TAX: A dirty three letter word?

For many ‘tax’ is a dirty three letter word. It is something to be endured under duress. We all know what it means to get that crested letter from the revenue. The Financing for Development Conference in Addis this week has revolved around tax. The loud call by the G77 for the establishment of a global tax body where all can have an equal say in global tax rules has been the pivotal issue in the negotiations, which are coming to a head as I write. Despite the many new initiatives launched during the FFD summit, this single issue has become critical – and emblematic of the deeper struggle going on within global politics, as I wrote here. Don’t be fooled by the gloss and spin!

The reason for this is quite straight forward. It comes down to a growing realisation that there are only a limited number of available sources to finance development in poor countries – and not all of them are equal.

Let’s take the main financial flows very briefly in turn. First there is overseas aid. Whilst aid remains an important source of finance, especially for the poorest countries, it has some serious down sides. The biggest weakness of aid is that it leaves countries vulnerable to the whim of international actors, who themselves are responding to their own political constituencies. This constituency, in recent years, by and large, in the OECD, has tended to question the value of aid as a legitimate public expenditure. Aid also comes with many strings, not all of which match the desires of national governments around their peoples’ futures. Irish Aid, thankfully, bucks the trend in being untied, grant-based and poverty focused. It sets a ‘gold standard’ I personally am proud of, but still, it is vulnerable to the same downsides.

The second major private flow is foreign direct investment. For sure, this is an important source of finance and it has been the focus of many discussions this week, but again it comes at a cost as a main source of finance. Large external investors are prepared to exert significant on national governments to restructure their economies in their favour as a condition of investment. Importantly, one such condition is pressure to reduce taxes.

The third flow is international trade. Again, it is an important source of foreign currency but history has shown that countries which are heavily dependent on this for development are vulnerable to currency fluctuations, making it a very risky source of core budget finance. A similar argument could be made for remittances from overseas. Again, nice to have – but hardly a sustainable way to finance a country!

Other flows such as raising public debt are becoming increasingly important. The structural adjustment programmes from the 80s onwards, and the recent Greek crisis, however, are testament to how unsustainable debt – whether public or private/public blends– can result in the most serious crises, including state collapse and conflict. That is why the proposals at the FFD conference around ‘blended finance’ and PPPs, which effectively increase public debt levels are so disturbing. In the absence of sovereign debt work out mechanisms or adequate safeguards, there could be many more Greece crises in the future. Bankrupt countries which are bailed out and then run by private finance institutions and technicians, who then literally ‘buy up’ countries are a very possible future.

The overwhelming impact of all of these external sources is to narrow the space that national governments have to implement policies on behalf of their people. With each of the above, countries are beholden to masters beyond their control. Inevitably, the pressure this brings to bear corrupts. It results in a crisis of accountability.

So the attention of many northern governments has turned to forms of domestic resource mobilisation, i.e. resources countries can raise ‘in house’. Unable to provide adequate ODA, they point to Southern government to raise their own resources. Tax is the essential, sine non qua – the unavoidable missing element in the discussion which is now taking centre stage.

Tax has a number of qualities other sources don’t have. It is an obligation, backed by law; it is predictable and long-term; by definition, it is a contribution to the financing of the public good which goes beyond the benefit received in return. As a source of revenue it is raised locally and largely spent locally, it is not bound by the same external conditionalities. Progressive tax has the added benefit of increasing social cohesion through institutionalised solidarity.

What the wealthy countries didn’t foresee on this week was the powerful counter argument to their call for greater domestic resource mobilisation. This was epitomised in a report by former South African PM Thabo Mbeki: African countries have lost the same about in illicit flows as they have received in aid in the last 50 years. Multinationals based in rich countries, who set the tax rules, are by and large responsible for this through tax avoidance schemes such as transfer mis-pricing. Annually, Africa looses $50 billion dollars to illicit flows. In an era of globalisation, if you want to raise domestic resources, you need to stop the bleeding from illicit flows. To do that, all countries need an equal say in setting the rules of global taxation.

Who, how and what is taxed says something deep about the communal values in a given society and how those are aligned to political power. Unfortunately in our world today, there is a profound mis-alignment between our societal values and the forces which determine taxation globally. The large corporations, and their powerful leaders who set the rules, are largely unaccountable. They are able to make the rules to their own advantage in the cracks between inadequate national and international laws. Reversing this through a global tax body which reflects better the shared values of justice and human rights is the key message from Addis, and now a top priority. Tax for me is no longer a dirty word – but a symbol of commitment to a just world.

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