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Tax is All About Trust

OECD   |   April 28, 2014    4:11 PM ET

By Pascal Saint-Amans

Pascal Saint-Amans

Following the financial crisis in 2008, millions of citizens faced hardship as they set about repairing the damage done to their economies and to public finances. For most people, the necessary sacrifice was bearable as long as it was shared fairly by everyone in society. Unfortunately, the evidence shows that this was not the case when it came to some large global companies.

It is well known that trust is hard to earn and easy to lose. It is just as obvious that, in times of crisis, people find it harder to accept anything on trust alone. Since 2008, those two elementary truths have had the effect of propelling taxation to the heart of public policy discourse. This is no surprise. After all, a healthy tax system is an essential requirement for a resilient society.

The trouble is, the international tax system designed almost a century ago to prevent double taxation (companies being taxed at home and abroad on the same transaction) had been overtaken by modern business methods and could now be manipulated by some companies to pay low, single-digit, effective tax rates. Profits could be shifted in and out of jurisdictions to reduce tax bills, leading to an erosion of tax bases in the process. Citizens, who have shouldered higher taxes everywhere, could not understand why companies, some of which were blamed for causing the financial crisis, were being allowed to get away with it. Corporate tax issues, which in the past may have got a passing mention in the financial press, became front page news.

Trust in the international tax system was evaporating fast, and governments were under pressure to take action, even unilaterally. Otherwise, it would have taken a generation to rebuild an international tax system based on consensus. That matters because cross-border investment and world growth require an efficient tax system that prevents double taxation, tax avoidance and abuse.

The need to move quickly to sustain and restore trust in the international system was clear. Our work on Base Erosion and Profit Shifting (BEPS) has been founded on the clear determination of G20 leaders to modernize the world's tax system on a multilateral basis. This could not be done by OECD countries alone if it was going to work. That is why we have involved non-OECD countries from the outset, with everyone working together on an equal footing. Responsible business leaders also back the work we are doing. After all, large firms have come to realize that the way they arrange their tax affairs now has a direct impact on their reputation and their trustworthiness. But to restore trust, it is not the only tax issue to address. Just as citizens are not prepared to accept large-scale tax avoidance by global businesses, they will not tolerate a situation in which the wealthy few can hide their money with impunity in tax havens.

Unlike legal fiscal planning by large firms, this behavior involves illegal tax evasion that is commonly linked to other crimes. However, the effect is the same: ordinary law-abiding people are left with the impression that they have to bear the cost of rebuilding society alone, while the rich shirk their responsibilities.

In April 2009 the G20 declared that the era of bank secrecy was over. Since then the Global Forum on Transparency and Exchange of Information for Tax Purposes, which is based at the OECD, has delivered an ambitious program of evaluations and reviews to ensure adherence to the existing standards of exchange of information, both in principle and in practice. The Forum issued its first set of comprehensive country ratings in November 2013. A new standard, intended to deliver a truly global model for the automatic exchange of financial account information, will be issued in mid-2014. More than 40 countries have already committed to early adoption of the standard. Taken together these measures represent a comprehensive and robust response to the scourge of offshore tax evasion.

However, trust is needed on several levels for implementation to go smoothly. Take tax inspectors. The OECD's Forum on Tax Administration brings together the heads of tax administration in 45 countries, including the G20. These 45 people lead 2 million tax officials who collect most of the world's taxes. Their job demands placing emphasis on building positive relationships based on trust.

Building up capacity in tax administration can also help in restoring trust. This is particularly important in emerging economies, where acquiring the skills needed to address international tax issues is not always easy. Enabling them to address tax issues involving big business would not only improve tax receipts but also their own citizens' trust in tax systems as a whole and their readiness to comply.

Finally, trust underpins the OECD's work too. Nothing we have accomplished in the fight against tax evasion since 2009 could have been achieved without the trust that has been built between our smart, hard-working staff and the countries and institutions they collaborate with.

Pascal Saint-Amans is Director, Center for Tax Policy and Administration at the OECD

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©OECD Yearbook 2014

A Plan For Education

OECD   |   April 28, 2014    4:01 PM ET

By Andreas Schleicher

Andreas Schleicher

Jobs, wealth and individual well-being depend on what people can do with what they know. There is no shortcut to equipping people with the right skills and to providing them with opportunities to use their skills effectively. If there's one lesson the global economy has taught us, it is that governments cannot simply spend their way out of a crisis.

We can do much to equip more people with better skills to collaborate, compete and connect in ways that lead to better jobs and better lives. The OECD's Skills Outlook released in October 2013 shows that poor skills severely limit people's access to better-paying and more-rewarding jobs. It works the same way for countries: the distribution of skills has implications on how the benefits of economic growth are shared. Put simply, where large shares of adults have poor skills, it becomes difficult to introduce productivity-enhancing technologies and new ways of working, which stalls improvements in living standards.

Skills affect more than earnings and employment. Adults with low skills are far more likely to report poor health, perceive themselves as objects rather than actors in political processes, and trust less in others. In short, without the right skills, people will languish on the margins of society, and economies will be unable to grow to potential.

Today's youth, who cannot compete on experience or traditional social networks in ways that older people can, are particularly vulnerable. While young people with advanced skills have weathered the crisis reasonably well since 2008, those without fundamental skills have suffered. Indeed, unemployment among young people without a high school education soared 20% in Estonia and Ireland and 15% in Greece and Spain. The short-term impact on individuals, families and communities beg for urgent policy responses; the longer-term scars, in terms of skills loss and de-motivation, will affect not only the recovery but long-term potential too.

But there is good news. What is often overlooked amid the grim statistics is that a few countries, like Austria, Chile, Germany and Korea, saw a sizeable drop in unemployment rates among their youth. With the right policies and economic environment, these countries have proven success along three lines: build the skills that foster employability; give young people the opportunity to make their skills available to the labour market; and ensure that those skills are used effectively at work.

We need to put a premium on skills-oriented learning throughout life instead of on qualifications alone. The OECD's Learning for Jobs studies, which have been under way since 2010, show that skills development is far more effective if the world of learning and the world of work are integrated. It is not difficult to understand why. Skills that are not used will atrophy. And, compared to purely government-designed curricula taught exclusively in schools, on-the-job learning allows people to develop "hard" skills on modern equipment and "soft" skills, such as teamwork, communication and negotiation, through real-world experience. Workplace training can also help to motivate young people and stoke their interest in education.

