Tax Policy – Is Now the Time for a 0 billion Tax Increase?

The massive debts governments across the globe are incurring to give life-support to their economies are going to leave policymakers with a tough choice: Raise taxes indiscriminately to pay off these debts and risk further economic depression, or focus on tax policies that help rebuild global economy.

Unquestionably, growth should be the top priority, but that will require global institutions such as the G-20 and the Organisation for Economic Co-Operation and Development (OECD) to set aside their tax policy agendas until the global economy has fully stabilized once the coronavirus pandemic subsides.

For the past decade, G-20 governments have been working through the OECD to develop policies to raise more revenues by reducing corporate tax planning (so-called anti-BEPS policies, for base-erosion and profit-shifting) and, more recently, through targeted taxes aimed at digital companies. The OECD estimates that its latest proposal would raise more than $100 billion from higher taxes, policies that would harm a fragile and recovering global economy.

Seemingly unconcerned about how the digital project could impact the economy at this crisis moment, officials at the OECD recently released a statement boasting that they are continuing to work “full steam” on this global digital tax project. The current deadline for completing the work is at the end of 2020, a timeline agreed to by the more than 130 countries and jurisdictions engaged in the negotiations. The next round of discussions is still on track to be held in Berlin at the beginning of July, and other discussions are expected to continue in the meantime.

However, now would be a good time to hit the pause button for two reasons.

First, policymakers have shifted their focus to the health crisis at hand and may not be able to commit the necessary time to evaluating the impact of the OECD’s proposal on their economies. For every country that would stand to gain revenue under the OECD’s proposals—such as France or India—other countries risk losing revenues—Ireland and the United States among them. The losers may be even less willing to move forward in negotiations without having the time to understand the full ramifications of the proposals.

Second, after the health crisis subsides, policymakers will need to turn their attention to designing pro-growth tax policies in the context of sustainable public finances. Corporate income tax revenues are the most volatile revenue source and implementing new international tax rules targeted at highly profitable business models is likely to create additional volatility, both for businesses and for countries.

Instead of rushing toward a global digital tax solution in these challenging days, the OECD should pause these negotiations until the global economy has reached a stable growth path, say 2 percent annual growth for two consecutive years as measured by the World Bank or International Monetary Fund (IMF). Only in the context of a healthy global economy would further discussions of a global digital tax fix make sense.

To its credit, the OECD is committing resources to addressing the health crisis in its role of assisting governments in providing tax relief and in promoting long-run pro-growth reforms. The OECD’s Center for Tax Policy and Administration is providing valuable recommendations regarding fiscal relief and the impact of tax treaties during the crisis.

Once the crisis abates, the OECD should reenergize its “Going for Growth” agenda on the policy priorities that will help get economies back on track. Governments can seek ways to raise revenue but only through policies that do the least amount of economic harm. Reducing tax frictions for business investment and cross-border trade will be paramount. For many countries, this will also mean lowering the tax cost on employees and hiring. Instead of implementing complex new international rules, countries at the OECD should focus on building a consensus on reducing international tax barriers.

The global community should recognize that the digital project is not only leading to bad tax policies, but it is putting the desire for tax revenues over the need for economic growth. Over the past several years, countries have designed unilateral digital taxes that skirt tax treaties and lead to double taxation. The OECD (with direction from the G20) has responded not by working to eliminate those policies directly, but by coordinating an effort to increase taxes on digital companies worldwide.

It’s as if the World Trade Organization responded to President Trump’s tariffs by negotiating higher tariffs across the globe.

A more patient approach could allow time for the team that is estimating the economic impact to evaluate its methods and obtain more recent data that could more accurately reflect the implications of the reform. The measurement challenges are immense, but the current evaluation does not account for many policy changes that have occurred since 2016.

The potential downside to a delay in negotiations is the proliferation of unilateral digital taxes (and retaliatory tariffs) that are likely to create chaos in international tax policy if an OECD solution is absent. Countries should be willing to lay down their arms to avoid new conflicts that would follow on the heels of this crisis, and perhaps that is the issue the OECD should focus on in its July meeting.

As priorities shift for governments around the world, the OECD should be willing to adjust the timeline and focus of its digital work and aim at supporting governments with tax policies promoting growth first, revenues second. The challenges we face at the moment are clearly much more physical than digital.

Source: Tax Policy – Is Now the Time for a 0 billion Tax Increase?