Reinventing Taxation for the 21st Century

Excerpt From: Rischard, Jean-Francois.

“High Noon: 20 Global Problems, 20 Years To Solve Them.” iBooks.

“It is hard to see how the world will get by without a major global rethinking of taxation—and sooner rather than later. There are four main reasons for this.
First, the new world economy—with its rapid rate of change and its increasing reliance on virtual, delocalized processes—is creating huge challenges for the world’s generally slow-moving, highly paper-based, and highly inflexible territorial tax systems. It’s a real time bomb, and it affects corporate taxes, personal income taxes, sales taxes, and virtually all other forms of taxation:

Corporate taxpayers have become more mobile and book more and more of their profits in lower-tax locations. Think of the example of Washington doctors dictating notes over the phone to typists in India: the company can book its profits either in India or in the United States. Many British gambling operations have recently set up on-line operations offshore. More broadly, with companies increasingly working through teams whose members are scattered across many countries, it becomes harder for any one country to claim the right to tax the results. No wonder some offshore tax havens have now started to also market themselves as e-commerce centers. To complicate things: with companies increasingly ready and able to relocate, you can bet that tax competition will increase—particularly when countries like Ireland have shown how successful low-tax policies can be in attracting corporations.

Individual taxpayers can become more mobile and elusive as well. And this can have major consequences: in the United States, for instance, the top 1 percent of earners provide 30 percent of the personal income tax proceeds. The Internet makes it harder to pinpoint the identity and location of individuals engaged in taxable activities. And they can more readily move their taxation to lower-taxed places—with many more ways to do this than before, especially when it comes to capital income. All this means that richer, more mobile taxpayers start free-riding on the less mobile, less cosmopolitan taxpayers.

E-commerce transactions are much harder for the taxman to track than traditional ones, particularly as the middlemen (who play an important role in tax collection and information) get cut out. Buy a book in New York, and you’ll pay an 8.25-percent sales tax; order it from and you pay no tax at all. In Europe, a British firm selling on-line to a German client should apply the German value-added tax, but will the British authorities really feel responsible to check this out?

These problems—and there are others—will only worsen as the new world economy phenomenon deepens, particularly as e-commerce develops, with anonymous e-money in its wake (see below).1 And this may come at a bad time, just as governments start having fiscal worries due to the aging of the population and the increasing burden of pension costs. On that account alone, a major global rethinking of taxation will have to take place.



But there’s a second reason for such a rethinking, and it has to do with preserving the planet’s environment. As we saw, the entirely different energy profile needed as part of the fight against global warming won’t be achieved without powerful tax incentives. It is especially urgent that the world start thinking about a carbon tax to help it take a major turn towards higher energy efficiency and the decarbonization of the energy system through renewable energy and other means. More generally, given the magnitude of a whole range of environmental issues, the time will come when taxes on goods consumed will have to reflect their environmental cost through some sort of green or eco-taxes—if the world is really serious about these issues.

A third reason to rethink taxation has to do with its goals and structure. There are a variety of issues to think about. For instance, carbon and eco-taxes, needed as they are, imply an increase in the relative weight of indirect taxation (on what you consume) compared with direct taxation (on your income). Efforts to offset the greater elusiveness of incomes through more taxation at the consumption level may change this balance in the same direction. And some people claim that taxing consumption (defined as income less savings) is the way of the future, a proposal that also connects to another older idea, recently even alluded to by U.S. Secretary of the Treasury Paul O’Neill, of doing away with corporate taxation because it leads to income being taxed twice.

But the increased weight of indirect taxation that would result from all of these changes, badly needed as some may be, would be unfair to lower-income taxpayers—requiring in turn some thinking about negative income taxes (subsidies, in a way). As you can sense, rethinking taxation appears to be both a must and a mess, as it would raise unusually complex issues—and I have hardly scratched the surface of all the ideas that are around, such as the idea of a tax on speculative capital flows (the so-called Tobin tax) or on arms sales to catch two birds at once: slowing them by “throwing sand in the wheels” and raising funds for global causes.

The fourth and final reason to rethink taxation relates to taxation methods. Two examples. The United States (along with the Philippines and Eritrea) taxes its nationals based on citizenship wherever they are; all other countries tax on the basis of residence. It’s hard to see how the world’s taxation systems can be streamlined with these two conflicting methods coexisting—and this messiness is bound to increase as more developing countries adopt the citizenship criterion in an effort to tax their skilled emigrants. A second question of method concerns automatic exchanges of tax information between jurisdictions. Such exchanges will increasingly be on the agenda because they would kill three birds at once: turning harmful tax competition into healthy tax competition, helping identify possibly destabilizing capital flows, and tracing cross-border money laundering and terrorism finance flows (someone called this “throwing light on the wheels,” rather than sand in the wheels).

Tax issues are sufficiently complex that any idea for changing taxation comes with strong pros and cons. But one thing is sure: the changes that will inevitably have to be made in the methods of taxation should not happen in some countries but not in others, if we are to avoid an unholy and unhealthy mess. The world would be far better off with some sort global framework for rethinking taxation for the twenty-first century. It would be best if this rethinking started very soon: the cat is already out of the bag, and the traditional, mostly territorial taxation approaches perfected in the twentieth century are poorly adapted to what is to come.”


Excerpt From: Rischard, Jean-Francois.

“High Noon: 20 Global Problems, 20 Years To Solve Them.” iBooks.