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Lately the so-called ‘Mafias’ are being increasingly blamed for almost all the ills that the national economy is currently suffering from. They are being particularly accused of hoarding, black marketing and price fixing of essentials, causing in the process immense hardships to the common man. On the face of it, the government appears to be out of its depth in the face of the high level of conning being perpetrated by these Mafias. But that is because these Mafias have been remote-controlling the government itself. Not the current one alone. It has been hoodwinking every government since almost day one.

Renowned economist Dr Hafeez Pasha offers a tongue in cheek nomenclature of his own for these Mafias. He calls them the ‘elite’ - ‘the conglomerate of rich and powerful groups in society’. According to Dr Pasha, the process by which there is ‘state capture’ by these ‘elite’ is by the drafting and implementation of rules, procedures and laws which give special privileges to different vested interests; further, there may be preferential access to land, bank credit, etc., which facilitates faster accumulation of assets in the hands of the elite.

But ‘state capture’ by the elite is not confined only to governments in countries like Pakistan. Even the most developed and world’s richest country, the US, too, is said to have been captured by its elite. According to Joseph E. Stiglitz, Todd N. Tucker, and Gabriel Zucman (The Starving State, published in Foreign Affairs magazine January/February 2020) in the United States especially, millionaires and billionaires have disproportionate access to political campaigns, elected officials, and the policymaking process. Economic elites are almost always the winners of any legislative or regulatory battle in which their interests might conflict with those of the middle class or the poor.

The governments in Pakistan were taken over by the elite very early in the day because of a lax tax culture in the newly independent country that led to a handful of its citizens becoming richer by the day while the state itself continued to starve reciprocally. The state requires revenue to perform its multiple roles as it takes money to build roads and ports, to provide education for the young and healthcare for the sick, and to staff the bureaucracies that keep societies and economies in motion and; as they say no successful market can survive without the underpinnings of a strong, functioning state. Since the state of Pakistan has remained dysfunctional because of lack of adequate revenues, it has consistently failed to perform its multiple role.

Lately, even the rich and seemingly prosperous countries have also started suffering from increasing incidence of tax avoidance and tax evasion resulting in diminishing revenue receipts. Over the last 20 years, according to economist Brad Setser, US firms have reported growth in profits only in a small number of low-tax jurisdictions; their reported profits in most of the world’s major markets have not gone up significantly—a measure of how cleverly these firms shift capital to avoid taxes. Apple, for example, has demonstrated as much inventiveness in tax avoidance as it has in its technical engineering; in Ireland, the technology giant has paid a minuscule annual tax rate as low as 0.005 percent in some years.

It is not just corporations that engage in tax avoidance; among the superrich, both in rich and poor countries, dodging taxes is a competitive sport. An estimated eight percent of the world’s household financial wealth is hidden in tax havens. Jurisdictions such as the Cayman Islands, Panama, and Switzerland have structured their economies around the goal of helping the world’s rich hide their assets from their home governments. Even in places that don’t show up on international watch lists—including US states such as Delaware, Florida, and Nevada—banking and corporate secrecy enable people and firms to evade taxes, regulation, and public accountability.

The authors of the article “Starving State” believe that unchecked, these developments will concentrate wealth among a smaller and smaller number of people, while hollowing out the state institutions that provide public services to all.

The result, they said, will be not just increased inequality within societies but also a crisis and breakdown in the ability of markets to function and distribute their benefits broadly.

“The parlous state of affairs today stems from policy choices that allowed elites to limit the reach of governments, including their ability to implement taxes. At the state level, an emphasis on sales taxes over property taxes shifted the burden disproportionately onto the poor and people of color, while sheltering wealthier white households. Despite these obstacles, the United States succeeded in implementing one of the world’s most progressive tax systems from the 1930s to the late 1970s, with top marginal income tax rates exceeding 90 percent, top estate tax rates nearing 80 percent, and effective tax rates on the very wealthy of about 60 percent at the middle of the century. But the administration of President Ronald Reagan dismantled this system, slashing the top marginal income tax rate to 28 percent in 1986, at the time the lowest among industrialized countries.”

This phenomenon is hardly unique to the United States. Many governments around the world have made their tax systems less progressive, all in the context of rising inequality. This process has been driven by reductions in the taxation of capital, including the fall of corporate taxes. The global average corporate income tax rate fell from 49 percent in 1985 to 24 percent in 2018. Today, according to the latest available estimates, corporations around the world shift more than $650 billion in profits each year (close to 40 percent of the profits they make outside the countries where they are headquartered) to tax havens, primarily Bermuda, Ireland, Luxembourg, Singapore, and a number of Caribbean islands.

Much of the blame is said to lie with the existing transfer price system, which governs the taxation of goods and services sold between individual parts of multinational companies. It leaves important determinations (such as where to record profits) to companies themselves (regardless of where the profit-making activity took place). Nowhere is tax avoidance more striking than in the technology sector. The richest companies in the world, owned by the richest people in the world, pay hardly any taxes. Technology companies are allowed to shift billions of dollars of profits to places such as Jersey, one of the Channel Islands, where the corporate tax rate is zero, with complete impunity. Digitalization has made that game of tax evasion even easier. Companies like Facebook, Apple and Google don’t even have to build new factories in a country to enjoy its tax benefits. Given that their businesses are based on data and technology they can distribute profits around the world through simple transfers that are done in ways that leave little for the taxman.

For millennia, markets have not flourished without the help of the state. Most economists rightly emphasize the role of the state in providing public goods and correcting market failures, but they often neglect the history of how markets came into being in the first place. The invisible hand of the market depended on the heavier hand of the state.

The good news is President Joe Biden has declared war on tax havens—in Europe too he is calling for a minimum corporate tax rate of 21 per cent for companies. Large member of states such as Germany are said to have welcomed the move, while smaller EU members like Ireland, the Netherlands and Slovakia are likely to oppose the proposal as for years, they have lured international corporations into their countries with the promise that they will be largely spared from the grasp of the domestic tax authorities.

Tommaso Faccio, head of the secretariat of the Independent Commission for the Reform of International Corporate Taxation, is convinced that “the biggest resistance” to the reforms will come from multinationals. “We already saw that during the OECD consultation process.”

If President Biden’s plan gets turned into an actual action, countries like Pakistan would also benefit immensely as most of their tax evaded wealth is currently ending up in tax havens denying their citizens the minimum of services like physical and social infrastructure that is the responsibility of the state to provide.

Copyright Business Recorder, 2021

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