Nordic countries, the Netherlands and Canada, for example, have been much better at providing high-quality lifelong learning opportunities, both in and outside the workplace, than other countries. They've developed programmes that are relevant to users and flexible, both in content and in how they are delivered. They've made information about adult education opportunities easy to find and understand, and provide recognition and certification of competencies that encourage adult learners to keep learning. They've also made skills everybody's business, with governments, employers, and individuals all involved.

Building skills is the easy part. Providing opportunities for young people to use them is far tougher. Employers need to offer greater flexibility in the workplace. Labour unions need to reconsider how employment protection for permanent workers can be adapted to benefit job seekers too. Long trial periods are needed to enable youths to prove themselves and facilitate a transition to regular employment. And some countries need to lower the minimum wage for younger workers, making it easier for low-skilled young people to get their first job and discouraging drop-outs (by lowering the opportunity cost of staying on at school).

Last but not least, we need to ensure that talent is used effectively. High-quality career guidance services, complemented with up-to-date information about labour-market prospects, can help young people make sound career choices, reduce mismatching and avoid dead-end jobs. Policymakers also need to maintain and expand the labour-market measures which have proven effective, such as counselling, job-search assistance and temporary hiring subsidies for low-skilled youth. In addition, income support should be linked to searching for work or other efforts to improve their employability.

The steps outlined here are not complicated, but require leadership and determination on all sides: governments to design financial incentives and favourable tax policies; education systems to foster entrepreneurship and provide vocational training; employers to invest in learning; labour unions to ensure that investments in training are reflected in better-quality jobs and higher salaries; and individuals themselves, to take better advantage of learning opportunities and shoulder more of the financial burden. It's time for all of us to take the lessons we learned from the crisis and turn them into a sustainable, practical, plan to give our young people the prosperous future they deserve.

Andreas Schleicher is the Special Advisor on Education Policy to the Secretary-General of the OECD, and Deputy Director for Education and Skills.

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OECD's 2014 Forum on May 5-6 will reflect on our vision for Inclusive Growth that combines a focus on strong economic performance with outcomes that matter for people's quality of life.

©OECD Yearbook 2014

Jobs Are Key For Inclusive Growth

OECD   |   April 28, 2014    3:52 PM ET

By Stefano Scarpetta

Stefano Scarpetta

Despite repeated signals that growth is resuming, unemployment or under-employment in low-paid jobs remain stubbornly high in many countries. Promoting sustained job creation is now the defining challenge of many governments around the world.

Coping with a job loss when offers are scarce and competition is fierce would be difficult for anyone. But being without work over a long period of time can have long-lasting "scarring" effects. Unfortunately, six years into the crisis such scarring has taken place and demands policy attention.

By the end of 2013 in the euro area, one in two unemployed persons was out of work for 12 months or more, corresponding to 17 million people. This group has almost doubled in size since 2007, with a particularly sharp increase among low-skilled workers.

Being out of work for that long can lead to a decline in skills, ill health and a loss of motivation to look for work. It raises the risk of dropping out of the labour market altogether, or at the very least taking on a poor quality job. The result is often exclusion and more demotivation, which can spill over into social tensions, while adding to the strain on public finances and long-term productivity.

The crisis has been particularly harsh on young people. In Europe, almost one young person in four is unemployed with the youth unemployment rate well above 30% in Portugal and the Slovak Republic, 42% in Italy, 54% in Spain and 58% in Greece. Youth unemployment is also high in some emerging economies-52% in South Africa, for example. In other countries, many youngsters are limited to low-paid, precarious jobs with little or no social protection in the informal economy.

The unemployment rate does not capture the full picture. While unemployment has driven some people to continue their studies and delay their job search in order to improve their qualifications, others do not even bother to look for work anymore. Almost one young person in six (15-24 years of age) in the OECD area is unemployed or, worse, not in any kind of employment, education or training-the so-called NEETs.

To make matters worse, many governments still face the daunting challenge of having to "do more with less" by providing effective labor market and social services to millions while controlling unprecedented public deficits.

High unemployment cannot be addressed without a return to sustained growth. But growth alone does not guarantee adequate job creation, as recent spates of "jobless growth" testify. More and better jobs with decent prospects are needed to kick-start a virtuous circle of rising confidence in the future and sustainable growth. A broad range of structural reforms is also needed to increase competition and enhance productivity, as are labor and social policies that orientate workers towards more productive jobs, and provide support to job seekers and vulnerable groups.

Helping youths get off to a good start in their careers is an absolute priority. This is why we have devised an Action Plan for Youth, launched at our OECD Ministerial Council Meeting in May 2013, which combines short-term measures to boost job creation for youth with more in-depth reforms to enhance access to jobs, improve education and strengthen the skills match.

Promoting inclusive growth requires both higher participation in the workforce and more productive and rewarding jobs that draw people to the labor market. An important aim should be to increase female participation rates, for instance, and to make sure women do not feel confined to low-paid/low-productivity employment with dim prospects of improvement, but can access better-paid, full-time jobs too. Nor should women feel forced to take on unprotected informal jobs, as is frequently the case in emerging markets. With labor forces set to shrink in many OECD and partner countries over the next 20 years, and with women increasingly outperforming men on several fronts in education, policies that boost female labor force participation and tear down long-standing structural obstacles to their employment would yield widespread benefits, while making economies more resilient and societies more inclusive. This applies not only to women but to other groups that are underrepresented in the labor market, such as youths, disabled people, low-skilled workers and older unemployed people.

The road ahead may be challenging, but with the right policy tools and effective co-operation, including among social partners, governments can not only put millions of people back to work, but help make labor more inclusive and rewarding for everyone.

Stefano Scarpetta is Director for Employment, Labour and Social Affairs at the OECD.

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OECD Forum 2014

OECD's 2014 Forum on May 5-6 will reflect on our vision for Inclusive Growth that combines a focus on strong economic performance with outcomes that matter for people's quality of life.

©OECD Yearbook 2014

Inclusive Growth: Making it Happen

OECD   |   April 18, 2014   11:49 AM ET

By Gabriela Ramos

Gabriela Ramos

Inequality has widened, with detrimental effects on our economies and societies. Can inclusive growth work? Yes, though it requires new thinking and approaches, and these are driving important initiatives at the OECD.

The benefits of economic growth do not trickle down automatically. This notion may run counter to orthodox economic wisdom, but it has been confirmed by the crisis. Indeed, the long period of economic growth that preceded the financial crisis was characterized by growing inequalities of income and opportunity. Our economic systems, with all their strengths and advantages, have been producing and perpetuating social disparity for decades, and this has worsened since 2008. We need to reverse this trend and ensure that the next phase of economic expansion benefits more than the lucky few. We have learned from the crisis, and now, as the recovery takes hold, a real opportunity has opened up to create more inclusive growth. The OECD is ready to help make it happen.

