Annette Alstadsæter spent a long time in the pub the night before NRC speaks to her. This week the annual economics festival Kåkånomics took place in Stavanger, Norway. Economists performed all over the city, in cafes, restaurants and theaters. “It was really cool,” the economics professor says enthusiastically on the phone. “There was beer drinking, so many young people were interested in economics – even taxes!”
The interest of young people in taxes is “encouraging,” says Alstadsæter, a Norwegian expert on tax avoidance. She feels strongly driven to expose tax avoidance by the rich and multinationals. Because if the government loses too much revenue, she says, “the future of the welfare state is at stake.”
The economist co-wrote the major international study on tax avoidance that was published this week Global Tax Evasion Report. The report is based on the work of more than a hundred researchers and on large amounts of data from most countries around the world. Alstadsæter is one of the main authors of the report, alongside French-American economist Gabriel Zucman, who initiated the project.
An important conclusion in the report: despite attempts to curb tax avoidance internationally, large companies still manage to pay little profit tax. In many cases, companies pay less than the 15 percent that was recently agreed internationally as a minimum.
Ultra-rich private individuals, the report also states, often manage to circumvent the tax authorities so cunningly that they are barely taxed or not taxed at all. Especially among the latter group, the line between tax avoidance (where the law is not broken) and tax evasion (where it does happen) is often ‘a gray zone’.
Tax avoidance is not a “law of nature,” the authors emphasize. Governments can ensure that they receive more tax money from multinationals and the ultra-rich.
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What motivates you to get involved with taxes?
“I am mainly concerned with the viability of the welfare state. We Norwegians are used to the fact that your background does not matter much for your social position. We are used to not having to worry about illness or pregnancy, because there is free care and paid maternity leave. We are in danger of forgetting that this is a privilege that must be paid for.
“If the rich and multinationals pay less, ordinary citizens have to pay more. The rich and corporations have all kinds of techniques to avoid taxes that normal people do not have. Tax avoidance increases inequality.
“In addition, tax avoidance undermines morale and trust among citizens. There have been many newspaper reports in Norway lately about the rich moving abroad to avoid wealth taxes. That is not without consequences. The next time you renovate your house, you will think twice about whether you are going to do it according to the rules or not.”
The Global Tax Evasion Report focuses extensively on a major recent breakthrough in international tax policy. In 2021, more than 140 countries decided to introduce a minimum rate of 15 percent as a profit tax for multinationals, a process that was supervised by the OECD, the club of industrialized countries. The international minimum rate should make the shifting of profits unattractive for companies. Such a widely supported international agreement on the level of profit tax was unprecedented.
The data in the report predates the agreement, which has yet to enter into force in most countries. In 2020, around 36 percent of the profits made by multinationals were diverted to tax havens – think of Bermuda and the Cayman Islands, which have virtually no profit tax. This often happened via ‘conduit countries’ such as the Netherlands. Governments worldwide lost between 170 and 200 billion dollars in tax revenue annually due to these constructions.
The OECD deal must put an end to this. But the report’s authors have an uncomfortable message: the agreement will end in failure.
The agreed minimum rate for profit tax of 15 percent is too low to begin with, they say. For example, it is considerably lower than what the Netherlands charges: 25.8 percent. Initially there was a minimum of 20 percent, but this was not accepted by countries with low corporate taxes (including European countries such as Ireland and Hungary).
After the 2021 political deal, detailed negotiations on its implementation began and then the agreements were once again “dramatically weakened,” the report said. Due to all kinds of exceptions that countries negotiated, the 15 percent is often much lower in practice. For example, multinationals with real economic activities in tax havens – an office, a factory – receive a discount on profit tax. This creates a new route through which companies reduce their profit taxes. In addition, American companies are temporarily exempt from the rules, because the Republican party in the US does not want to ratify the agreement.
In its original form (a minimum rate of 20 percent, without exceptions and shortcuts), the agreement would generate an additional 16.7 percent in global profit tax revenue. This is now less than 5 percent, the researchers calculated. Converted to OECD figures, this would mean: initially the agreement would generate a total of more than 200 billion dollars per year, now only about 75 billion.
There is also a new trend that worries Alstadsæter and her colleagues: governments are increasingly offering tax breaks to companies that reduce their CO2reduce emissions (or promise to do so). Countries worldwide are engaged in a state subsidy race to attract or retain low-emission industries. These subsidies often take the form of tax rebates, for example in the US climate package of 375 billion dollars. Although this race between countries can help reduce emissions, the report says, “just like normal tax competition” it also undermines governments’ tax revenues.
The report states that there should be a minimum profit tax rate of 25 percent, without exceptions. But it also says that countries must get to work themselves.
“It is always good to conclude international agreements, but the big perfect international tax agreement will never happen. Countries must therefore first close the gaps in their own tax legislation. It’s about the details in legal texts, the boring but very important things. I often tell politicians: focus on those three or four things, try to get a little further each time.”
The Netherlands, which supports the OECD process, has started working in recent years to tackle its own role as a ‘conduit country’. Among other things, a tax on royalty and interest payments was introduced as of 2021. Although it is too early to definitively assess the effects of this, it is striking that money flows from the Netherlands to tax havens have decreased, according to data from De Nederlandsche Bank.
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Closing loopholes in national legislation, says Alstadsæter, is just as important in the fight against tax avoidance by private individuals.
Worldwide, it has become more difficult in recent years for private individuals to transfer money to foreign accounts and thus avoid capital taxes in their own country. In 2017, more than a hundred countries agreed to automatically exchange bank information so that the tax authorities can better see what private individuals are hiding in foreign accounts. This is called a “major success” in the report.
In 2013, wealthy individuals stole a total of about 10 percent of global GDP in tax havens (which amounted to about $7 trillion that year). Meanwhile, 10 percent of global GDP is still located in tax havens (this now amounts to more than 12,000 billion dollars). Only: in 2013, almost all of this deposited money was not taxed, but now this only applies to a quarter of the deposited money, according to the report.
But this is not the whole story, says Alstadsæter. In Norway she sees that super-rich people are leaving the country themselves to avoid the tax authorities, to countries such as Switzerland.
How exactly does this work?
“The Norwegian rich know very well in the press to frame that they are ‘tax refugees’. They say they have amassed their wealth themselves – but that is very relative, if you have benefited from a highly educated workforce in Norway and if you do not have to pay for health insurance for your staff.”
According to Norwegian law, private individuals who have lived in Norway for ten years and who move abroad are obliged to pay Norwegian income and wealth tax for another three years, she explains. But separate tax agreements with other countries subsequently undermine that obligation. For example, in the bilateral tax agreement with Switzerland, an exception is made for people who do not own a house in Norway. So the rich simply sell their houses and leave. “Cancel or amend those bilateral agreements,” says Alstadsæter.
The report also states that the wealthy are increasingly investing their wealth in foreign real estate, in Dubai, London and also Oslo.
“Thanks to this automatic exchange of bank details, you can no longer just have a foreign bank account in Switzerland that no one knows about. As a result, the wealthy have started looking for other routes to hide their wealth. Real estate is becoming a more important destination. That’s a real problem. Firstly, a lot of criminal money is laundered in this way. In addition, foreign property owners often do not feel responsible for properties at all. Tenants have to deal with owners they do not know in practice, who avoid their responsibility for fire safety through a holding company in the Cayman Islands. It is also a problem geopolitically: foreign powers can buy up real estate without the authorities knowing, and thus gain access to critical infrastructure.”
What can governments do about this?
“So we must extend this automatic exchange of data to real estate. The super-rich are always finding new ways to invest their wealth. But we can also do something about that, and transparency is a very important weapon.”