The Battle Against Tax Evasion: A Closer Look

Tax Evasion

In recent years, the problem of tax evasion has been getting more attention. The European Union Tax Observatory has released its ‘Global Tax Evasion Report 2024,’ which emphasizes the need to deal with this issue urgently. In this article, we’ll simplify the key findings and recommendations from the report.

The Proposal: 2% Global Wealth Tax

The report suggests a 2% global wealth tax for billionaires worldwide. This means that the wealthiest individuals should contribute 2% of their wealth in taxes. Why is this necessary? It’s because some billionaires are currently paying incredibly low taxes, as little as 0% to 0.5% of their wealth. The report argues that a 2% tax is fair, especially when we consider that billionaire wealth has been growing at an average rate of 7% annually since 1995, when adjusted for inflation.

Successes and Challenges in Curbing Tax Evasion

The report looks at how well we’re doing in the fight against tax evasion. One significant achievement is the automatic exchange of bank information, which has greatly reduced offshore tax evasion over the past decade. In the past, people used to hide about 10% of the world’s GDP in offshore tax havens, keeping it hidden from tax authorities. Now, although that 10% still exists, only 25% of it escapes taxation. It’s a substantial improvement.

Remaining Challenges in Offshore Tax Evasion

Despite the progress made, there are still challenges in stopping offshore tax evasion. The report identifies two main reasons:

• Non-compliance by Offshore Financial Institutions: Some offshore banks do not follow the rule of automatically sharing bank information. They often worry about losing their customers, and foreign tax authorities usually don’t penalize them.
• Shift to Uncovered Asset Classes: Wealthy individuals have started investing in assets like real estate, which are not included in the automatic exchange of information. To address this issue, the report suggests expanding the list of assets subject to automatic information exchange.

Challenges in the Global Minimum Tax on MNCs

The report also examines the global minimum tax of 15% imposed on multinational corporations (MNCs) by 140 countries and territories in 2012. While this was expected to increase global tax revenues by 10%, various loopholes have cut the expected income in half. The report raises concerns about “greenwashing,” where MNCs use environmental tax credits to significantly lower their tax rates. For instance, some U.S. green-energy tax credits can reduce corporate taxes by about 15%.

Emerging Forms of Aggressive Tax Competition

The report highlights a growing trend of preferential tax regimes targeting wealthy foreign individuals. In the European Union and the United Kingdom, the number of these regimes has increased from 5 to 28. These regimes offer tax exemptions or reductions to foreign residents while keeping regular tax rates for local taxpayers. This approach weakens overall tax collection as governments willingly give up tax revenue, negatively affecting other countries.

Conclusion:

Tax evasion is a significant issue that needs to be addressed. The ‘Global Tax Evasion Report 2024’ proposes a 2% global wealth tax for billionaires and provides insights into tackling this problem. By dealing with offshore tax evasion, the global minimum tax on MNCs, and aggressive tax competition, we can move closer to a fairer and more transparent tax system that benefits everyone.

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