Inequality has reached unacceptable heights in many countries. In 2010 the average income of the richest 10% in OECD countries was 9.5 times higher than that of the poorest 10%, greater than at any moment in the previous 30 years. In other parts of the world, including in India, Indonesia and South Africa, inequality has soared. Only in very few countries, notably in Latin America, did inequality decrease, albeit generally from an extremely high level. In Brazil, for instance, the gap between the richest and the poorest 10% has narrowed, but nevertheless stands at 50:1. In many countries, lower-wage workers have been working harder and harder, but have not moved up the social ladder. Take the case of the United States: while average working hours among lower-wage workers increased by more than in other OECD countries before the crisis, household incomes of those at the bottom actually fell. The pernicious consequences of increased inequality, however, extend far beyond income. Access to employment, good health and educational opportunities are all disproportionately determined by socio-economic status.

The crisis has widened these gaps. In at least half of OECD countries, income inequality increased by more over the first three years of the crisis (2007-2010) than in the previous 12 years. In fact, the cost of the crisis has not been shared evenly. Vulnerable groups have borne the brunt of adjustment. The full force of this effect was highlighted in an OECD-wide youth unemployment rate of 16% in 2013, twice the standard rate. And the employment prospects remain discouraging in many countries: equitable access to quality employment is becoming harder to achieve, with non-standard working arrangements now accounting for 40% of total employment. At the same time, in-work poverty has increased, and now affects 8% of the total population. In Greece, Israel, Japan, Spain and the US, the rate of in-work poverty can be as high as 12%. This rate is far greater in emerging and developing countries due to the size of their informal sector.

Inequalities which surface in the job-market are often entrenched during education, which puts those at the bottom at a serious disadvantage. Poorer students struggle to compete with their wealthier classmates and go on to lower levels of educational attainment, smaller salaries, and most strikingly, shorter lives. Data from 15 OECD countries shows that, at age 30, people with the highest levels of education can expect to live, on average, six years longer than their poorly educated peers.

The detrimental effects of inequality have translated into growing political disaffection and anti-market sentiment. Citizens are increasingly feeling that they are losing out, while a small elite siphons off the gains of greater prosperity. Millions of people report low levels of life satisfaction and are losing confidence in the ability of policymakers to respond. In the OECD, confidence in governments stands at a record low 40%.

At the OECD we take these problems seriously. We know that applying the same policies that have resulted in these disparities or that have not helped to reduce them is not an option. We are conscious that we need to revise the ideas, theories and concepts that were used to measure, diagnose and produce our policies. This is why we have launched the New Approaches to Economic Challenges (NAEC) initiative. Our aim is to help governments to overcome the crisis through policies which take complexity and behavioral economics into account, and explore new ways to measure progress. The ultimate goal is to infuse a more inclusive, sustainable form of growth. Our focus is on economic growth, not as an end in itself, but as a means to improve well-being. It puts people at the center of the policy debate.

The OECD is leading the charge against income inequality by devising metrics, analyzing the evidence and developing the policy tools needed to combat it. We have pioneered new work to develop well-being indicators and measurements that go beyond GDP and productivity to reflect what matters most in people's lives. Inclusive growth means caring about people, and the NAEC initiative will explore new ways of combining strong growth with a better distribution of income and other outcomes, such as opportunity, education, and a clean environment. This work will enhance policymakers' understanding of the adverse effects of rising inequality on growth, with the overarching aim of turning inclusiveness into a driver of strong economic performance.

Our approach is multi-dimensional, policy relevant and actionable, allowing policymakers to identify, analyze and exploit synergies among mutually-reinforcing policy levers, and to make the right policy choices.

With government budgets under stress and the recovery still fragile, it is more important than ever to set in motion a virtuous circle of growth and inclusiveness. Our future prosperity and well-being depend upon it. At the OECD we are determined to help our member and partner countries design, promote and implement better policies for better lives. By fostering inclusive growth, we can make a measurable and positive difference to people's lives everywhere.

Gabriela Ramos is the OECD Chief of Staff and Sherpa to the G20.

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OECD Forum 2014

OECD's 2014 Forum on May 5-6 will reflect on our vision for Inclusive Growth that combines a focus on strong economic performance with outcomes that matter for people's quality of life.

©OECD Yearbook 2014

Bringing International Tax Rules Into the 21st Century

OECD   |   January 2, 2014    4:25 PM ET

By Pascal Saint-Amans

Pascal Saint-Amans

It's a watershed moment for international tax policy. The debate over tax evasion by the wealthy and tax avoidance by multinational corporations has never before grabbed so many headlines or caused so much anger. To regain the confidence and trust of our citizens, there is a pressing need for action. To this end, the OECD's work on tax base erosion and profit shifting (BEPS) and automatic exchange of information -- with strong political support from the G20 -- will pave the way for rehabilitating the global tax system.

With understandable fury over tax avoidance by some, finger-pointing and oversimplification can easily happen, shedding more heat than light. Naturally, the business community feels like it's in the cross-hairs. They worry about the impact of new rules, unconstructive tax transparency debates and what the changes will mean for their shareholders, and for their tax obligations.

But the point of crafting new international tax rules is not to punish the business community. It is to even the playing field and ensure predictability and fairness. The OECD's role is to help countries foster economic growth by creating such a predictable environment in which businesses can operate. Today, we see that the rules have not kept up with the realities of doing business in our globalized world. The gaps between domestic tax systems, combined with economic incentives and legal accounting practices have all given rise to the phenomenon of double non-taxation, allowing some multinationals to pay little, or no corporate tax at all.

This has created a chain of interlinked problems which have a detrimental effect on all stakeholders. First, it harms the man on the street: when tax rules allow businesses to shift their income away from where it was produced, it erodes that country's tax base and shifts the burden onto individual taxpayers. Second, it harms governments: when multinationals are not perceived as paying their 'fair share', it undermines the integrity of the entire tax system in the eyes of the public. Additionally, in some countries the resulting lack of tax revenue leads to reduced public investment that could promote growth. Third, it harms other businesses. Domestic firms face the economic burden of higher taxes, while the multinational next door can reduce its taxes by shifting its profits to a low tax jurisdiction. These distortions make it harder for small and family-owned businesses to compete fairly.

That's why the OECD and G20 economies like Brazil, China and India are working together to address BEPS, providing consistency for both business and tax sovereignties. G20 leaders meeting in St. Petersburg endorsed the OECD's Action Plan to address the gaps in the international tax system through BEPS.

