Case Centre resources

Facing imminent collapse during the height of the financial crisis of 2008-09, investment bank Merrill Lynch received a second lease on life as it was acquired by Bank of America. The deal was reportedly encouraged by the US Treasury which sought to avoid major contagion of failing banks. Later it emerged that Bank of America had failed to disclose to its shareholders in advance of their approval vote of the $50 billion purchase that $5.8 billion was being earmarked for Merrill Lynch executive compensation.

In the wake of public outrage of bank bailouts and bank executive pay the US Securities and Exchange Commission (SEC) brought a formal complaint against Bank of America together with a pre-negotiated $33 million settlement agreement to the court of US federal judge Jed Rakoff for final approval. The US Supreme Court discouraged judges from second-guessing the executive branch of government in granting such approvals but Rakoff questioned whether the settlement amount was proportionate to the scale of the misrepresentation. Moreover, he considered whether justice was being served as Bank of America shareholders, who were the victims of the misrepresentation, were being asked to bear the settlement cost, over the managers who had overseen the acquisition. Rakoff pondered whether to reject the settlement agreement.

In 2011, Essex County Council’s (ECC) children’s social care service was in serious need of reform, having received multiple ‘inadequate’ ratings from Ofsted, the UK regulator. To improve its effectiveness, ECC hoped to introduce new preventative measures to keep children out of care and at home with their families when it was safe to do so. But amid public-funding cutbacks, ECC had severely limited resources to trial new approaches.

In light of these constraints, ECC was considering an alternative funding model called a social impact bond (SIB): private investors would fund a new intervention upfront, and ECC would repay the investors (plus a return) only if the intervention achieved specified, pre-agreed social outcomes. Specifically, a proposal from a social investment organisation suggested that a SIB could fund Multisystemic Therapy (MST), a licensed, evidence-based programme designed in the US to help at-risk youth remain at home with their families. The ECC had to assess the mixed evidence available on the effectiveness of MST, and consider the trade-offs of using a SIB, which had not yet been used in children’s social care nor at the local-authority level.

In the forty years to 2019, the level and sources of taxes in OECD countries had remained roughly constant. However, this apparent stability had concealed serious threats to the nature of public finance. First, public expenditures had grown over that same period, particularly following the 2008-09 global financial crisis. Second, traditional sources of taxation, namely taxes on labour income and consumption, which together accounted for about 85% of tax revenue, were coming under threat by a number of emerging technological and social phenomena, including advancements in job-replacing automation; a growing gig economy; greater cross-border e-commerce; an ageing population; and an increasing concentration of wealth. All of these changes suggested the need for a fundamental redesign of the tax system. 

This background note, written for non-tax experts, explores how these phenomena challenge the legacy approaches used to tax labour and capital. It discusses ways to rethink tax systems for the 2020s and beyond, with a particular look at two bold, yet controversial, new policy ideas: an automation tax and a tax on global wealth.