Over recent years, the key intellectual battle when it comes to the resolution of the Eurozone crisis has been about how to pursue budget sustainability. Is the best way starting with austerity and hoping that the private sector and exports pick up the shortfall or is it better to invest in growth and thus increase public revenues that can then be used to reduce debt to GDP ratios?
The former argument has always been based on fanciful ideas and the debate – theoretically as well as empirically – is settled now. Austerity has failed and has created enormous havoc in many countries. What has not happened yet is a change of policies. This is mainly because so many governments have made austerity the backbone of their economic strategies and admitting such a fundamental error would be political suicide. Furthermore, the wrong idea that borrowing is always bad is now so entrenched in the public’s psyche that a discursive effort to turn around public opinion seems too daunting even to those politicians who privately admit that austerity is not only wrong to the extend it has been implemented but, moreover, in principle.
But there is another pressing political issue that does not require a change of public opinion and could offer much needed economic relieve: tax evasion and avoidance. Even though the topic has recently flared up a few times the true magnitude of this issue is not yet fully understood. It is estimated that the likes of Google, Amazon, Starbucks and Apple together with rich individuals cost EU governments the massive sum of 1tn Euro in foregone tax revenues every year. This is such a stunning amount that it makes sense to put this figure into perspective.
According to Eurostat figures for 2012 the total government debt of Greece was 304bn Euro, for Ireland the figure was 192bn Euro, for Portugal 204bn Euro and for Cyprus 15bn Euro. This means that just 72 per cent of tax revenues lost across the EU in one year would be enough to pay down all public debt in these countries. Another example is the Eurozone’s permanent rescue mechanism ESM. It has a total volume of 700bn Euro, only 70 per cent of the annually lost revenues. There was a massive public outcry across the continent about the financial risk each country assumed for its share of the ESM. That the total volume of the facility is less than the annual financial loss due to tax evasion and avoidance was, however, not discussed at all. Looking at these comparisons it is very easy to see how collecting even a fraction of these lost tax revenues would help especially the crisis-stricken countries to rebuild their broken economies without being forced to dismantle their welfare states, which were after all established to kick in in bad times (and not for being abandoned when needed).
It is also important that this tax topic is not left to anti-business actors that are eager to use the current crisis to once again attack not just market fundamentalism but the market economy per se. The key issue here is not one of systemic change but one of fundamental fairness. You work in an economy and pay your taxes (mostly automatically), you consume in an economy and pay your taxes (automatically) so why should you be able to trade in an economy without paying your fair share of tax?
There are effectively three things that need to be disentangled in this context: tax evasion, tax avoidance and tax planning. Tax evasion is illegal and should always be prosecuted helped by improved transparency and better information, tax avoidance is based on the aggressive use of legal loopholes and regulatory arbitrage between different jurisdictions and tax planning is perfectly legitimate as it involves using the incentives given in one jurisdiction. For those of you living in the UK: if you have an ISA, you are a tax planner.
So how can we tackle tax avoidance and evasion? There are four things that need to be done. First, you have to pin down and localise for tax purposes as much of trading activities as possible. Use access to the single market as a lever and look into ways for how to restrict market access for legal bodies that are registered in tax havens. Second, there needs to be a degree of tax harmonisation across Europe so tax competition to the bottom is stopped. Third international information flows must be improved significantly so transactions become more transparent and last but not least there needs to be a serious international attempt to stop the shifting around of profits. If there is a massive turnover but almost no taxable profits the alarm bells should sound. There need to be new ways to reconcile turnover and taxable profit.
The political uptake of this pressing issue has been very sluggish so far. The European Parliament wants to halve the annual loss of tax revenues by 2020. But given the current financial pressures for governments all over the world much faster progress is needed and may be even possible. Many key international players are exposed to similar financial pressures so there should be a joined interest. Public financial burdens could be substantially reduced if progress towards tax fairness is made and the electorate is sympathetic to it too. In particular the G8, meeting again under British chairmanship in two weeks, need to make real progress. There is a window of opportunity that needs to be utilised.
Let me finish these thoughts with one last comparison. Next month there will be a conference in Berlin to talk about how to use the EU’s funds to tackle youth unemployment over the next seven years. The total sum involved for the whole period is 6bn Euro, less than 0.001 per cent of the 7tn Euro in tax revenues that could be lost over the same period. It surely is time to act.