G20 leaders also stepped up the fight against offshore tax evasion by establishing automatic exchange of information as the new global standard of tax cooperation. The implementation of this new standard will make it easier for tax authorities to detect undeclared income hidden in foreign accounts or through foreign entities and investments. Foreign bank accounts and other foreign assets will no longer be secret because countries will share this information with each other on a regular basis. The OECD is working with G20 countries to provide the technical standards to make automatic exchange a reality and this includes ensuring the confidentiality of information exchanged.

Taxation remains at the core of countries' sovereignty. But without international, consensus-driven action we risk countries taking unilateral action to protect their tax bases which could easily lead to tax chaos for the global business community. That is why the OECD -- a unique forum for international cooperation and dialogue -- is working with countries around the world to bring the international tax rules into the 21st century.

The time is ripe for the business community and governments to work together to achieve a fairer, more effective and more efficient international tax system that provides a 'win' for everyone.

Pascal Saint-Amans is Director of the Center for Tax Policy and Administration at the OECD.

This blog was originally published on September 17, 2013.

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In Search of Elusive Growth: Making the Most of R&D Tax Incentives

OECD   |   December 31, 2013    1:27 PM ET

By Andrew Wyckoff

Andy Wyckoff

Finding new sources of growth right now is tough. And in a time of rising inequality, to do so equitably and fairly is even tougher. Innovation -- which fosters competitiveness, productivity, and job creation -- can help but with budgets stretched to the limit how can governments boost innovation in their economies?

Tax incentives for business R&D is a good place to start. As of 2011, 27 of the OECD's 34 members provided tax incentives to support business R&D -- more than double the number in 1995. By 2011, over a third of all public support for business R&D in OECD countries came through tax incentives -- a share that jumps to more than half when the U.S. -- with its large direct procurement of defence R&D -- is excluded. Other economies -- including Brazil, China, India, Singapore and South Africa -- have also instituted new tax provisions to stimulate investment in R&D.

As they have proliferated, R&D tax incentives have become more generous. Over the period 2006-2011, about half of the 23 countries for which complete data are available increased their generosity, with R&D tax support rising by almost 25 percent in some countries. This probably underestimates the shift towards greater generosity because the economic crisis caused a decline in both profits (and hence taxes) and R&D. This growing popularity of R&D tax incentives as a policy instrument is due to a variety of reasons including being exempt from EU and WTO "state aid" rules, and the fact that tax expenditures tend to be "off budget, " meaning they escape the scrutiny that applies to direct expenditures.

A new OECD report shows that in a relatively short period of time, R&D tax incentives have become among the most widely used policy instruments to promote innovation. Some have asked "is this too much of a good thing?" and in this era of tight public budgets "are governments (and citizens) getting value for money?" The answer depends on the exact design of the R&D tax incentive.

Most firms engaging in R&D are multinationals that can use cross-border tax planning strategies that result in tax relief that may exceed what was originally intended. This in turn may cause an unlevel playing field vis-à-vis purely domestic firms that do not benefit from these same tax planning strategies. This may also disadvantage young firms that have been the disproportionate source of net job growth and tend to be the origin of radical new innovations that spur growth.

Evidence from 15 OECD countries over 2001-11 suggests that young businesses, many of which are among the most innovative, play a crucial role in employment creation regardless of their size. Over this period, young firms (less than or equal to five years of age) accounted for almost 20 percent of total (non-financial) business sector employment but generated about 50 percent of all new jobs created. And, during the economic crisis the majority of jobs destroyed generally reflected the downsizing of large mature businesses, while most job creation was due to young enterprises.

Some will argue that R&D tax incentives are preferable to direct support policies so as to avoid picking winners. But this isn't an either/or situation. A mix of incentives could be the smartest path forward. Recent OECD analysis shows that well-designed direct support measures - contracts, grants and awards for mission-oriented R&D - may be more effective in stimulating R&D than previously thought, particularly for young firms that lack upfront funds. Direct support that is non-automatic and based on competitive, objective and transparent criteria can stimulate innovation.

It's the policy package that matters. Tax incentives should be designed to better meet the needs of domestic companies and young, innovative companies that do not benefit from cross-border tax planning opportunities. There should be a balance between indirect support for business R&D (tax incentives) and direct support measures to foster innovation. And governments should ensure that R&D tax incentive policies provide value for money.

Do this and growth might be a bit less elusive than we think.

Andrew Wyckoff is Director for Science, Technology and Industry at the OECD.

This blog was originally published on October 11, 2013.

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Migration, Inequality and Development: Why International Cooperation Is Needed

OECD   |   December 19, 2013    5:06 PM ET

By David Khoudour

OECD's David Khoudour


Migrants are all too often viewed as a problem in destination countries when they can and should be seen as a potential solution to inequality in and between nations. But their ability to fuel development in poorer countries, while also bolstering developed-world economies, will hinge on governments employing the right policies and cooperating internationally.

The truth is we live in an unequal but flat world. Thanks to advances in communication technologies, most of the planet's inhabitants, including the poorest, know how other people live thousands of kilometres away. They also know they can improve their lives without having to wait decades for their countries to reach the living standards of the richest ones. Crossing borders, though it can be a long and risky enterprise, is often the most efficient socio-economic ladder for individuals and the best alternative to the long process of income convergence between nations.

Yet, the vast majority of the earth's inhabitants do not migrate. International migrants actually make up just 3% of the world population. Even though 9 out of 10 of the estimated 232 million migrants worldwide leave their home countries to seek better job opportunities and higher wages - a trend that reflects the huge income differential between countries - things are more complicated than they seem.

Contrary to conventional wisdom, most migrants are not the poorest people from the poorest countries. Most come from middle-income countries like China, India and Mexico. And within these countries, they are not the poorest either. Moving to another country requires a certain amount of capital - financial, human and social - which the poorest do not possess. For that reason, very unequal countries do not always see high levels of emigration: the poor do not have the financial means to move abroad and the rich would lose their economic and social power by doing so.

If the world's poorest people are not migrating, can migration still reduce inequalities within and between countries?

The first beneficiaries of migration as a driver of inequality reduction are migrants themselves. Even though they can face demanding labour and social conditions in host countries, moving abroad usually comes with a significant wage increase. In countries with generous welfare states, immigrants also benefit from social protection and better education prospects for their children. In origin countries, families can use the money sent back by the migrants to improve their living conditions. They can spend more, can access better education and health services and may even invest in small businesses.

