Income inequality: How can the business sector close the gap?

Kristen Dailey, executive director of Global Washington. (Credit: Amanda Pain)

When President-elect Donald Trump was accused of not paying federal income taxes, he responded by saying, “That makes me smart.” It’s a testament to the structural problem that exists globally today: vast inequality between rich and poor.

“It is not that there is anything wrong with being rich or economic growth, but what is happening is that despite rising prosperity more people are poor,” Judy Beals, director of Oxfam America’s private sector department said in an interview with Humanosphere. “Rising inequality is killing the hope in the U.S. and across the world – the hope that people can get ahead. While the private sector is part of this problem, it is also critical to the solution.”

Today Global Washington, a nonprofit based in Seattle, is hosting its annual conference. The focus – Allies for Action: effective NGO and business partnerships to improve lives in developing countries – was chosen to spotlight the work being done by its members and to foster new relationships, Kristen Dailey, executive director of Global Washington, said.

“There is not enough philanthropic money in the world to meet the complex global challenges facing us today,” Dailey told Humanosphere. “NGO and business partnerships can, when done right, leverage funds in an effective way to improve lives in developing countries.”

Dailey said the Global Washington conference is known as a premier gathering place of practitioners in international development. As people convene today, they will discuss the current challenges and opportunities in working together, as well as how to form effective relationships.

“An effective relationship does not mean it has to be a friendly relationship,” Beals said. “Fundamentally, as NGOs, we are going to be pushing boundaries and pushing the private sector for more. But an effective relationship is based on respect.”

Jennifer Potter, former president and chief executive officer of Initiative for Global Development, told Humanosphere that many businesses want to do good work, and it is important for NGOs to find the right partners. She said Global Washington is working to create a forum for better communication between the two sectors, but while partnership and communication are important, reducing global inequality requires a lot more.

As the development and private sectors embark on achieving the Sustainable Development Goals (SDGs), understanding poverty and inequality are crucial to helping the developing world. While the number of people living in extreme poverty (defined by the World Bank as living on less than $1.90 a day) reduced by half between 1990 and 2010, the gap between the rich and the poor during this same time period grew.

According to Oxfam International’s report, An Economy for the 1%, 62 people on the planet in 2015 held as much wealth as half the world’s population (3.6 billion people). A complex network of tax havens has allowed wealthy businesses and individuals to hide nearly $7.6 trillion. Since 2010 wealth has risen 45 percent for the richest 62 individuals, while the bottom half of the population has lost 38 percent of global wealth.

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According to Martin Kirk, director of strategy at The Rules, inequality is not something that will be resolved without a change to the system and how people think about charity.

“Charity is like palliative care; it is small acts of mercy to alleviate immediate suffering,” Kirk said to Humanosphere. “There is a huge difference between that and redesigning a political system so that it works for everyone; and if the private sector is not involved in redesigning that system we might as well all pack up and go home.”

Beals said corporate social responsibility is much more than charitable giving. It requires a company to analyze its impact on the world throughout its supply chain, and in turn take responsibility for its global footprint. She said companies also have a great deal of power and political voice, and a responsible company uses that voice to reduce inequality. Most importantly, she said, a responsible company pays its fair share of taxes.

Government spending makes up the largest share of anti-poverty spending globally; much more than foreign aid. When a government has appropriate tax revenue it can provide health care, education, housing and infrastructure to its citizens.

Corporate taxes are the third-highest revenue source for governments, but corporations continue to find ways to avoid paying taxes. According to Americans for Tax Fairness, corporate taxes have dropped from 32 percent of federal tax revenue in 1952 to 10 percent in 2013.

Corporate tax havens and an industry of tax avoidance have expanded since the 1980s. By participating in profit-hiding the business sector is doing more harm than can be negated through philanthropy. According to the International Monetary Fund (IMF), the developing world, which is more reliant on corporate taxes, loses nearly $400 billion a year due to corporate tax avoidance. Tax revenue in Africa is worth ten times the value it receives in foreign aid, according to the Tax Policy Center.

“Now that’s not enough to fund all SDGs, but it certainly makes a decent dent in the gap of public financing,” said Tax Justice Network CEO Alex Cobham in an interview with Humanosphere.

Cobham said international tax law is based on rules formed by the League of Nations in the late 1920s that are no longer fit for purpose. “Multinational corporations have changed a great deal in 80 years,” he said. “But the response has been to make the rules more complex, more difficult to administer and easier to game.”

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The Tax Justice Network is working to simplify the Organization for Economic Co-operation and Development (OECD) international tax rules and lobbied the organization to push multinational corporations to release country-by-country reports. Additionally OECD has implemented base erosion and profit-shifting measures to tackle companies shifting profits to low or no tax locations. Cobham said the next step is to make this information available to the public.

Cobham said it is important not to confuse charity with the social responsibility of paying taxes. The role of taxes in every country is part of a social contract. “Nonprofits should not be partnering with multinationals that are not taking a lead on tax transparency,” he said.

“Fixing a broken tax system is quite complex,” Beals said. “But it is only a matter of time before companies understand that rising inequality has a negative effect. Companies will fail if countries collapse, and there is no middle class.”

Beal said to help reduce inequality, companies need to take a hard look at business practices. The private sector can help reduce global inequality by paying workers a living wage, providing employees with paid family leave and sick leave, ending the gender pay gap, promoting government spending programs that will increase the well-being and productivity of its workers and, of course, by paying corporate taxes.

“Businesses need to examine their business model and how it interacts with this system that produces inequality,” Kirk said. “There is no point in doing a little bit of [corporate social responsibility]work if you are funneling all your profits into tax havens. Businesses need to find a balance between profit-making and capacity-building and environmental and social impact.”

“If ever there was a time when we need to really commit to working together, it is now in this current political climate,” Beals said. “There is opportunity to break down competition among NGOs and between NGOs and the private sector. We are in this together and will not reduce inequality without each other.”

The conference today is a forum for conversations among sectors. Whether it is through partnership, changing tax policy or advocating for structural systemic changes, every sector needs to voice that it is no longer “smart” to avoid social responsibility, and it is no longer “smart” for a majority of the world’s resources to be in the hands of a few.

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Amanda Pain

Amanda Pain, MPH, is a freelance writer based in Seattle with a background in journalism, global health and international development.