMF, which has now debunked the old myth that redistribution is bad for growth, advises governments to implement progressive tax systems that help fund essential public services – including health, education and social security. All of which will help economic mobility and, ultimately, reduce inequality.
The way we tax is important. In an era of almost weekly scandals of multinationals dodging their taxes, many are challenging a system that lets the richest walk away from their financial obligations by hiding money in far-away bank accounts while the poorest end up picking up the tab. As each European citizen loses about €2,000 every year because of tax evasion and tax avoidance, their governments continue to turn a blind eye to this tax injustice.
Dodgy tax policies do not just affect Europeans but also those in the developing world as well. As multinational companies, many of them in the EU, may shift more than €350bn away from some of the world’s poorest societies through shady practices – it is often ignored that these practices are diverting money from those who need it the most.
The reasons for tackling tax injustice are obvious. It is now time to implement change. At this week’s summit, leaders are set to finally give the green light to review the EU Savings Tax Directive. It represents a significant step in addressing tax cooperation between member states. By expanding the automatic exchange of tax information, governments will now have the opportunity to discover which individuals are shirking their responsibilities – bringing a new level of scrutiny to European tax evaders.
Politicians and officials must now build on this momentum by pushing for an even greater tax transparency agenda. One policy governments should be particularly receptive to is the so-called ‘country by country reporting’. This would help pinpoint where companies are producing real economic work. Obliging big companies to release information on where they work and how much they pay in tax will not only create greater public confidence in multinationals but also impress investors who will have far greater clarity when investing into companies.
Transparency rules must also highlight the abusive use of shell companies, a process in which corporations or individuals store large amounts of income in countries that have little relevance to their business but low tax rates. The European Parliament recently recognised this immoral practice. An encouraging signal that should be now backed by national leaders.
Transparency is a crucial tool in the greater challenge against tax dodging. As some might suggest, it will not wholly solve the issue but the fundamental principle resides: those who have nothing to hide, have nothing to fear. Ensuring that companies and individuals can no longer hide could, in the long term, will help heal the gross inequalities that persist in our society.
This blog post was originally published in Policy Review