Nonetheless, migration is not the panacea to all development problems and can even worsen inequality. Immigrants are often victims of human trafficking, labour exploitation and racial discrimination. Local populations, especially the lowest skilled, can also see migrants as a threat in terms of job competition and social cohesion. For origin countries, migration can turn into a development trap. In situations where emigrants relieve pressure on the labour market through their departure and help families back home invest in education and social protection through remittances, states can lack the incentive to make necessary reforms.

The net positive impact of migration on development and inequality reduction depends on the policies implemented in origin and destination countries. Immigration has become a sensitive and divisive issue in many countries - yet those same countries face labour shortages and demographic imbalances caused by population ageing. Immigration may be part of the solution.

The phenomenon of migration today requires an international co-operation framework that views migrants not only through a security lens, but as key players in countries' economic and social development. Political leaders must begin acknowledging the needs of their economies instead of using immigrants as scapegoats for the problems in their countries. Such a framework would promote migrants' rights (including the right not to migrate), better regulate recruitment agencies, increase the number of bilateral agreements that facilitate labour mobility and implement more programmes to leverage the development impact of migration.

Some countries are already working in this direction. If we are to change current perceptions on migration and make it an efficient motor of inequality reduction, these countries need to be followed by many more.

David Khoudour is head of the migration and skills unit at the OECD Development Centre.

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Rich Man, Poor Man: Are 'The 1%' Worth It?

OECD   |   December 16, 2013    5:55 PM ET



Even in the world of high-flying soccer salaries, the deal announced late this summer between Real Madrid and Welsh player Gareth Bale was eye-popping -- £85 million (about $120 million). The 24-year-old will now earn at least 10 times more in a week than the average British worker earns in a year.

Gosh.

Mr Bale is rich -- not Bill Gates-rich -- but rich. He's also typical of many of today's high-earners in that he's making his own money. In previous centuries, high incomes typically came from inherited wealth. That's why so many of Jane Austen's characters never seem to work -- they don't need to: Their wealth is invested instead in government bonds that reliably pay an income of between 4 and 5 percent a year. In Pride and Prejudice, a would-be suitor reminds Elisabeth Bennet that unless she marries, her wealth will produce an income of only £40 a year: "... one thousand pounds in the 4 per cents, which will not be yours till after your mother's decease, is all that you may ever be entitled to."

If she were alive today, Lizzy Bennet might be running her own business and earning her own money. In that, she would be a typical member of today's set of top earners -- the 1 percent -- which as Chrystia Freeland has written, "consists, to a notable degree, of first- and second-generation wealth. Its members are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition ...".

Over the past few decades, these winners have done quite nicely for themselves, most notably in English-speaking countries: In 1980, the top 1 percent of income recipients in the U.S. earned 8 percent of all pre-tax income; by 2008, their share had risen to 18 percent and it rose in many other OECD countries too. Several factors have worked in their favour: lower taxes; technological advances that reward skilled workers; the emergence of a global market for talent; and rising executive salaries.

But here's a question: Are all these jet-setting meritocrats really worth it?

Historically, various justifications have been offered for income inequality - in other words, people earning more than others. As Branko Milanovic notes in The Haves and the Have-Nots, J.M. Keynes retrospectively justified 19th century inequalities by arguing that the rich had not wasted their money on fripperies but, instead, "like bees, they saved and accumulated", so providing capital for investment, which ultimately benefited everyone.

Arguments today aren't all that dissimilar. T.J. Rodgers, founder of Cypress Semiconductors, recently defended his own wealth by pointing to the money he had reinvested in his own firm and in new businesses, such as a restaurant in his home town that created 65 jobs. "How much more do I need?" he asked. "How many more jobs do you want?"

In essence this is an appeal to the idea of "economic efficiency" - inequality may not always be popular, the argument goes, but it ensures a society's economic resources are put to their best use. The most influential thinker in this area was probably the economist Arthur Okun, who in the 1970s argued that there was a "big trade-off" between equality and efficiency: Reduce the wage gap by raising taxes or minimum wages and you kill people's incentives to work hard and risk losing some of that tax money in the "leaky bucket" of government.

That argument still appeals to many, but it has its detractors. Based on an analysis of growth patterns in a number of countries, IMF economists Andrew Berg and Jonathan Ostry concluded that "when growth is looked at over the long-term the trade-off between efficiency and equality may not exist." While some inequality is necessary to ensure markets run efficiently, the economists argue, too much can destroy growth.

Among the downsides of rising inequality, they say, are that it may pave the way for financial crises, as many argue it did in the run up to the 1929 Wall Street Crash; it may also fuel political instability, as in Brazil earlier this year; and it "may reflect poor people's lack of access to financial services, which gives them fewer opportunities to invest in education and entrepreneurial activity."

Indeed, that last point is increasingly invoked. As Joseph Stiglitz has written, "growing inequality is the flip side of ... shrinking opportunity," a view echoed earlier this year by Alan Krueger, then-chairman of the U.S. President's Council of Economic Advisers: "In a winner-take-all society, children born to disadvantaged circumstances have much longer odds of climbing the economic ladder of success."

But if we accept the idea -- and not everyone does -- that too much inequality benefits the rich and hurts the poor we're left with another question: How much inequality is "too much" inequality? Economists may have their own views but, ultimately, that's a question only politicians and societies can answer.

Useful links

Reducing income inequality while boosting economic growth: Can it be done -- from the OECD's Going for Growth 2012

Less Income Inequality and More Growth -- Are they Compatible? Part 4. Top

Incomes, by Peter Hoeller (OECD, 2012)

Divided We Stand: Why Inequality Keeps Rising (OECD, 2011)

OECD work on income inequality.

Rich Man, Poor Man: The Middle Classes -- Now You See Them, Now You Don't

OECD   |   December 16, 2013    5:38 PM ET



"I just had a cup of tea with soymilk," tweets Dave Ellis. "It was one of the worst decisions I've ever made in my life."

Dave's tweet, and many, many more, can be found on Middle Class Problems, which makes fun of the daily challenges facing folks in the middle of our societies. In truth, their supposed pretensions and status anxieties have long made the middle classes objects of fun and even scorn. Even John Lennon, raised in fairly comfortable surroundings, turned his back on them and proclaimed himself a Working Class Hero.

Lennon was able to play with his identity, perhaps, because from a social perspective the term that might have described him best -- "middle class" -- is so vague. By definition, middle class is relative -- somewhere between not well-off and very well-off, or rich, but where?

