No taxation, plenty of representation: the G8, hyper-elites and global governance

Andrew Norton
20 June 2013
Comment
The Center for Global Development’s Alex Cobham goes for the big historical note at the top of his blog assessing the achievements and disappointments of the recent G8 summit – quoting Churchill no less and ‘not the beginning of the end… but just might be the end of the beginning’. Other commentators (for example Richard Murphy of the Tax Justice Network) have been a bit more Dunkirk than El Alamein in their assessment.

ODI Executive Director Kevin Watkins gives great credit to David Cameron and his team for taking on a highly ambitious (Lawrence Haddad suggests maybe too ambitious) agenda. And of course there is a sense of disappointment: in terms of the high expectations and excitement raised by the huge developmental gains which could be achieved by meaningful action on corporate and personal tax avoidance and evasion. This focuses in particular on the UK’s inability – in the end – to get enough agreement from the other G8s on the issue of public disclosure of beneficial ownership of trusts and companies to be able to declare a real success on a key issue.

But – standing back from the detail – the sub-text of Alex Cobham’s Churchill quote is worth reflecting on. Is this a moment of real historical significance, and if so, why? There are three reasons why the G8’s focus on tax as a problem of global governance could be seen in these terms:

  1. the potential developmental gains for taking on the tax issue (encompassing the corporate agendas such as profit shifting and trade mispricing)
  2. the vital long-term importance of being able to address (through effective taxation) the growing separation of global hyper-elites from their societies of origin
  3. the fact that governance (in the sense of accountable power) starts with tax – so making taxation work in a globalised world is vitally important for giving the world confidence that other global challenges can be addressed. 

On the first point (the potential development gains), much has been written, and the numbers are striking. As the Economist noted in its useful pre-summit summary, outflows from poor countries—whether from the illegal siphoning off of the proceeds of corruption or the legal shifting of corporate profits by mispricing internal transactions, dwarf aid. If you include those outflows, Africa would have been a net creditor to the rest of the world in 1980-2009, to the tune of up to $1.35 trillion, according to the African Development Bank and the campaigning group Global Financial Integrity.  Legitimate tax revenue is obviously a more sustainable footing than aid to keep the human development and poverty gains of the last couple of decades moving forwards.

The second point also matters. The growth of globalised hyper-elites – separated from the societies to which they owe their start, not needing public services, providing their own security, and not willing or obliged to pay a reasonable amount of tax anywhere – is hugely corrosive. Robert Frank has characterised the global phenomenon of the super-rich as a global super-class, creating a global society of their own (Richistan). Between 2002 and 2011, the number of billionaires in the Forbes Rich List increased by 248 per cent. In Chile (to take one example) the richest 10 per cent of the population increased their share of national income by nearly 50 per cent between 1972 and 1987 (reaching 51 per cent). And the growth of the global super-elite has clearly been facilitated by new techniques of wealth management. Following the financial de-regulation of the 1980s (led by the US and the UK)  their money has moved offshore – away from scrutiny and any real possibility of either taxation or the recovery of gains which may not have been entirely legally and honestly obtained. 

As you might expect, this shows up in the data (though less than it would if rich people answered questionnaires about their income and wealth). Branko Milanovic found that the richest one per cent (and less so the richest five per cent) are among the major beneficiaries of global wealth shifts in the decade up to 2008. The importance of preventing the continual growth of income and wealth inequality for both poverty reduction and for sustainable growth is intuitive, obvious, and also well-supported by evidence. The problem of the hyper-elites is not the only factor leading to growing country-level inequality, but it is a big element, and the failure to get to grips with it is indicative of a broader problem. The starting point in policy terms for getting serious is rather simple – a global regime for taxation that is fit for purpose in a world of growing complexity and inter-connectedness.

And finally – the really big picture point – governance (in the sense of accountable power) is to a large degree founded on tax, so making taxation work in a globalised world is vitally important for giving the world confidence that other global challenges can be addressed. This is not about the numbers. It is also not about a simple equation. As Mick Moore has outlined, the intuitively obvious case (that states which are dependent on citizens for revenue will be more accountable and responsive) does not necessarily always apply. If taxes are raised in oppressive ways there is not necessarily any accountability dividend from citizen taxation. 

Two propositions do hold good. Firstly, that if global tax regimes are clearly grossly unfair (because the poor, small businesses and the middle class have to pay while the rich and big corporates do not) then ‘vertical’ social contracts which underpin public authority will erode at all levels – local, national, regional and global. The second proposition refers to what is arguably the greatest problem of our age: the inability to set up effective systems of global governance to tackle the big global challenges. This was discussed at a recent event at ODI presenting Ian Goldin’s new book Divided Nations.

It seems a reasonable bet that in order to get far with some of these challenges (notably climate change) we need to protect the capacity of the world to raise public revenues. But beyond that there is a wider point – why should any actor (private, corporate or sovereign) bother to engage in collective action for the public good if the wealthiest and most powerful can avoid their fair share of tax contribution? And if we cannot find a global governance machinery to address a problem which blights the majority of countries north and south (and all big ones) then there may be little hope of progress in relation to other challenges.

There are some difficult issues to address here, including the fact that the global institutional infrastructure for addressing taxation faces a classic globalisation trade-off between backing an institution with weak legitimacy but reasonable operating efficiency (the Organisation for Economic Co-operation and Development) against one with strong legitimacy but weak operating capability (the United Nations).

The G8 communique is clearly only a start given the scale of the challenge.  And maybe they should have got a bit further than they did. But it is an important start nonetheless – real progress will depend on sustained public pressure, of the kind that has been brought to bear in advance of the summit by a range of civil-society actors, from the Tax Justice Network to Kofi Annan’s Africa Progress Panel with its landmark report on extractives. It is not likely to be easy to get meaningful change – but it will be important to keep trying.

Andrew Norton