The G7 helped to build this low-tax world. Are they really ready to change it?

Back in the 1980s there was a New York hotelier named Leona Helmsley. What made her notorious was her 1989 trial for tax evasion, during which her housekeeper testified that she had once uttered the immortal line: “We don’t pay taxes, only the little people pay taxes.” While this may strike us as self-evidently true today, it wasn’t so then. Helmsley was sentenced to 16 years in jail. She eventually served 18 months. The point is, she did time for not paying her taxes.

The latest attempt at cracking down on people not paying their fair share, unveiled by G7 finance ministers this week, suggests a return to the times when we actually expected people to pay their taxes. But all may not be as it seems.

In the years since Helmsley’s trial, governments across the world actively enabled tax evasion by individuals and corporations (which is illegal) by vastly increasing the scope for tax avoidance (which is legal). I first became aware of this in 2010, when I paid more taxes than General Electric. This year, I paid more in income tax than an entire subsidiary of Microsoft did through corporation tax.

But it’s not just corporations. Earlier this week, the non-profit US investigative news site ProPublica showed us that it’s the billionaire class that pays least of all. My effective tax rate in the US, where I live, is just over seven times that of Elon Musk and 240 times (not a typo) that of the investor Warren Buffett. Jeff Bezos reported such a low income that he qualified for, and claimed, child tax credit in 2011.

In the early 90s, governments started buying into an argument about capital mobility, taxes and welfare states: in a world of global capital, investors will seek the best returns they can get globally. If those returns are reduced by “distortions” such as taxes, investment will flow to countries that tax less. Consequently, those expensive and expansive welfare states that neoliberal economists had always targeted had to go. Funding them through taxing the wealthy and corporations would lower investment and employment, so the story went.

Governments across the Organisation for Economic Co-ordination and Development (OECD) used this argument to cut taxes on both individuals and corporations. The UK’s corporate tax rate fell from 34% to 19% between 1990 and 2019, while the US’s rates fell from 35% to 21% over the same period. But rather than those reductions leading to an explosion of investment in both countries, investment levels actually fell, as the tax-savings made were taken as profit and pushed into asset markets. In the UK, gross fixed-capital investment fell from 23.5% of GDP in 1990 to 17% in 2019. In the US, it fell from 23.5% to 19%.

While utterly failing to promote investment, what such changes did set up was ruinous tax competition between states. Countries “optimised” their tax regimes to the point where they became the core business model of the state. Ireland (through a 12.5% rate), Latvia (by acting as a conduit for Russian capital flight), and the UK (with its tax havens and opaque property markets) are but the most obvious examples. On the other side of the Atlantic, one could add Panama and Belize as tax havens and the states of Delaware and Nevada for corporate shell companies.

But it wasn’t just corporations: governments also did the same for individuals. Recently, the Rand Corporation examined how incomes in the US would look if the country hadn’t spent decades changing taxes and regulations to benefit the wealthy. Median earnings in 2018 were $50,000. They “could have been” $92,000. Changing taxes and regulations to benefit the top effectively cost the average US worker $42,000 a year by 2018.

Tax-skewing only tells us one part of the story, though. As the ProPublica data details, the reason why “only little people pay taxes” is because we can’t avoid them. The rich can, mainly because income from wages gets taxed while income from loans does not. Consequently, if you are extremely wealthy you can pledge your assets (stocks, shares, houses, art) as collateral against loans that you can live off, tax free. You can then take your extra untaxed cash from these loans and use it to buy more assets, to get more loans, effectively settling the loans after death with a tax sheltering trust – avoiding tax even after you have reached the grave.

For corporations, the tax bounty is even more bounteous. Domiciling in low-tax havens and hiding true ownership is plain vanilla. Actually illegal but barely prosecuted crimes such as “smurfing” (structuring transactions to keep to a minimal value) and property market money-laundering (getting a shell company to buy a building in order to hide income) sit alongside legitimate strategies such as intra-firm transfer pricing (where different parts of a firm sell each other inputs so the tax headquarters can report a loss), state-enabled inversions (where a firm lowers its tax by changing its nationality) and tax “sandwiches” (where firms can move royalties offshore through countries that have no withholding taxes). Collectively these cost countries between $500bn and $600bn a year in lost revenue.

Given all this, it’s heartening to see the US back at the table with the OECD fighting “base erosion”, the G7 agreeing on a minimum 15% global corporate tax rate,; the UK actually proposing raising corporate taxes, and the Biden administration using the ProPublica leak to make the case for higher individual taxes on the super-rich. But should we trust them to actually do so?

The deals on the table look good as long as you don’t look too closely. That 15% rate applies only to firms that have profit margins above 10%. How easy is it for a firm to game its margins? Very easy. Moreover, words are cheap. Let’s remember that David Cameron pledged in 2010 that he would raise taxes on banks to pay for the financial crisis bailouts. That never happened. This time round, right after signing the G7 agreement, the chancellor, Rishi Sunak, sought exemptions for the City of London from the G7 taxes he had just signed up to. Meanwhile, Biden may never get the G7 agreement through Congress, and the EU will surely go back to “fiscal probity” through spending cuts rather than tax increases.

Surveys show declining trust in governments everywhere, and a growing feeling that the economy is a rigged game. Both are not without justification. Governments took us down this low-tax rabbit hole, and they now promise to be the ones to dig us out of it. Given who funds their parties and their campaigns, I’m not holding my breath for any new Helmsleys to show up in the dock anytime soon.

• Mark Blyth is a political economist at Brown University. He is the author, with Eric Lonergan, of Angrynomics