Against regressive taxes and austerity

April 12th, 2023

This year, 85 per cent of the world’s population is expected to live under austerity measures, likely further widening inequality.Citizens are told that there is no money, even if during the pandemic 38 per cent of intervention funds benefitted large companies instead of financing social protection and supporting informal workers. Countries effectively bailed out affected companies, while failing to tax the ones which made excess profits.

Despite widespread economic volatility in recent years, the world’s largest 1,000 companies recorded excess profits of $1.15 trillion in 2020 and 2021, a 68.5 per cent increase from the pre-pandemic period. Taxing corporate windfall profits, especially from fossil fuel companies, and imposing taxes on wealthy individuals would have enabled greater recovery spending, which only averaged 2.4 per cent of GDP in 21 Global South countries in 2020-2021.

Instead, the IMF Fiscal Monitor from October 2022 warned that “one needs to weigh carefully whether taxes on windfall profits from fuel extraction are appropriate”, citing concerns they could reduce investments into the energy sector in the long term.

Countries in the Global South that consider taxing windfall profits also face other obstacles.  As Guyana’s Vice President noted, “In Guyana’s oil contract agreement, it would be a breach to impose the tax on the massive returns being enjoyed by the companies.” Here, the World Bank should assist countries in navigating out of such legal threats rather than reinforce them (see Observer Summer 2021).

An example of the consequences of the Bretton Woods Institutions’ (BWIs) policies can be seen in Ecuador, where an IMF loan led to fiscal consolidation, deregulation and health care cuts combined with regressive value-added taxes (VAT), contributing to one of the highest rates of excess mortality from the pandemic (see Observer Summer 2020). This contrasts, for instance, with Chile’s introduction of higher mining royalties to finance its crisis response aiming to increase tax collection by 3.6 per cent of GDP, or about $10 billion annually.

Making matters worse, the IMF estimates that the 2021 Organisation for Economic Cooperation and Development (OECD)/G20-led Global Minimum Tax proposal of 15 per cent on multinational companies will not help countries in the Global South. It calculates the additional revenue collected from this tax at below 0.2 per cent of global GDP, while claiming that domestic tax reforms in low-income countries could increase revenue by 8 per cent. This not only implicitly assumes that the Global Tax Deal cannot be improved but also puts the onus on developing countries. As the IMF’s advice to Kenya shows, this means dismantling innovative progressive taxes, including removing domestic digital services taxes without offering alternative sources of income.

This comes against the backdrop of a resolution at the United Nations General Assembly in November 2022 that will bolster the role of the UN in tax governance, possibly leading to a UN Tax Commission. It remains uncertain whether this proposal will succeed despite its importance, as ongoing negotiations at the OECD – supported by the IMF – may hamper progress.

In contrast to the IMF, the World Bank has made public statements linking progressive taxation to tackling inequality. However, in practice, their rankings of business environments – whether the old Doing Business Report (that gave points for low taxes and less social protection) or the new Business Enabling Environment Project (where lower taxes are recorded as part of measures, but no longer part of the ranking) – reward the contrary. Its advice continues to maintain that lower taxes bring about growth and investment.

The World Bank’s Development Policy Financing (DPF) also tends to suggest regressive VAT taxes, while supporting actions to tackle tax avoidance and evasion. However, loan conditions rarely support wealth or windfall taxes (see Background, What is World Bank Development Policy Financing?). There is another incoherence: If the Bank truly aimed for a green and sustainable tax agenda, its advice to countries should be to reduce tax incentives to extractive industries and not the opposite.

One pertinent example comes from Brazil, where one of the largest bauxite mines, Mineração do Rio Norte, received a 75 per cent corporate income tax exemption costing $76 million between 2020-2021, more than the combined revenues raised by the regional municipality through local taxes, fees and charges over the same period. Doing away with such exemptions, while potentially provoking Investor State Dispute Settlement (ISDS) cases (see Observer Summer 2020), would be highly progressive ways to raise public revenues.

Regressive taxes and austerity are already the default option for constrained countries, a dangerous trend made worse by IMF and World Bank policies. While poor and marginalised populations are not able to mobilise their causes effectively in political or judicial arenas, corporations and the wealthy are – and have historically done so.

Progressive tax policies are a must in order to equitably address the current crisis and multilateral organisations should encourage their incorporation in the local and global spheres instead of posing obstacles to their implementation or labelling them as undesirable or technically unfeasible.


Photo: World Bank / Simone D. McCourtie | The opinions expressed in this article are those of the authors and do not reflect the opinions of the photographer.

Written by Klelia Guerrero & Matti Kohonen

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