Tax spillover assessments: an idea whose time has come

Andrew Baker, professor of political economy, University of Sheffield, and Richard Murphy, professor of practice in international political economy, City University, London, call on the G7 to task agencies with carrying out fairer assessments of global tax systems using a new framework

Fairer tax systems are a prerequisite for the fairer capitalism that the French presidency has made its overarching priority for the 2019 Biarritz Summit. Effective taxation of digital companies and minimum rates of corporation tax have been the focus of G7 discussions this year. However, baseline political agreement will likely prove elusive, while both will be difficult to enforce and implement.

A more fruitful tangible step towards creating a fairer international tax system would involve establishing regular tax spillover assessments for all countries, conducted by a multilateral agency. We call on G7 leaders to task multilateral agencies, such as the International Monetary Fund, World Bank, Organisation for Economic Co-operation and Development, and United Nations, with producing such a process of assessment as a priority.

Tax spillovers were first identified as a significant problem in an IMF paper in 2014. They were defined as the impact of one country’s tax rules and practices on others. Tax spillovers were found to have a “significant and sizable” impact in reducing corporate tax bases and rates, especially in developing countries. The IMF focused on cuts in headline rates of corporation tax, finding that a 1% reduction in all countries would reduce a typical country’s corporate tax base by 3.7%, with the effects two to three times higher for developing countries. This research established that race-to-the-bottom effects induced by tax competition were real and significant and that developing countries were disproportionately harmed.

Harmful effects

In our recent research, we found that spillover effects go beyond corporation tax to cover a wider range of tax policies and practices: income tax, capital gains, tax administration, company and trust administration, and even social security taxes. All can be subject to, or the source of, harmful spillover effects. Some tax policies, for example, produce domestic spillovers that undermine other parts of the tax base in the same country.

We used these observations to create a new spillover assessment toolkit that evaluates the vulnerability of states to spillover effects, and the extent to which a state’s own policies generate both domestic and international spillover risks through a qualitative assessment methodology. The IMF’s earlier econometric research focused on aggregate effects but struggled to capture what was taking place within individual states. Now, a toolkit for conducting national level spillover assessments has been created through our work.

We need spillover assessments to enable us to identify which tax policies cause what harms to which tax bases and which areas of tax policy, both within the same state and in other states. This knowledge would enable the development of programmes for targeted national tax reform aimed at reducing the harmful spillover effects each national tax system generates.

Most importantly, spillover assessments would redefine notions of appropriate and legitimate government behaviour. A new baseline norm of avoiding and minimising harms to others would become the centrepiece of this new international tax governance. The race to the bottom in taxation, which developing countries are most ensnared in and from which they experience the most harmful effects, could then be partially abated. This would constitute a significant step towards greater international tax justice.

Crucially, this is something the G7 and G20 leaders could commit to at low cost. A framework for conducting spillover assessments now exists. There is consensus on the need for spillover assessments and the purpose they could serve in alleviating race-to-the-bottom dynamics and reducing tax policy harms among leading development non-governmental organisations and campaign groups. Oxfam, Action Aid, the Tax Justice Network and Eurodad all support implementation of a version of our framework by the international community. Staff at the World Bank and the OECD and the Global Initiative for Fiscal Transparency that they lead, as well as the IMF and the European Commission, have also shown interest in country-level spillover assessments and what they could achieve.

What is currently missing to make spillover assessments a reality is the political support that would allocate mandates to teams of trained assessors and give momentum to this process. The G7 can provide this. Now is the time for the leaders to recognise the benefits of spillover assessment and commit to developing a multilateral process. 

Co-authored by Richard Murphy
Professor of practice in international political economy, City University, London
Richard Murphy is a professor of practice in international political economy at City University, London. He is also a UK chartered accountant, a co-founder of the Tax Justice Network and director of Tax Research UK. He created the concept of country-by-country reporting, which has been adopted by the Organisation for Economic Co-operation and Development.

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