Episode 42 - Tax Justice with Fariya Mohiuddin
This episode we are joined by special guest Fariya Mohiuddin to discuss tax justice. Fariya has a Masters degree in Global Affairs and is currently living in Berlin, where she works as the Senior Program Officer for the International Budget Partnership's Tax Equity Initiative. She has been working on Tax and development and tax justice issues for the last 8 years.
This is Kyla leading the charge and these are my research notes. I opened the episode with a “fun” fact from the Tax Justice Network’s website: it’s estimated at least 10% of the world’s wealth is hidden in tax havens, but it’s basically impossible to measure and TJN feels this estimate is too low.
Another fun Fact: Tax Justice Network has a podcast called Taxcast that’s 8 years old! That’s almost older than podcasting! This is something I found while doing general research and wanted to pass along to any listeners who want a deeper dive into the topic.
Then we jumped straight into the questions:
What is Tax Evasion? Tax Avoidance?
Kyla’s answer: Tax evasion is when people deliberately misrepresent their financial affairs to tax authorities in order to pay few or no taxes. This is usually a federal offense, depending on the country. This is different than tax avoidance, which is technically legal, but still supremely dodgy when performed by huge companies or the ultra-wealthy. If you’re a regular person avoiding taxes by slipping some funds into a Tax Free Savings account, that seems fine? But if you’re a billionaire not paying taxes because you’ve moved all your money into an offshore account or a shell company, that’s where things go funky? From what I understand, this is also how big companies can shuffle their money around the world and pay taxes nowhere? I’m very much a layman on this subject. Never read the Panama Papers.
Fariya fills in the gaps:
Tax evasion – outright not paying taxes, definitely illegal
Tax avoidance – clever accounting practices that shift taxes to low tax jurisdictions, not illegal. Also known as tax planning and transfer pricing
Tax evasion and avoidance robs the world’s poorest people while the rich get even richer. Tax Justice seeks to restore the taxes to whom they are due.
Tax justice is a central concern for anyone working for social justice. We believe in genuinely progressive taxation: that is, tax systems that generate sufficient public revenue, while ensuring that this revenue is fairly redistributed and focused on re-balancing economic and other inequalities (including gender, disability, marginalized groups). Progressive taxes, progressively raised, progressively spent.
Overall, a mix of progressive taxes with high rates for high-earners, combined with low-rated consumption taxes will bring about a more progressive overall tax system.
Why is it a problem?
So why should we pay taxes? Who is hurt by hiding some money?
It’s a problem because it constitutes theft from society. Think of taxes as the subscription fee to live in a society. Fariya lives in Germany and gets premium societal services and so doesn’t mind having a relatively higher tax burden than when she lived in Canada.
But you might think, well rich people work hard. Don’t they deserve to keep their money?
Well, there’s 3 things about this:
(1) If you’re making money because you own a business – how does that business actually work?
If you have educated workers – in the context of Canada, they’re often educated at public schools and public universities paid for by taxes.
If your workers are healthy – that’s because of a healthcare system paid for by taxes.
If your workers can get to work and your goods can be shipped/brought to market using transport and transit – that’s taxes paying for that infrastructure.
If you have intellectual property that is being protected by the courts, if you have contracts that are being protected by the law – taxes pay for the legal system.
And so, if you’re making money by benefiting from all these aspects of the system – if you avoid taxes – that’s theft. You are taking from the system and not paying back into it. And also in a real way, you’re saying “I got mine and now I’m pulling the ladder from up underneath me so that no one else can innovate or make use of opportunities in the way that I did”.
(2) Often, the rich aren’t working hard at all. For example, in the US the top 0.1% of income earners earn 2/3rd of their income from capital and only one third from labour. That’s shares, properties, other assets like art, gold, etc – capital is VERY under-taxed compared to labour. And even if we did tax it properly, we allow people to use clever accounting tricks and practices like setting up shell companies and trusts to hold their capital – further avoiding taxation.
Put another way, the working person is way overtaxed compared to someone rich that owns a bunch of properties or shares. Workers are subsidizing the rich and not the other way around.
(3) Last but not least, a lot of wealth/this capital is inherited and we very rarely tax inheritances properly and allow them to be held in trusts.
Reference: 2016 Duke of Westminster inheritance (from The Guardian)
Had the Grosvenor estate bequeathed to the new Duke of Westminster been liable for 40% inheritance tax, the amount owed to the Treasury would have been not far off the government’s entire death duty take for the last financial year.
Hugh Grosvenor, however, avoids a significant cut to his £9bn inheritance because the estate is held in a trust.