The economic definition is unclear, too (see Box 1): For example, some experts use a relative approach and define a household as middle class if it's earning, say, between 75 percent and 125 percent of median income. (Median income is the point in the income range, after taxes are paid and state transfers received, that separates the top 50 percent of earners from the bottom 50 percent.) Other approaches are more global: Goldman Sachs has defined middle class households as having an income of between $6,000 and $30,000 a year. By contrast, experts working in development tend to use a much lower figure -- between $10 and $100 a day. Another way to see it is that, after covering the essentials, middle-class households have some money to spare -- in other words, they've risen above subsistence living and can start thinking about the future.

In any case, defining "middle class" in purely economic terms misses a lot. That's because to be middle class is as much a question of values as of income or wealth. "Middle class values," says development expert Homi Kharas, "emphasize education, hard work and thrift." The goal of all this, adds columnist David Brooks, is improvement - of the individual, family and society: "They teach their children to lead different lives from their own, and as Karl Marx was among the first to observe, unleash a relentless spirit of improvement and openness that alters every ancient institution."

It's these values that make the middle classes so important -- a reality underlined by recent protest in Brazil and elsewhere. As the OECD's Horacio Levy wrote, the rallies showed that a "part of the population now feels empowered to demand access to quality services".

Those calls are only likely to grow: According to Homi Kharas, there were 1.8 billion middle class people in the world (based on the $10 to $100-a-day definition) at the start of this decade. Europe and North America accounted for more than half the total, and the next biggest share was in the Asia-Pacific region, with 28 percent of the total. By 2030, Kharas estimates that the middle class will total 4.8 billion, and around two-thirds will live in the Asia-Pacific. These, he argues, they will increasingly take over from U.S. consumers as the main drivers of the world economy.

Naturally, any projections like this come with health warnings. It remains to be seen, for example, how the current slowdown in emerging economies will affect the emerging middle classes. Their position is often fragile -- $10 a day doesn't buy a lot of stability -- and they are vulnerable to setbacks both in the economy and in their own households in the form of unemployment or illness. But, economic shocks aside, their long-term prospects probably look good.

By contrast, many fear the same can't be said for developed economies. As Alan Krueger, then-chairman of President Obama's Council of Economic Advisers, said in June, "economic forces have been chipping away at the middle class for decades". As we've noted before on this blog, income inequality has tended to rise in OECD countries, fuelled by factors that include technological change, globalization and the emergence of winner-take-all economies. In many OECD countries, middle-class incomes have grown less quickly -- or even stagnated -- compared to those of high earners. Middle-class jobs, too, are under pressure, increasingly vulnerable to technological advances, even in areas like law and tax accounting that might once have seemed immune.

The result, argue some, is a "squeezed middle" -- a middle class that grabs a shrinking share of national income and is losing confidence that its children will do better than it's doing. In the world of middle-class problems, that's a very big one indeed.

Useful links

OECD work on income inequality

Divided We Stand: Why Inequality Keeps Rising (OECD, 2011)

An emerging middle class -- Mario Pezzini in the OECD Observer

The hurting middle class -- Arianna Huffington in the OECD Observer

A hollowing middle class - Peggy Hollinger in the OECD Observer

Rich Man, Poor Man: Poverty, Then And Now

OECD   |   December 12, 2013    3:32 PM ET



Should we try to end poverty? "Yes," you reply, and wonder why we'd even ask.

People in earlier times would have been surprised, too. And for them, the answer would have been equally obvious -- "no." Well into the 19th century, poverty was widely seen as inevitable: Economists estimate that in 1820 around 84 percent of the earth's population lived in absolute poverty, or on the equivalent what we now call "a dollar a day" (it's actually $1.25). Poverty was also seen as useful: "Everyone but an idiot knows that the lower classes must be kept poor or they will never be industrious," the English writer and traveler Arthur Young wrote in 1771.

That quote comes from a fascinating paper by Martin Ravallion, which traces -- from an economist's perspective -- the great shift in attitudes towards poverty over the past three centuries. For much of that time, poverty was regarded as necessary: "True, it was miserable for the poor," as The Economist commented recently. "But it also kept the economic engine humming by ensuring the availability of plentiful cheap labour." Not just cheap, but uneducated: "To make the Society happy and People easy under the meanest Circumstances, it is requisite that great Numbers of them should be Ignorant as well as Poor," the 18th century economist Bernard de Mandeville wrote.

That's not to say that the poor didn't have their defenders. But, as Ravallion points out, efforts to help them were focused on easing suffering, not eradicating poverty. Workhouses began to appear in Europe in the early 17th century: "Welfare recipients were incarcerated, where their 'bad behaviours' could be controlled, and obliged to work for their upkeep."

When did attitudes change? Ravallion traces the beginnings of the First Poverty Enlightenment to the late 18th century, and the coming together of several key ideas, such as the French Revolution's "liberty, equality, fraternity," which established a moral case for regarding the poor as equal human beings. Later, industrialization would help make the case for mass education, which raised individuals' economic prospects. Over time, acceptance also grew for the construction of social safety nets and at least some income distribution.

Today, it's hard not to feel a bit smug when confronted with the attitudes of the past. In two centuries, we've gone from a world where "all countries were sick and poor and life expectancy was below 40," in the words of Hans Rosling, to one where a significant number of countries are rich and where the Millennium Development Goal of halving absolute poverty was met "five years ahead of the 2015 deadline." Few now would argue against poverty eradication.

But as the work of Amartya Sen has shown, narrow measures only tell part of the story: Poverty is not simply a lack of wealth but can also represent a lack of access to things like healthcare, decent education and economic opportunity.

We associate these problems mostly with developing countries, but they are also issues in the wealthy world, where there are concerns about signs of a gradual rise in relative poverty. Relative poverty is typically calculated as the number of people living below a "poverty line". For developed countries, the OECD places the line at 50 percent of median income. Median income is the point in the income range (after taxes are paid and state transfers received) that separates the top 50 percent of earners from the bottom 50 percent.

Between the mid-1980s and the late 2000s, relative poverty rose in 16 of 19 OECD countries for which data are available, and there has also been an uptick in child poverty. As a recent Unicef report said (and as we noted in this blog), children living in relative poverty are "to some significant extent excluded from the advantages and opportunities which most children in that particular society would consider normal."

Those disadvantages are especially clear in education, where the OECD's PISA assessments have shown a clear link between family background and how well students do in high school. And they continue in tertiary education: If your parents went to university, the odds rise substantially that you'll go too.

Many experts argue that these patterns of educational disadvantage are set very early in a child's life, and that more needs to be done tackle them by investing heavily in pre-school and early education. But rallying support can be difficult: The benefits can take decades to appear and, as The Economist noted recently, some critics argue that such early interventions represent overreach by the state.

