Since the economic collapse of 2008 and the ensuing recession, increasingly more attention is being paid to corporate accountability. Recently, the Occupy movement has brought into sharp relief some of the discontent with poor corporate citizenship. If you pay close enough attention, there have been many stories in the media exposing unfair – sometimes illegal – corporate practices and how they are affecting the overall health of the economy. We’ve learned, for example, how G.E. – America’s largest corporation – avoided paying any taxes in the United States in 2010 – thanks to the “clever use” of tax breaks and offshore accounting. While Republican presidential hopefuls will have you believe that reducing corporate tax rates is the best way to boost the economy, American corporate tax rates haven’t been this low (35%) since before the Second World War. Meanwhile, the United States is struggling to figure out how to cut a soaring budget deficit and continue financing key health care and welfare programs.
This situation, however, is not unique to the United States or the industrialized world. Indeed, a recent report by Eurodad (European Network on Debt & Development) finds that developing nations lose more than a trillion (yes, trillion) dollars of potential tax revenue every year because of corporate tax evasion.
The UK-based Tax Justice Network also recently published a report to highlight the negative effects of tax dodging by multinational corporations, and launched a new campaign “Tackle Tax Havens (By the way, their website, www.tackletaxhavens.com, offers myriad resources, information and data about tax evasion – I highly recommend checking it out.) Their report “shows that tax evasion costs 145 countries, representing over 98% of world GDP, more than US$3.1 trillion annually.”
As noted in the executive summary of the Eurodad report, “the international community has repeatedly stressed the need to mobilise domestic resources in developing countries, as the most sustainable way of financing development and ending aid dependency […] The cross border nature of multinational companies’operations combined with the absence of adequate transparency regulations have very damaging implications for a country’s ability to mobilise domestic resources.” Mobilizing resources through taxation is not just critical for developing countries’ ability to finance development: it is, in fact, one of the most fundamental functions of modern, sovereign states – developing or industrialized. Drawing a parallel with the way in which the United States is weak on corporate tax enforcement allows us to see the depth of the problem of tax evasion.
While we continue to think about how developing nations can finance programs to support economic and social development, it’s clear that the issue of corporate tax evasion must be addressed. In the extractive industry, efforts such as the Extractive Industry Transparency Initiative, begin to deal with this issue, but the voluntary nature of the EITI, and the lack of enforcement mechanisms, make it an imperfect solution. Dealing with tax havens is a third rail issue. Similarly, attempting to close tax loopholes for multinational corporations is practically political suicide. The globalized nature of this problem suggests that bold, concerted action will need to take place – nothing less than the viability and sustainability of our economic and financial systems are at stake.