“The benefits of trusts are that they don’t form part of somebody’s estate,” says Ian Dyall, a manager at the financial adviser Towry. “In a discretionary trust, you have a whole pick list of potential beneficiaries which the trustees can choose to appoint benefits to. Because of that, you can’t point a finger to any potential beneficiary and say that’s your money. Money can stay in the trust and cascade down from generation to generation and nobody pays inheritance tax on it.”
Additional talking point: The erosion of tax bases through tax dodging impacts on the governments’ ability to fund these public services out of domestic resources, and leaves them dependent on external finance, such as development aid or loans from the IMF. The activity of multinational corporations is key to this loss of domestic revenue through abusive tax avoidance. Tax avoidance occurs when companies try to dodge taxes through complex internal structures and by finding loopholes in tax laws. Furthermore, domestic tax systems are often skewed in favour of these multinational companies, which get incentives that indigenous companies and citizens do not benefit from.
How Big is the Problem?
Depends on who you ask. The Organisation for Economic Co-operation and Development (OECD) estimates 8% of the world’s wealth is hidden in tax havens. $7.6 trillion dollars.
James Henry (TJN Senior Advisor, former Chief Economist for Mckinsey) says USD 21-32 trillion is held offshore. Gabriel Zucman – USD 8 trillion (80% undeclared to tax authorities)
Kyla tried to figure out how much money is in the world and it gave her a headache. From Market Watch:
“The amount of money that exists changes depending on how we define it. The more abstract definition of money we use, the higher the number is.”…For purists, who believe “money” refers only to physical “narrow money” (bank notes, coins, and money deposited in savings or checking accounts), the total is somewhere around $36.8 trillion. If you’re looking at “broad money,” which … (also) includes any money held in easily accessible accounts, the number is about $90.4 trillion. But for those preferring an even broader interpretation, including … cryptocurrencies, plus above-ground gold supply, and funds invested in various financial products like derivatives, the amount is in the quadrillions. (Kyla’s note. 1 Quadrillion has 15 zeros). As for money owed by every single person and country in the world, the grand total is $215 trillion.”
Is a wealth tax a solution? Fariya thinks so!
How to Support Businesses That Pay Taxes?
This is a tough one because technically tax avoidance isn’t illegal and so there are very few incentives for companies to not make use of shell companies or subsidiaries in low tax jurisdictions to shift profits and pay very little tax - we already know Amazon, Apple, and Facebook don’t pay taxes because they have made deals with governments and/or are headquartered in Ireland specifically to negotiate low rates
Fariya’s advice is to do a bit of research: check where a company lists its legal headquarters. A lot of Canadian companies might show that legally their headquartered in the Caymans, the Bahamas, British Virgin Islands - this is a dead giveaway that this is for low tax purposes.
Kyla mentioned the flags of convenience flown by large cruise companies as an example.
“A ship registered in the US is governed by United States maritime law, which specifies the wages that must be paid to crew, the environmental safeguards that apply to waste disposal, the certifications for ships' officers and the right of passengers to take action against the cruise operator in a US court of law, to name just a few of the strictures.
A cruise operator might decide that they would rather operate under a less strict regime, and most do.
This means they register in another country and adopt a flag of convenience, and in the cruise industry the preferred flag is that of the Bahamas. Among other advantages, the Bahamas does not impose any tax on income. Any profit the cruise line makes is untaxed, neither is there any tax on capital gain if a vessel is sold at a profit.”
If a company registered in the following countries, it’s a sign that it may be for tax reasons:
In Europe: the Netherlands, Luxembourg, Ireland
In Canada or the USA: Bahamas, Cayman Islands, British Virgin Islands
In Asia: Singapore, Macau
In Africa: Mauritius, or even Dubai
Beyond a personal measure of research, you can support politicians and platforms that are serious about tackling this issue. In Canada, the best resource is Canadians for Tax Fairness – an NGO that is fighting the good fight and keeping track of how the needle can be moved within Canada and by the Canadian government.
In the UK you can check out the Fair Tax Mark Initiative, which Celebrates companies that pay their fair share of taxes. “Operates as a not-for-profit social enterprise and believes that companies paying tax responsibly should be celebrated, and any race to the bottom resisted. To date, they have focused on certifying businesses head-quartered in the UK, but a suite of global standards will be rolled out in 2021.” eg. Lush, Co-Op grocery, Ethical Consumer.
For international listeners, check out the Global Alliance for Tax Justice website to find your own regional alliance for tax justice!