The role of fiscal policies for sustainability


By Karen B. Brown, Theodore Rinehart Professor of Business Law, George Washington University Law School

This blog is part of a special series exploring subjects at the core of the Human-Centred Business Model (HCBM). The HCMB seeks to develop an innovative – human-centred – business model
based on a common, holistic and integrated set of economic, social, environmental and ethical rights-based principles. Read more about the HCBM here, and check out an event about it here
The HCBM project originated in 2015 within the World Bank’s Global Forum on Law, Justice and Development and is now based at the OECD’s Development Centre.

development-financeSustainable enterprises seek to marry models for good business practices with principles of economic, social and environmental sustainability, many of which are founded on the United Nations Sustainable Development Goals (SDGs). These objectives aim to advance human rights, fair wages, healthier and safer working conditions, gender equality, child welfare, environmental protections, and ethical behavior designed to impede corruption, money laundering and tax evasion. The failure to achieve these objectives imposes considerable costs on governments: diminished productivity and quality of life for their constituents, inefficiency in the operation of markets, and reduced economic growth. An important step towards achieving sustainability goals may come through a government’s use of incentives in the fiscal regime.

Governments traditionally use their tax codes to make “tax expenditures” designed to achieve objectives that advance important policy goals or principles. For example, a government may provide a departure from normal tax rules by reducing the capital gains tax and deferring the time for when gains must be reported if a taxpayer invests in certain qualified opportunity zones that are designated low-income communities. In other words, the government is willing to forego the capital gains tax revenue it would otherwise collect in exchange for investment intended to stimulate economic growth in areas where underserved constituents reside. Other examples abound of using tax expenditures to achieve legitimate governmental ends. Consider the following three ways — substantive tax provisions, tax rate reductions and “bright listing ”– that use incentives to encourage the integration of human-centred goals into business practices:

First, a government may provide tax benefits to businesses that make a specified level of demonstrated progress toward achieving selected sustainability goals that are deemed essential for societies. These could include accelerated depreciation allowances for investments in sustainable factories or equipment, tax credits for maintaining a gender-balanced workforce, or less burdensome recordkeeping or disclosure requirements for transparent pricing practices. According the maximum benefits to businesses that cooperate in these practices with multiple governments would incentivise the businesses to continue these good practices consistently and globally.

Second, instead of according benefits in the substantive tax rules or information reporting requirements, a government could provide tax rate reductions connected to achieving stated sustainability goals. A detailed and valuable model for implementing this type of incentive is explored, for example, in Professor Eva Andrés Aucejo’s paper on Fiscal and Economic Incentives for Companies Implementing an Alternative Business Approach (University of Barcelona, 2017). While tax rate reductions have been effective when used by developed countries to achieve desired outcomes, a report by the IMF, the OECD, the UN, and the World Bank (Options for Low Income Countries’ Effective and Efficient Use of Tax Incentives for Investment, A Report and Background Paper, October 15, 2015) concludes that developing countries have been less successful in using tax rate reductions to attain development goals. Further study is thus warranted and desirable on appropriate ways to institute a tax rate reduction scheme that will yield satisfactory results for both developed and developing countries.

Third, given that providing substantive tax benefits or implementing tax rate reductions, as the first two options describe, require detailed and time-consuming studies of complicated cost-benefit analyses and trade-offs as well as arduous balancing of interests to reach sustainability goals while minimising revenue losses for governments, an easier approach might prove more attractive. Such an approach could be establishing a “Bright List,’’ an innovation suggested by the work of a group known as The B Team. The “Bright List” would be published and promoted by participating governments and list verified businesses that commit to adopting principles of fairness, transparency and sustainability. The advantage of the ‘’Bright List’’ is that it could be implemented in a short time frame after the selection of the initial governing principles for participating. The list of principles could be expanded periodically as further study is undertaken. The public acclaim that would result from the recognition of businesses on the list as role models and worthy contributors to sustainable and fair growth could significantly advance accepting the goals of a human-centred business model. Already, 12 leading companies have adopted The B Team Responsible Tax Principles promoting transparency and fairness in tax practices to “demonstrate responsibility … in creating a stable, secure and sustainable society.”