How a New Deal for Global Taxation Might Save Democracy

Every year, multinational corporations divert some $1.38 trillion in profits away from the countries where they were made to places with much lower, or even zero, corporate tax rates. And while much of this is strictly legal, that doesn’t make it right.

Lower tax rates can encourage innovation and investment. But the combination of complex laws and outdated global rules has meant that tax has become effectively optional for large multi-nationals and wealthy individuals with the money to invest in lawyers and accountants.

This has come at immense cost, and not just to national budgets. Most dangerously, it creates a sense of injustice and resentment that has stoked the right-wing populism that is shaking the foundations of liberal democracy.

Nothing fuels mistrust in government, or the belief that justice and the rule of law serve only to protect the rich and powerful, more potently than wealthy corporations and individuals not paying their fair share of tax.

COVID-19 has made the gap between haves and have-nots painfully clear. While millions have suffered financial hardship, others have supercharged their wealth. Amazon’s profits, for instance, have soared more than 220% during the pandemic as locked-down consumers have shopped online.

So what can a liberal democracy do to turn the populist tide? Tax is one lever to rebuild social trust and the social contract between a state and its citizens. Our tax systems were designed not just to fund government services but to redistribute wealth and income, to mitigate inequality and to ensure a social-welfare safety net for all.

When I was Prime Minister of Australia, I introduced major reforms to the way we tax multi-nationals, including the so-called Google tax that imposed a 40% tax rate on any large multinationals shifting profits overseas.

But there is only so much one country can do. That is why I welcome the proposed two-pillar reforms from the Organisation for Economic Co-operation and Development (OECD.) The first pillar aims to ensure that large multi-nationals pay tax where they operate and earn profits. The second pillar seeks to introduce a global minimum corporate tax rate—currently pitched at 15%—putting a floor on competition over corporate income tax.

Currently, 130 countries and jurisdictions representing 90% of global GDP have joined the OECD’s tax proposal. The devil is in the details; we must make sure the international rules don’t just favor wealthier nations over lower-income ones. Transparency is crucial. Our biggest global businesses can track every dollar in every country in real time. Why can’t our tax systems do the same?

If my experience with tax reform has taught me anything, it’s this: the hardest taxes to avoid are the simplest. The more complex a tax system, the more opportunities there are for loopholes. And before too long, taxes become optional for those with clever lawyers and the resources to cover their fees.

We can debate whether tax rates should be higher or lower—but not whether taxes are optional. If everybody pays, then everybody can pay less.

And yes, combatting populism needs more than tax reform. But we need a fair and just tax system to help defuse the gnawing sense of irreversible inequality that is enabling so many illiberal leaders. The future of our liberal democracies depends on it.