THE HON WAYNE SWAN MP
FEDERAL MEMBER FOR LILLEY
THE TAX ELEPHANT IN THE ROOM
It's been seven years since the subprime feeding frenzy collapsed Lehman Brothers. As global demand fell off a cliff the global economy entered the Great Recession from which demand is yet to recover.
The lead up to the Great Recession was characterised by mass speculation through complex derivatives most notably Collateralised Debt Obligations (CDOs). These highly artificial and complex products, that some say were designed to deceive, were bought and sold aggressively by large and respected financial institutions with the full backing of credit rating agencies.
The movie, 'The Big Short', based on Michael Lewis' book of the same name, acutely observes "the closer you were to the market, the harder it was to perceive its folly". The consequences for the global economy were devastating. Professor Laurence Ball concludes the loss of potential output for 23 high income countries was 8.4 percent below its pre-crisis path. The damage from the Great Recession is, he notes, much the same as if Germany's economy had disappeared. Billions were generated for a few, and misery for millions.
As business leaders, economists and political leaders gather in Davos this week, the global outlook is as grim as it's been any time since 2011. While there will be plenty of hand wringing about extraordinary monetary policy and asset bubbles, most in their hearts know the root cause of lower growth is weak demand.
Over the past two years the G20 has failed in its primary purpose to coordinate effective global action to strengthen demand, kowtowing -- as Stiglitz accurately characterises -- to deficit fetishism.
Few gathering this year in Davos would disagree there is a need for effective and urgent action. Hopefully delegates take on board Martin Wolf's advice that, while it might be hard to avoid crises, it is vital to make them both small and rare.
Last year's Davos theme 'the New Global Context' marked a significant shift from previous meetings and for the first time discussions on economic inequality were placed front and centre.
This year's theme, 'How to Shape the Fourth Industrial Revolution', is timely and points to the critical role values and ethics play in the age of digital disruption including in our capital and financial markets.
Technological change is a welcome source of productivity improvement and economic growth, but there is growing concern that job destruction won't be matched by job creation.
To deal with this challenge, and the even more daunting challenge of the growing concentration of wealth and income, requires a mix of policies to lift growth, starting with credible monetary and fiscal policy. There must also be incentives for investment in physical and human capital; most particularly health, education and infrastructure.
Central to the capacity of nations to fund their own growth is a progressive tax system for corporates and for individuals.
We are now armed with new research from the IMF that shows when the benefits of growth are concentrated, overall growth is weaker. When growth is more fairly shared, overall growth is stronger.
This repudiation of 'trickle down' economics -- the notion that if you give more money to the wealthy everyone will be better off -- has thus been cast aside by the most important international financial institution we have. This work has important implications for domestic resource mobilisation, or, put another way, it points to the importance of progressive taxation.
The UN and OECD estimate the cost of multinational tax evasion and avoidance amounts to as much as US$240 billion annually. This figure seems conservative, considering the wide range of evidence emerging from developed economies like Australia.
Tax havens and their plundering of the revenue from developed and developing countries and the protection they provide for large corporations and wealthy individuals is now a dramatic handbrake on global growth. Just as importantly, tax avoidance is a huge part of the trashing of public faith in democratic legitimacy around the world. Everyday workers have the sense the economy is an inside/outside game, in which the wealthy play by different rules and everyone else is denied opportunity. They're not wrong. And at least in part, this is what is driving the popularity of modern political demagogues from Donald Trump to Marine le Pen.
As delegates at Davos gather and look to the tax haven of Liechtenstein in the north and Zurich in the west, they should ponder Gabriel Zucman's conclusion in the Hidden Wealth of Nations, that with eight percent of the world's financial wealth held in tax havens, they lie at the heart of the financial, budgetary and democratic crises which Davos meets to discuss.
Hopefully they will have read Oxfam's report showing the further concentration of wealth; with the number of people owning the same amount as the bottom half of humanity falling from 388 to 62 in five years.
I fear that the same tunnel vision (and, for some, greed) which blinded advisers, regulators and politicians to the risks posed by financial and accounting engineering in the lead up to the Great Recession, now surrounds the reluctance of the same advisers, regulators and politicians to act against rampant tax evasion.
The proof of this reluctance is found in Zucman's conclusion that since the April 2009 meeting of the G20 in London, which declared the end of banking secrecy, the amount of money held in the world's tax havens has increased by 25 percent.
Solving this problem is a question of leadership and ethics, as Christine Legarde has observed "... regulation alone cannot solve the problem. Whether something is right or wrong cannot be simply reduced to whether or not it is permissible under the law. What is needed is a culture that induces bankers to do the right thing even if nobody is watching."
If rich countries like the United States and Australia are unable to effectively tax large multinational corporates and very wealthy private interests, it's going to be even more difficult for emerging nations to put in place progressive tax systems. And if they can't get progressive tax systems in place, their capacity to fund affordable quality health and education is minimal.
Sadly the tax elephant in the room is not on the formal agenda at Davos. It needs to be. But, much more than that, an urgent signal is required from the developed world, and most particularly from Davos delegates themselves -- the ultimate insiders in this global economy -- that they are serious in eliminating the scourge of tax havens and in doing so will work with the developing world to develop for a global tax framework that is fair for all.