More than two centuries on from the era of Arthur Young, it's clear we no longer believe that people should be kept poor or deprived of educational opportunities. But, it seems, we're still figuring out how best to ensure that these opportunities reach everyone.

Useful links

OECD work on poverty reduction, income inequality and inclusive growth
Divided We Stand: Why Inequality Keeps Rising (OECD, 2011)

Latin American Growth: Increased Prosperity And Inclusiveness

OECD   |   November 26, 2013    5:03 PM ET

2013-11-27-4560025195_337c1f2fb1_m.jpgBy Luiz de Mello

Many countries across Latin American and the Caribbean have in recent years achieved strong growth in living standards while improving social development and the distribution of income. This is no small feat in a continent that remains one of the most unequal in the world, and is all the more impressive when compared with the recent experience of OECD countries, where income disparities have actually increased over the last 30 years, and growth has been slow since the global crisis.

To help policymakers learn from and build on recent Latin American experiences, the Organization for Economic Cooperation and Development (OECD) and the Economic Commission for Latin America and the Caribbean (ECLAC) invited experts from across the region to a Consultation on Inclusive Growth on November 14th and 15th in Santiago, Chile. We discussed the progress that has been made toward ensuring that the benefits of economic growth are better shared among all Latin Americans.

The discussion has to begin with economic growth, which remains the first step if Latin America is to bridge the large gap in living standards relative to the wealthier OECD countries. Income per capita in the region is today only about one-third of the average in the OECD area, even in the more prosperous countries like Argentina, Brazil, Chile and Mexico. The drivers of growth must also be reconsidered -- Latin American growth has long been based on investment and job creation, given the region's favorable demographics, rather than gains in productivity, which drive performance in advanced economies. Future prosperity in the region will depend largely on the steps countries take to improve their productivity. Our recommendations are well-known, and include chiefly greater investments in human capital and better policies to leverage this investment.

Latin America's lopsided distribution of income will add a degree of difficulty to the bid to make growth strong and inclusive. After all, Inclusive Growth is not about pro-growth or distribution-friendly policies; it is about making progress on both fronts. And Inclusive Growth is not about income alone; it is about better outcomes in all aspects of life that matter for people's well-being.

The Latin American countries that have made the most progress toward achieving Inclusive Growth have done so through a mix of external push and home-grown solutions. The global economic environment has helped. Increased world demand for commodities - courtesy of China and other fast-growing emerging-market economies - has driven up the terms of trade, boosting consumption and shifting income to those employed in lower-paid, lower-productivity, often informal jobs. Those at the lower end of the income distribution have benefited greatly.

Many countries have invested heavily in human capital. Easier access to services has created opportunities for those who had not been able to study and acquire marketable competencies. Not only has the supply of skills increased but also demand for those skills. The premia that employers paid for additional years of education used to be among the highest in the world but are now coming down, narrowing the dispersion in labour income.

The best performing countries have also implemented structural reforms. They have opened up their economies to trade and improved the business environment. In doing so, they have unleashed opportunities for investment and entrepreneurship, which is good for productivity and growth, also benefiting those who had hitherto been excluded from economic life.

Public policies have changed. Increasing emphasis has been placed on reaching out to underserved populations and linking social protection strategies to participation in education and health care programs. Multidimensionality -- a key feature of Inclusive Growth -- has come to the fore in the design of social programs. This is the case of Brazil's Bolsa Família program, which directs cash transfers to the country's poorest families, as long as their children attend school and receive preventive health care. Mexico's Oportunidades and other programs throughout the continent share the same philosophy. Short-term income-support objectives are thus combined with the long-term bid to improve human capital and health. It's a solution made in Latin America that the rest of the world is taking notice of.

To ensure these successes continue, countries must put in place necessary reforms to safeguard the progress achieved to date and continue addressing the region's longer-term challenges, notably slow productivity growth, poverty and high inequality. We must all continue working to better understand the policies that deliver both strong growth and greater inclusiveness, and the trade-offs that may need to be addressed in meeting both objectives.

Luiz de Mello is deputy chief of staff to the Secretary-General of the OECD.

In Search of Elusive Growth: Making the Most of R&D Tax Incentives

Andrew W. Wyckoff   |   October 10, 2013    1:22 PM ET

Finding new sources of growth right now is tough. And in a time of rising inequality, to do so equitably and fairly is even tougher. Innovation - which fosters competitiveness, productivity, and job creation - can help but with budgets stretched to the limit how can governments boost innovation in their economies?

Tax incentives for business R&D is a good place to start. As of 2011, 27 of the OECD's 34 members provided tax incentives to support business R&D - more than double the number in 1995. By 2011, over a third of all public support for business R&D in OECD countries came through tax incentives - a share that jumps to more than half when the US - with its large direct procurement of defence R&D - is excluded. Other economies - including Brazil, China, India, Singapore and South Africa - have also instituted new tax provisions to stimulate investment in R&D.

As they have proliferated, R&D tax incentives have become more generous. Over the period 2006-2011, about half of the 23 countries for which complete data are available increased their generosity, with R&D tax support rising by almost 25% in some countries. This probably underestimates the shift towards greater generosity because the economic crisis caused a decline in both profits (and hence taxes) and R&D. This growing popularity of R&D tax incentives as a policy instrument is due to a variety of reasons including being exempt from EU and WTO "state aid" rules, and the fact that tax expenditures tend to be "off budget, " meaning they escape the scrutiny that applies to direct expenditures.

A new OECD report shows that in a relatively short period of time, R&D tax incentives have become among the most widely used policy instruments to promote innovation. Some have asked "is this too much of a good thing?" and in this era of tight public budgets "are governments (and citizens) getting value for money?" The answer depends on the exact design of the R&D tax incentive.

Most firms engaging in R&D are multinationals that can use cross-border tax planning strategies that result in tax relief that may exceed what was originally intended. This in turn may cause an unlevel playing field vis-à-vis purely domestic firms that do not benefit from these same tax planning strategies. This may also disadvantage young firms that have been the disproportionate source of net job growth and tend to be the origin of radical new innovations that spur growth.

Evidence from 15 OECD countries over 2001-11 suggests that young businesses, many of which are among the most innovative, play a crucial role in employment creation regardless of their size. Over this period, young firms (less than or equal to five years of age) accounted for almost 20% of total (non-financial) business sector employment but generated about 50% of all new jobs created. And, during the economic crisis the majority of jobs destroyed generally reflected the downsizing of large mature businesses, while most job creation was due to young enterprises.

