Global Tax Policies Must Align in Reaction to Economic Pressures

The global economy is at a critical juncture marked by promise and peril. The World Bank’s caution about a third consecutive year of downturn, reaffirmed at International Monetary Fund meetings this spring, potentially marks the slowest period in nearly 30 years.

This outlook spans the globe, with economic aftershocks from the pandemic, inflation, and food insecurity forcing many countries to feeling the pinch, including in the Middle East and North Africa. Ongoing conflicts in Gaza and Ukraine add more complexity and uncertainty.

We need state-level solutions to address national fiscal pressures, while global coordination can address shared economic problems. Tax policy is one area where governments can help foster growth.

Governments in advanced and developing economies must coordinate to address debt and inflationary challenges. Mobilizing domestic revenue remains a pressing task, though this must be balanced with the need to spur economic growth and avoid higher unemployment.

As additional tax data emerges, governments must examine the implications of policies such as raising value-added taxes. In the Middle East, governments should consider widening the tax base to mobilize revenue without increasing the tax burden on taxpayers. Astute policymaking prioritizes both fiscal stability and sustainable growth.

These economic challenges are further complicated by sweeping changes in the international tax architecture, primarily through the Organization for Economic Cooperation and Development and Group of 20 Pillar Two solution.

This ambitious reform agenda seeks to make global tax rules more coherent and transparent, including a 15% global minimum corporate tax rate. Navigating this intricate policy landscape demands careful attention from economic policymakers.

Tax policy will play a pivotal role in addressing economic and technological challenges. Governments must also recognize tax policy as a tool to advance the UN Sustainable Development Goals.

As some jurisdictions begin to implement Pillar Two, there is a significant and overlooked risk of heightened tensions in global economic relations between countries that have and haven’t adopted it. As differences between national tax systems grow, so do risks of unraveling global economic ties that could potentially spiral into a trade war.

However, there is a viable solution. Countries can interpret their existing bilateral tax treaties liberally while following Pillar Two principles. By doing so, they can sidestep unnecessary conflicts that could dampen investment, stifling economic expansion precisely when it’s most needed.

All countries should collaborate proactively to avert negative outcomes and instead foster global growth through trade. By embracing cooperation and ensuring they pursue international tax norms, countries can mitigate risk of escalating tensions and nurture sustainable development on a global scale.

Tax incentives have long been pivotal in attracting investment. Yet as reforms progress, policymakers must consider how to design incentives that encourage productive investment while avoiding distortions. To assist this process, governments should understand how tax policy influences investors’ decisions, particularly as companies face a maze of tax regulations.

Companies must understand the impact of tax policies, ensure compliance, and optimize tax strategies across diverse jurisdictions. Businesses generally favor broad-based and easily administered taxes. Simplifying invoicing and tax collection encourages efficiency and promotes investment.

Tax policy uncertainty can deter investment, underscoring the importance of clarity and stability in tax frameworks to maintain investor confidence and stimulate economic growth.

Sectoral issues remain important. Growing digital economies at the domestic and multinational levels, without discouraging foreign investment, should be a priority.

Following the success of COP28 in the United Arab Emirates in January, tax policy that supports a just energy transition and global climate goals has gained prominence. By combining tax measures with targeted incentives, countries can encourage development of green financing and attract more investment into renewable energy projects.

However, all fuels should be taxed fairly, and government incentives for investment shouldn’t encourage projects that aren’t economically viable without the incentives.

Governments face a common imperative in these complex challenges: to intensify efforts in nurturing economic growth as a prerequisite for achieving the SDGs. Once again, tax policy emerges as vital for success.

Governments can implement proactive measures to help more businesses transition into the formal economy. Reforming tax administration for taxpayers and introducing greater transparency will spur revenue growth. All countries, not just developed economies, can reform tax administration and use digitalization to promote transparency and efficiency.

As the global economy contends with slowed growth, it becomes even more urgent to adopt policies best suited to achieve the SDGs. In this context, fostering collaboration and partnerships between governments and the private sector aligns with UN development goals.

Strengthening these partnerships and cultivating greater trust between governments and taxpayers will help countries navigate fiscal challenges while advancing innovation, resilience, and inclusivity globally.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Fahad M. Alturki is director general chairman of the board of the Arab Monetary Fund.

Daniel Witt is founder and president of the International Tax and Investment Center in Washington, D.C.

Write for Us: Author Guidelines