GUEST BLOG: Bill Rosenberg – Tax & Finance

The second panel at the hui in October 2018 on What an Alternative and Progressive Trade Strategy for New Zealand Should Look Like was on the Internationalised Economy.  This contribution is from Bill Rosenberg on financial stability and tax.

Bill is the Policy Director and Economist at the Council of Trade Unions.

I want to cover the topic of financial stability and tax in three different areas: 1) domestic finance, 2) cross border international finance and 3) taxation of multinationals.

In the domestic arena the global financial crisis (GFC) hammered home to us the importance of strong financial regulation. Regulation needs to be at a system level – the too big to fail or too connected to fail issues of a whole system. It needs to be at an institutional level: this is about the stability of the institutions and the protection of customs of those financial institutions. And it needs to be at a product level; we must be very careful about the kind of high risk products we saw in the US as the partial trigger for that financial meltdown.

But the trend of these international agreements is to deregulate, to allow the entry of financial firms and products both by investment and by selling products across borders. They either come into the country or they open up the availability of these products across borders, making regulation much more difficult. There is concern among some experts that the prudential exception in these agreements will not be effective in allowing these regulators to do their job of regulating. This raises problems at all levels: the control of the institutions, restrictions on the ability to control financial flows across borders, increasing the availability of difficult to regulate products, and reducing our ability to restrict the offering of toxic financial products.

The scale of the financial system and offerings are both important. The bigger they are the more influence they have on the local economy and the more difficult they are to regulate. And the ability to control institutions offering products also becomes more difficult, in particular through institutions selling products across borders. So the concern is that this raises the probability of future financial crises. These concerns are intensified by making investor-state dispute settlement (ISDS) available to these financial institutions, as in the CPTPP [although not for cross-border financial trading], further threatening the willingness of governments to regulate and enforce regulation. So we need in these agreements to enhance the ability to regulate, not to reduce it.

If we talk about the cross-border issues of finance, international finance other than foreign direct investment can move rapidly across borders and therefore be destabilising. This is particularly a risk when we are undergoing progressive political change. The threats, or the reality, of large financial movements can create the impression of crisis, much like the frenzy over business confidence surveys we have recently experienced. The frenzy is concerning because sometimes the problem can be real. Financial movements also influence the exchange rate, sometimes creating serious imbalances in the real productive economy for exporters and for those competing with imports. An increasing body of research also suggests that increased financial openness and the size of the financial system is associated with rising inequality.

So we need to be able to manage financial flows through controls on those flows, often called capital controls. That is, regulation of those financial flows or through the use of international financial taxes, even if they are only used quite rarely during times of crisis or when crisis is threatening. Many of these are made unlawful, or it is unclear whether they are permitted, under trade and investment agreements. A related need is to be able to take action necessary to prevent financial or balance of payments crises or where we cannot prevent them to help us mitigate or recover from them. The US has opposed effective exceptions in these crises. Even the IMF, for many years a strong proponent of deregulating capital movements, has become much more accepting that capital controls are a valid policy option.

On the other hand, foreign direct investment (FDI), where control of assets is concerned, raises issues of control and national interest. In some ways it is analogous to immigration – we want to be able to select what is needed for NZ. We are largely unable to do that, other than where land and fishing quotas are involved, under our current rules as a result of commitments made by previous governments in the WTO and other agreements. In addition there are increased barriers to placing conditions on FDI in investment chapters of the agreements. We need rules broad enough to allow this kind of selection and control of FDI.  

Finally I’ll talk briefly about taxation of transnationals. There is fortunately increasing international cooperation on the taxing of multinationals that shows where international agreement should be focused. Some of this is possible. However, there are large gaps, particularly regarding the digital service corporations such as Google and Facebook, where there is international concern at their ability to massively avoid tax. We, like many other countries, are limited in what we can do. We are sandwiched between double taxation treaties, which require a physical local presence of the corporation to tax it, on the one hand, and on the other hand these trade and investment agreements, which make alternative approaches such as taxing revenue unlawful on the other. There may be a small place between them where countries can do something. But what is left is not likely to be very satisfactory in the long run.

We need much more policy space to do this effectively, without damaging side effects. And we need international agreements to recognise the nature of these corporations that work across many different jurisdictions. More broadly, we need greater international cooperation to ensure fair taxation of multinationals, such as taxing them in proportion to their revenues around the world, make international financial transaction taxes more effective, and stop unethical practices, including tax avoidance and corruption. We also need to be careful that tax rules increase, and don’t limit, taxation options that are so important to governments that want to improve public services and reduce inequality.

So whether we are considering finance, taxation or any of the other issues we are talking about in this conference, we need to see international rules that are consistent with our own economic, social and environmental goals.

Barry  You talked about the need for new regulation of financial flows and taxation of multinationals. How would these be developed and implemented at the international level? Would it be through major change to current trade and investment treaties or do we need something like a new regulatory instrument?

Bill – We have to continue to push to change the nature of the trade and investment agreements, and there are a number of areas we can look at. Getting rid of ISDS is one, but there’s a whole lot of others in the area of ensuring regulators have enough policy space to do their job. For example, widening the prudential protections to make sure they are available at all levels. But we find the negotiators say they don’t want to change the exception because then every other agreement we’ve negotiated will be seen to be weak. So we’ve set up some bad precedents.

Perhaps what we need to be thinking about how to provide for mass change to these international agreements, or have a litigated understanding of what these exceptions mean to widen that space. There are precedents for that in the agreements that are emerging on taxation of transnationals, where countries are realising that there must be a common interest in making sure they don’t rob the revenue too much. And there are agreements at the Bank of International Settlements, for example, on regulation of banks that are common across countries. Now some of these don’t go far enough and are very difficult to work with because there are huge vested interests pushing back against these things. But some of these things are possible and we may be able to use some of those precedents.