Ontario Global Research

The mechanisms of secrecy

Aid, Tax and Finance for Development

8/13/2012

Tax is the most important, the most beneficial, and the most sustainable source of finance for development. Tax revenue in Africa, for example, is worth ten times the value of foreign aid. The long-term goal of poor countries must be to replace foreign aid dependency with tax self-reliance. As the 2010 African Economic Outlook notes:

"The challenge is for African countries and their partners to end the vicious circle of aid dependence that shifts government accountability away from citizens towards donors. Instead, they need to start a virtuous circle of aid working to make itself redundant, by supporting public resource mobilisation."

We believe there is a role for foreign aid. However, action on tax has the potential to deliver gains to poor and middle-income countries that are far greater than what can be achieved with aid. To meet the Millennium Development Goals, OECD countries have been urged to raise their levels of aid to 0.7 percent of Gross National Income – but this is as nothing when compared to potential tax revenues: in many rich countries, tax constitutes 30-40 percent of GDP (and sometimes more). Just one example illustrates the scale of what is on offer: this single innovative Brazilian tax measure has raised some $20 billion a year, and helped cut tax evasion to boot.  The importance of tax is summed up in slogan chosen by Kenya's revenue authorities: "Pay Your Taxes, and Set Your country Free." 

Tax is also the nexus between state and citizen, and tax revenues are the lifeblood of the social contract: the very act of taxation has profoundly beneficial effects in fostering better and more accountable government. (Read more here.)

Developing nations in Africa, Latin America and elsewhere are especially vulnerable to the offshore world. As corrupt dictators and other élites remove vast sums of private and relocate them to financial centres like London, New York and Zurich, developing countries’ economies are deprived of local investment capital and their governments are denied desperately needed tax revenues – with the result that capital flows not from capital-rich countries to poor ones, as traditional economics suggests, but, perversely, in the other direction. Recent research on 40 African countries has shown, for example, that the accumulated stock of capital flight from 1970-2004 was about $607 billion as of end-2004, compared to external debts of "only" $227 billion. Sub-Saharan Africa, it concludes, is a net creditor to the rest of the world: its external assets, measured by the stock of capital flight, greatly exceed external liabilities, as measured by the stock of external debt. The difference is that while the assets are in private hands, the liabilities are the public debts of African governments and, through them, their their people. South African Finance Minister Trevor Manuel was right when he said: "It is a contradiction to support increased development assistance, yet turn a blind eye to actions by multinationals and others that undermine the tax base of a developing country."  

Tax has many other benefits too, such as the fact that it does not, unlike aid, result in Dutch Disease effects, which have devastated many mineral-rich economies and have seriously blighted many aid-dependent ones too. Read more here.

It is astonishing that so many members of the aid community have ignored tax for so long. Action on international taxation is, quite simply, the key to lifting hundreds of millions of people out of poverty.

The path forwards 

International development policies (that is, efforts to help turn poor, fragile countries into strong, rich ones) have focused far too much, for far too long on the supply of foreign aid to developing countries. Some aid works, some probably doesn't, but there is not even a clear consensus among academics and economists how effective aid has generally been in addressing world poverty. 

Whatever the truth about aid, TJN believes that there is a more sustainable way to promote development that must urgently also be considered: to give countries the freedom to pay for their own development by raising their own revenues. One way to do this is to fight against tax havens, which suck financial capital out of countries (and the poorest countries are the most vulnerable) by offering secrecy and other corrupting services. Banks and accountants based in tax havens encourage élites to send their wealth offshore, depriving economies of investment and depriving governments of tax revenues to finance the infrastructure and other public goods necessary for development. As a result of the tax haven scandal, poor countries too often have to rely on aid to replace the lost taxes.

Development institutions like the World Bank – despite assaults on taxation by numerous vested interests and ideologues - have begun to wake up to the importance of tax in development. The UN hosted a landmark conference on Financing for Development (FFD) in 2002 in Monterrey, Mexico, which adopted the “Monterrey Consensus," in which it was explicitly recognised that it was essential to mobilise domestic resources – that is, tax. The IMF, OECD and World Bank also pledged to improve international co-operation on tax. As the IMF put it:

Developing countries must be able to raise the revenues required to finance the services demanded by their citizens and the infrastructure (physical and social) that will enable them to move out of poverty. Taxation will play the key role in this revenue mobilization. . . . the increasing globalization of the economy is relevant both for developed and developing countries. The constraints that it places on countries' ability to set and enforce their own taxes are felt increasingly keenly.

In this context, the constraints of globalization are largely caused by tax evasion and avoidance, and tax competition.  This was recognized in the Monterrey Consensus.  One of the tangible outcomes of Monterrey was the decision of the UN General Assembly in December 2003 to create a committee of Tax Experts.  However, the new Committee, which meets once a year in Geneva, remains largely dominated by representatives of the rich countries, and has scarcely begun to develop a new agenda to reflect the concerns outlined at Monterrey. There have been many criticisms (such as this one) of the Monterrey process, notably that it has ignored the concerns of poor countries to a large degree.

A follow-up process in Doha, Qatar, in December 2008 reflected only limited progress in bringing TJN’s core concerns onto the international agenda. In August 2007, the U.N. General Assembly published a report assessing the path to Doha. This is a long document, but we would highlight a couple of elements:

There is growing recognition that international cooperation in combating tax evasion is not only indispensable in the fight against international crime and terrorism, but also that such cooperation could actually constitute an innovative source of finance for development by reducing revenue leakage. (para 125)

and

The United Nations should broaden and intensify its tax cooperation work and play a greater practical role in dealing with tax matters, including

Number of comments: 4

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