Some will argue that R&D tax incentives are preferable to direct support policies so as to avoid picking winners. But this isn't an either/or situation. A mix of incentives could be the smartest path forward. Recent OECD analysis shows that well-designed direct support measures - contracts, grants and awards for mission-oriented R&D - may be more effective in stimulating R&D than previously thought, particularly for young firms that lack upfront funds. Direct support that is non-automatic and based on competitive, objective and transparent criteria can stimulate innovation.

It's the policy package that matters. Tax incentives should be designed to better meet the needs of domestic companies and young, innovative companies that do not benefit from cross-border tax planning opportunities. There should be a balance between indirect support for business R&D (tax incentives) and direct support measures to foster innovation. And governments should ensure that R&D tax incentive policies provide value for money.

Do this and growth might be a bit less elusive than we think.

It's Time to Reform Farm Support

Ken Ash   |   September 24, 2013    4:12 PM ET

Global food demand is rising so fast that farmers are beginning to have trouble keeping up. Projected world population growth, coupled with the new eating habits of a rising middle class, are likely to continue putting pressure on prices and boosting farm income levels for years to come. Despite this strong outlook, governments in advanced economies supported farmers to the tune of US$259 billion in 2012, through a combination of price support measures and budgetary spending. A new OECD report released last week shows that support ranges from lows of less than 5 percent of farm receipts in New Zealand, Australia and Chile to highs of 50 percent and more in Japan, Korea and Switzerland. Across the 34-member OECD area total support to agriculture is estimated at almost 1 percent of GDP.

As high as these numbers are, it is important to note that support in OECD countries has been gradually trending downward. In contrast, support to farmers in many emerging economies has been rising. In 2012, public farm support reached US$219 billion in a group of seven key agricultural countries: Brazil, China, Indonesia, Kazakhstan, the Russian Federation, South Africa and Ukraine. That said, the range of support levels -- from 5 percent or less in Ukraine, South Africa and Brazil to 15 to 20 percent of farm receipts in the Russian Federation, Kazakhstan, China and Indonesia -- is smaller than the range seen across OECD countries, and the highest levels of support still remain much lower.

The type of farm support generally on offer remains the problem. Across the 47 countries covered by a new OECD report, over half of the support provided in 2012 resulted from domestic prices being kept artificially higher than world prices. This is done through various regulations and restrictions on trade, as well as government subsidies based on farm output or input use.

These policies push relatively high prices still higher, and the costs are borne disproportionately by poorer consumers. All forms of support linked to production distort the decisions that farmers make, sometimes encouraging them to 'produce for governments' rather than for consumer demand. Support linked to production also goes primarily to those that produce the most -- larger farmers, often with already healthy incomes -- and not to the poorer farm families often put forward to justify these policies.

There are alternative policies that governments can and should pursue. It is not a matter of reducing farm support to zero and 'doing nothing.' But 'business as usual' is not an option either if the global food and agriculture system is to meet the planet's food, feed and fuel needs amidst competing demands for water, land and biodiversity resources and the uncertain impacts of climate change.

Countries should be thinking about increasing strategic public investments in the agriculture sector. While priorities will vary by country, its resource endowments, and its stage of development, there will be common elements: investing more in people, in education and skill development, and in emerging economies in improved health services for rural and farm families. Also essential will be increasing public and private spending on research and development, technology transfer, food safety and food quality assurance systems and rural and market infrastructure.

By following this forward-looking advice, governments can boost social returns and contribute to the long-term productivity, profitability, and sustainability of farming. It's high time to move away from those support policies, which have their roots in the past, toward better policies for a stronger agricultural future.

Bringing International Tax Rules Into the 21st Century

Pascal Saint-Amans   |   September 17, 2013    3:51 PM ET

It's a watershed moment for international tax policy. The debate over tax evasion by the wealthy and tax avoidance by multinational corporations has never before grabbed so many headlines or caused so much anger. To regain the confidence and trust of our citizens, there is a pressing need for action. To this end, the OECD's work on tax base erosion and profit shifting (BEPS) and automatic exchange of information -- with strong political support from the G20 -- will pave the way for rehabilitating the global tax system.

With understandable fury over tax avoidance by some, finger-pointing and oversimplification can easily happen, shedding more heat than light. Naturally, the business community feels like it's in the cross-hairs. They worry about the impact of new rules, unconstructive tax transparency debates and what the changes will mean for their shareholders, and for their tax obligations.

But the point of crafting new international tax rules is not to punish the business community. It is to even the playing field and ensure predictability and fairness. The OECD's role is to help countries foster economic growth by creating such a predictable environment in which businesses can operate. Today, we see that the rules have not kept up with the realities of doing business in our globalized world. The gaps between domestic tax systems, combined with economic incentives and legal accounting practices have all given rise to the phenomenon of double non-taxation, allowing some multinationals to pay little, or no corporate tax at all.

This has created a chain of interlinked problems which have a detrimental effect on all stakeholders. First, it harms the man on the street: when tax rules allow businesses to shift their income away from where it was produced, it erodes that country's tax base and shifts the burden onto individual taxpayers. Second, it harms governments: when multinationals are not perceived as paying their 'fair share', it undermines the integrity of the entire tax system in the eyes of the public. Additionally, in some countries the resulting lack of tax revenue leads to reduced public investment that could promote growth. Third, it harms other businesses. Domestic firms face the economic burden of higher taxes, while the multinational next door can reduce its taxes by shifting its profits to a low tax jurisdiction. These distortions make it harder for small and family-owned businesses to compete fairly.

That's why the OECD and G20 economies like Brazil, China and India are working together to address BEPS, providing consistency for both business and tax sovereignties. G20 leaders meeting in St. Petersburg endorsed the OECD's Action Plan to address the gaps in the international tax system through BEPS.

G20 leaders also stepped up the fight against offshore tax evasion by establishing automatic exchange of information as the new global standard of tax cooperation. The implementation of this new standard will make it easier for tax authorities to detect undeclared income hidden in foreign accounts or through foreign entities and investments. Foreign bank accounts and other foreign assets will no longer be secret because countries will share this information with each other on a regular basis. The OECD is working with G20 countries to provide the technical standards to make automatic exchange a reality and this includes ensuring the confidentiality of information exchanged.

Taxation remains at the core of countries' sovereignty. But without international, consensus-driven action we risk countries taking unilateral action to protect their tax bases which could easily lead to tax chaos for the global business community. That is why the OECD -- a unique forum for international cooperation and dialogue -- is working with countries around the world to bring the international tax rules into the 21st century.

The time is ripe for the business community and governments to work together to achieve a fairer, more effective and more efficient international tax system that provides a 'win' for everyone.