Tax reform: a pressing issue

The economic crisis exposed weaknesses in public finances. A global approach to reforming tax systems is now required.

The eruption of the 2008 economic crisis has exposed the fragility of advanced economies’ public finances, and made reform of their tax systems a pressing issue.

Developed economies’ tax revenues have stagnated since the crisis, as their recessions have been followed by periods of anaemic growth. For example, France’s economy grew by a total of only 5% between 2008 and 2012, while the United Kingdom’s economy (which felt the effects of the crisis earlier) shrank by almost 4% over the five years up to and including 2012.

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Total tax revenues in the eurozone, as elsewhere, fell in 2009. They returned to their 2008 levels of approximately €3.6 trillion only in 2011.

While tax revenues have stagnated, the crisis has increased demands on the public purse, including for assistance paid out to the unemployed. For example, social-security costs in Spain rose from 21% of gross domestic product (GDP) in 2005 (figures for 2006-09 are not available) to 27.4% of GDP in 2013, while French social expenditure increased from 30% of GDP in 2005 to 33% in 2013. The pressure on the public budget of supporting large numbers of unemployed has been felt across the developed world: OECD average unemployment has risen from 5.6% of the active population in 2007 to 7.9% in 2013, while eurozone unemployment has risen from 7.6% to 12% over the same period.

Bailing out banks affected by the crisis has also exposed public budgets to enormous and unexpected costs.

According to the European Commission, European Union governments provided €591.9 billion in capital to their banks (equal to 4.6% of the EU’s 2012 GDP) in 2008-12.

Governments were ill-equipped to meet these extra costs. Taken as a whole, the eurozone has run a net deficit since at least 2002. The governments of France, Italy, Poland, the United Kingdom, Austria and Portugal have had to borrow to meet their costs every year since at least 2002. (Germany, the Netherlands, Belgium, Spain and Ireland all had at least one year of budget surplus during that period.)

Despite increased social security costs and lower tax receipts by value, governments have not increased the share of GDP they collect as tax. Prior to the economic crisis, government tax revenues in member states of the Organisation of Economic Co-operation and Development represented an average of 34.8% of GDP; by 2011 this figure had decreased slightly to 34.1%.

However, this overall tax revenue masks adjustments in specific tax rates made in response to the crisis. In the eurozone, consumption taxes have broadly increased since the crisis, while new taxes on financial institutions, air passengers and property have been introduced. By contrast, taxes on labour and corporate income have declined.

Yet, at the same time it became apparent that many governments were struggling to apply even their standard tax rates to global companies and, in particular, those in the hi-tech sector (see page 13). Examples quickly surfaced: companies such as Amazon, Google or Apple were paying unusually low tax rates in countries where they appeared to be doing good business.

This gave rise to a pronounced sense of injustice in populations whose governments were taking an axe to public spending.

A consensus has emerged within the international community of leading economies that a global approach is needed if governments are to improve their revenue collection without facing the threat at every turn of corporate relocations.

Leaders of the world’s largest economies promised in 2009 to increase scrutiny of low tax jurisdictions (so-called tax havens) (see page 11). Last Sunday (23 February), finance ministers from 20 of the world’s largest economies reaffirmed their commitment to increasing tax transparency and clamping down on tax avoidance, while only on Tuesday (25 February) a US congressional committee slammed Credit Suisse for allegedly helping more than 22,000 US citizens avoid US tax (see page 11).