Inclusiveness, Implementation and International Tax Transparency
To this day, economic growth remains unsteady and uneven across the globe. Important uncertainties such as the economic slowdown in emerging market economies, the strength of economic recovery in the euro area or overall sluggish investment give rise to financial and economic turbulences, showing the global economy to be far away from a return to long-term and sustainable growth.
In 2014 G20 countries have committed to taking action to “support development and Inclusive Growth, and help to reduce inequality and poverty”, including by lifting G20 GDP by an additional 2% by 2018. The OECD has since been a pivotal partner for the Turkish 2015 G20 Presidency that leads progress on this path by focusing on “the three I’s”: Inclusiveness, Implementation and Investment.
The goal of inclusive growth contrasts sharply with reality. As the OECD’s latest publication on the topic, “In it together: Why Less Inequality Benefits All” shows, inequality is today at its highest levels in many G20 countries.
The crisis did not make things better with the high cost to address it. Austerity meant less government spending in infrastructure and education. In the decades leading up to the crisis, progress in average living standards in emerging economies was already characterized by high levels of income inequality, despite a decline in some of them.
In the most advanced G20 countries household incomes started drifting apart between the mid-1990s and the late 2000s. Today, the richest 10% of the population in G20 countries earn nearly ten (9.83) times the income of the poorest 10% – compared to 9.3 times in the 2000s. The young have been disproportionately affected, especially the unskilled.
They are particularly prone to unemployment and lifelong low-paid and insecure jobs. Female participation in the workforce in OECD and G20 countries is in every single country lower than that of men, on average 30% for the G20 countries and women are less paid, between 5 and 37% in OECD countries. In parallel, concentration of wealth is on the rise as well. The poorest 40% own only 3% of total household wealth while the wealthiest 10% own half.
The OECD estimates that the rise in inequality in the twenty years after 1985 in 19 OECD countries reduced cumulative growth in the twenty years after 1990 by 5%. The reason is that more equal societies are better at mobilising skills and other social resources to foster economic growth. So a first step by the G20 to address high inequality lies in assessing and improving the distributional impact of existing growth policies. An “inclusiveness filter” for the key measures put forward for the G20 National Growth Strategies should help favour policies that help reduce income inequality.
Then, to tackle inequalities where they originate, we need effective tax-and-transfer systems. They are of particular importance also for the needs of low-income developing countries. Redistribution policies have been strengthened in many emerging economies, but tax systems could yet be more progressive. Increased formal employment could enlarge the tax base to also finance social protection systems. There is still scope to make these regimes more progressive. In advanced economies, tax transfer systems have become less progressive over the last two decades and less effective at redressing inequality.
Lastly and related to aspects of redistribution, leakages in the tax system that mostly benefit the wealthy need to be dealt with. No inclusive growth narrative will succeed without fighting tax evasion and avoidance, to which the OECD has made an essential contribution through its work on BEPS and tax transparency. Its continuation will be crucial for the domestic resource mobilization aspect of the financing for development agenda.
Working with the G20 leadership, the OECD as the standard-setter in international tax matters has been instrumental in bringing about the Common Reporting Standard for the Automatic Exchange of Financial Account Information, endorsed by G20 Leaders in November 2014. It allows tax administrations to detect transfers and funds held offshores that were previously unknown, and unknowable. So far, 94 jurisdictions have committed to undertaking the first exchanges under the CRS by 2017 and 2018. As a consequence, more than 37 billion euros have already been collected in two dozen countries through voluntary disclosure initiatives, with the OECD expecting to announce further progress by November. Developing countries need to be fully integrated in the process. The OECD “2014 Roadmap for Developing Country Participation” helps facilitate developing country participation in the new Standard.
The G20/OECD Base Erosion and Profit Shifting (BEPS) project to counteract double non-taxation will be finalized by the fall. By realigning the location of profits, these new international tax rules make it possible for all countries to better collect their taxes. This holds especially true for developing countries, which are even more exposed to BEPS than others. We also must continue to work together and build on our inclusive approach when it comes to implementation and monitoring – ensuring that developing countries can participate in partnership via a single, global approach to the international tax rules. More than 60 countries have already joined the OECD/G20 BEPS Project. Regional Policy dialogues are held to facilitate inputs and implementation by developing countries. A special OECD Report on the Impact of BEPS in Low Income Countries addresses specific challenges faced by these countries.
The Addis Tax Initiative, an outcome of 3rd International Conference on Financing for Development in Addis Ababa in July, aptly states that access to technical expertise to address cross-border tax issues will rely on broad based capacity building. The OECD/UNDP partnership “Tax Inspectors Without Borders”, also launched in Addis Ababa, is one such important instrument to meet demand for tax audit support, and to build long-term capacity.
With more challenges ahead for the inclusive growth and tax agenda and in view of the global relevance of the G20 economic governance, the OECD is looking forward to supporting the Turkish Presidency in bringing its goals on implementation and inclusiveness to fruition at the Leaders’ Summit in November and will continue to put its expertise and policy analysis at China’s disposal for its 2016 G20 Presidency.