Noah Herfort is an undergraduate at the University of St Andrews, where he studies International Relations and Sustainable Development. Noah is interested in climate change, politics, and writing, passions which came to the fore during his work with the U.S. State Department and Climate Institute. In the future, Noah plans on pursuing a Masters and gaining employment in the environmental-political sector. He can be contacted at noahherfort@icloud.com.
U.K. | June 27, 2020 | Student Essay
“We’ve got to be talking about taxes… taxes, taxes, taxes,” Rutger Bregman said at the opulent World Economic Forum in 2019, lifting a sacrosanct veil of silence on a long-forgotten concept amongst the world elite. Yet Bregman, who has since been shunned from Davos, was right on the money. As the world’s wealth exploded in the aftermath of sweeping neoliberal reform, tax evasion experienced a similar eruption, fueling global inequality and eviscerating the welfare state. A neo-gilded era has since arrived, as corporate behemoths plunder just as they did in the late 19th century, except this time their looting has gone international and reciprocal political will has all but evaporated. In the age of footloose capital and broad financial deregulation, there needs to be global cooperation to hold powerful corporations accountable. As the leader of Europe and champion of multilateralism, Germany has the opportunity to tackle tax dodging by enacting reform within the G20.
Tax avoidance is a financial pandemic, impacting wealthy and poor countries alike. Of course, there are a couple of big winners, such as the “big four” consulting firms, who have made a fortune by helping the wealthy evade their taxes, as well as so-called “tax havens,” countries with small to non-existent corporate tax rates that gleefully store corporate profits in exchange for lavish fees. While corporate titans, abetted by the dangerously savvy tax evasion industry and the partnership of a few opportunistic countries, make a windfall, the rest are deprived of their fair share of prosperity. According to Gabriel Zucman, a Professor of Economics at the University of Berkley and renowned tax expert, Germany suffers especially from this parasitic arrangement, losing more tax revenue than any other EU country.
In a high-profile example, the German health care giant Fresenius avoided paying 2.9 billion euros in taxes over the course of a decade. Fresenius successfully shirked its tax duties by stashing profits in lucrative tax havens. While the majority of the company’s sales were made in relatively high-tax markets, such as Germany and the U.S., the company artificially reduced these profits. Instead, it manipulated transaction prices and wired profits to offshore tax havens. Fresenius got richer, the public got poorer.
Despite having a combined corporate tax rate of 30 to 33%, Germany failed to fully tax Fresenius. This corporate criminality is certainly a product of the sophisticated tax dodging industry, which has developed elusive tax instruments adapted to the frictionless global economy. Yet the crux of the issue extends beyond corporate ingenuity. Tax evasion is not a foregone conclusion, it is a choice made by governments around the world. In fact, for some, this choice is less a vapid capitulation (“they’re too darn good at dodging taxes!”) than it is a welcome admission. Certain countries of a neoliberal bent (I’m looking at you America) view tax competition as the “will” of the omniscient market. “If tax havens like Bermuda have a 0% corporate tax rate, then we have to lower our own tax rate,” opines the market fundamentalist. Yet this policy prescription is no less dogmatic than it is morally bankrupt. A race-to-the-bottom global tax architecture would be a boon for wealthy corporations and a death knell for the welfare state.
Luckily, it doesn’t have to be like this. G20 members can stamp out tax evasion, and Germany can lead the way. In fact, Germany, which boasts some of the largest companies in the world, has already pushed for G20 measures that combat corporate tax avoidance, making it the natural leader in the fight against tax dodging. When it comes to actual policy, Germany should advocate for a 25% minimum corporate tax rate amongst G20 members, a small amount by historical standards. This type of broad policy coordination would have an indelible impact, as close to a thousand companies are headquartered in the U.S. and EU, while the rest are concentrated in G20 countries. In fact, if G20 countries were to impose a 25% minimum tax tomorrow, more than 90% of the world’s profits would be taxed at the corresponding rate. Recovering this lost revenue would have a dual impact. Not only would it replenish cobwebbed coffers and buttress state welfare programs, but it also would erode manipulative political power of ultra-wealthy corporations.
Of course, corporations could still stash profits in offshore tax havens. There would be more policing of corporate activity, but the tax avoidance window, no matter how small, would still be there. This is where defensive measures come into play. Germany, and its G20 counterparts, could target any lingering tax deviants by apportioning a company’s tax deficit. For example, Fresenius generated the majority of its sales in countries with a corporate tax rate of at least 30%, yet the company’s global tax rate in 2018 was only 18.2%: a 11.8% tax deficit. To make up for this lost revenue, G20 countries would divide up this tax deficit in accordance with the location of the company’s sales. If, for instance, Fresenius made 30% of its sales in the U.S., then the American government would collect an additional 3.5% (30% of 11.8%) on the profits made by Fresenius in a specific year. The corporate tax avoider would have nowhere left to go.
Taxes are essential to effective governance. Shirking this civic duty is not indicative of a particular business acumen or profound personal intellect (as U.S. President Donald Trump claims), rather it’s a corrosive practice that undermines pivotal institutions and fuels global inequality. Germany has the bureaucratic know-how to devise necessary policy and the political capital to persuade its G20 partners. It is well-positioned to lead the way.
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