About a decade ago, the world’s biggest economies agreed to crack down on multinational corporations’ abusive use of tax havens.
This resulted in a 15-point action plan that aimed to curb practices that shielded a large chunk of corporate profits from tax authorities. But, according to our estimates, it hasn’t worked.
By our reckoning, corporations shifted nearly $1 trillion in profits earned outside of their home countries to tax havens in 2019, up from $616 billion in 2015, the year before the global tax haven plan was implemented by the group of 20 leading economies, also known as the G-20.
In a new study, we measured the excessive profits reported in tax havens that cannot be explained by ordinary economic activity such as employees, factories and research in that country.
In 2015, the G-20 adopted the plan officially, and implementation began across the world the following year.
Global crackdown
In addition, following leaks like the Panama Papers and Paradise Papers – which shed light on dodgy corporate tax practices – public outrage led governments in the U.S. and Europe to initiate their own efforts to lower the incentive to shift profits to tax havens.
Profit-shifting soars
The figure was less than 2% back in the 1970s. The main reasons for the large increase were the growth of the tax avoidance industry in the 1980s and U.S. policies that made it easier to shift profits from high-tax countries to tax havens.
In 2019, the total government tax loss globally was $250 billion.
So far, the world as a whole has been trying to solve this problem by cutting or scrapping corporate taxes, albeit in a very gradual way. In the past 40 years, the global effective corporate tax rate has fallen from 23% to 17%.
Global minimum tax
At the same time, governments have relied more heavily on consumption taxes, which are regressive and tend to increase income inequality.
Our research suggests implementing this type of tax reform is necessary to reverse the shift of ever-greater amounts of corporate profits going to tax havens – instead of being taxed by the governments where they operate and create value.
Ludvig Wier is External Lecturer of Economics, University of Copenhagen and Gabriel Zucman is Associate Professor of Economics, University of California, Berkeley. This article is republished from The Conversation under a Creative Commons license.