In this article, Dr Charles Enoch, formerly Deputy Director at the International Monetary Fund and currently European Studies Centre Visiting Fellow, St Antony's College, Oxford – shares his views on the first provocation.
Understanding the challenges of corporate taxation in a digitized, globalized economy is one of the key focus areas for the Responsible Tax project in 2019. An initial provocation was published in the Spring and a Think Piece is scheduled for the autumn. This will embrace multiple viewpoints, from across the expert spectrum. Roundtables to discuss some of the emerging issues have been held in London and Brussels, with more to follow. You can read some of reports (h)ere.
The importance of the Responsible Tax project
The Responsible Tax project is hugely important, and highly commendable. In an age of total footlooseness, increasing international interconnectivity, stressed social welfare systems, and growing domestic and international inequalities, the work being carried out under this project is critical. The recognition that tax and social welfare are essentially twin sides of the same coin, and that the developing world should not just suffer the collateral effects of decisions taken by a small group of rich countries is central. In that connection the search for international standards and agreements is central.
Tax avoidance schemes have become increasingly less palatable in recent years, in part as their pervasiveness has become exposed. The OECD and EU work combatting base erosion has made some progress. Further work might include the feasibility and limits of moving forward with less than full consensus. Enhancing transparency is also important.
The current tax system is not fit for purpose
As noted in the Responsible Tax project, the present tax system is not fit for purpose. Some of the likely changes may involve new taxes--particularly to encourage sustainability in economic activity in the face of climate change. Some will likely involve the recalibration of existing taxes. In that regard one should not be bound by perceptions deriving from present rates: corporate tax rates have just moved down another few notches with the Trump tax reforms; on the personal tax side, we have become used to just two or three bands--so that someone earning 100,000 Pounds a year pays the same marginal tax rate as someone earning 4 billion (indeed more, since around that rate one loses one's allowances). In the 1970s the top person income tax rate was 83%, and "unearned" income was taxed a further 15%. Perhaps the rate above say 500,000 Pounds should be 98%, with rates moving progressively towards this through myriad stages (it is not hard to devise the mathematical formula that shows increasing marginal tax rates as income rises, approaching 100% as income goes into the billions).
A focus on sub-national taxes
While the Responsible Tax project rightly has an international focus, and focuses on national taxes, one should not neglect sub-national taxes. These are often critical for education and health services, and also are much threatened by the footloose nature of current production and servicing. Social services may decline because the local tax base declines, particularly if the base rests ion local property taxes of one or other form that the Amazons of the world can avoid. One possibility could be to shift towards local sales taxes, with liability of the purchaser of the product and/or that tax is equalized between those providing "bricks and mortar" locally and those that avoid the concomitant costs and imposts.
The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG International.