Business

Tax as a force for good: can the Caribbean get on board?

Wednesday, December 19, 2018

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Humanity is facing massive environmental challenges. Our societies also face equally important social challenges, including enabling a growing population to develop to their full potential and find decent work. Governments must develop coherent strategies to deal with these megatrends. Tax has an important role to play, as tax costs have a fundamental impact on investment, employment and consumption decisions.

The foundations of modern tax systems were laid down in the era of the industrial revolution: before globalisation, mass consumption, the emergence of climate disruption, digitisation, automation and robotisation.

Considering today's fast-changing world, tax systems will need to adapt. Just as we now see our planet as an interconnected system, we must take a fresh look at our tax systems as a whole. In order to craft a tax system that is fit for the 21st century, it is necessary to think more widely about what governments should be taxing, and how the tax revenues should be used.

ACCA's most recent policy paper Tax as a force for good: rebalancing our tax systems to support a global economy fit for the future, focuses on two types of tax: labour taxes (which include personal income tax, payroll taxes and social security contributions) and environmental ('green') taxes.

Between 2009 and 2016, the labour tax burden across the OECD increased further. On average, of every dollar an employer pays in labour costs, only $0.64 ends up in the pocket of the employee.

There is some variation across continents: African, Latin American and Caribbean countries generally rely more on taxes on goods and services. Still, labour tax revenues provide a significant share of revenues in these regions, and substantially more than green taxes.

Organisations such as the IMF, World Bank and ILO have all called for a change from labour taxes towards tax on resource-use and consumption.

REBALANCING THE TAX SYSTEM

Rebalancing tax systems is not easy for a number of reasons. Firstly, tax policy is driven by politics, and the relatively short cycles in politics make it difficult to develop long-term tax strategies.

Secondly, nobody really likes to pay for something that was previously free of charge.

Also, industries with an interest in keeping the status quo often have a stronger voice than other interest groups such as NGOs, health care organisations or small and medium-sized enterprises. While it is not easy to change tax systems, the basic principle is simple: tax less what you want more of. Three steps need to be taken.

1: Put a price on pollution and natural resource use, such as fossil fuels, waste, water and the extraction of metal ores.

2: Use revenues to lower the tax burden on labour and improve social protection. The revenues from step 1 are used to lower personal income tax, social contributions (both for employees and employers) and payroll taxes.

3: Monitor and adjust – any reform needs to be monitored and adjusted. Tax revenues from green taxes may reduce over time, as they succeed in changing consumer and business behaviour (much like labour tax revenues go down when employment declines). When this happens, the scope of the taxes can be expanded, or the rates increased.

The risks and opportunities of such a shift are not evenly distributed, but in the face of the megatrends, 'business as usual' is no longer an option. Fortunately, innovation and adaptation are in the DNA of business and every sector has opportunities for developing business models that are fit for the future.

UNPRECEDENTED LABOUR CHALLENGES

Across the world in 2018, 192 million people are unemployed. Almost 1.4 billion workers are estimated to be in vulnerable employment. Informal workers – those who work without a legal contract – generally have lower wages and little or no job security.

In developing countries, vulnerable employment affects three out of four workers.

In the Caribbean, youth unemployment rates remain very high at just under 25 per cent. Crime has risen sharply since 2004 in the region and murder rates are now among the highest in the world. More specifically, violent crime in the Caribbean is significantly higher than in any other region (with 6.8 per cent of the population affected versus a world average of 4.5 per cent).

An estimated 71m people under 25 years of age are unemployed globally and young people are twice as likely as adults to be in temporary employment. Additionally, ageing populations are causing one of the most significant social transformations of the 21st century. The number of people aged 60 or over is expected to more than double by 2050.

RECOMMENDATIONS

As businesses are forging ahead to adapt to the challenges of our time, governments should respond by providing clear financial incentives to enable inclusive and circular growth. ACCA recommends the following actions.

For governments:

1. Put a price on pollution and resource use, starting with abolishing fossil fuel subsidies and pricing carbon emissions.

2. Use the tax revenues to reduce taxes on labour and expand social protection, in particular addressing the needs of lower-income households.

3. Gradually increase the rate and scope of taxes on pollution and resource use.

4. Engage with businesses and the public ahead of any changes, and communicate the impacts in a transparent manner.

5. Work together with the governments of other countries to adopt a regional approach to achieving the same environmental and social objectives.

For businesses:

1. Evaluate the risks and opportunities related to global environmental and socio-economic megatrends.

2. Apply internal carbon pricing and water pricing, and monitor other external costs as well as external benefits, to start shifting business investment decisions towards more inclusive and sustainable options.

3. Adapt the business's governance, strategy-setting, risk management and performance measurement to respond to risks and opportunities – including considering opportunities for viable new circular and inclusive business models.

4. Engage proactively with government to push for forward-looking policies to promote inclusive circular business growth.

Maria Sookdeo is an ACCA business development manager.


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