Taxes serve SDG achievement
In theory, a global wealth tax could close entirely the financing gap the international community faces in achieving the Sustainable Development Goals (SDGs). This is a conclusion that Alex Cobham of the Tax Justice Network and Steven J. Klees of the University of Maryland reached in a study produced on behalf of the International Commission on Financing Global Education Opportunity. The project’s co-directors were Klees, Adriano Campolina of Action Aid and Winnie Byanyima of Oxfam.
According to the scholars, most low and lower-middle-income countries still have not substantially increased their tax revenues. They see two main reasons:
- International donor agencies promoted sales taxes too much, neglecting taxes on income, profits, assets and capital gain.
- Tax havens facilitate tax avoidance and evasion in a “race to the bottom”.
According to UNESCO, low-income and lower-middle-income countries need an additional $ 39 billion to meet SDG targets for primary and secondary education. Cobham and Klees argue that improving global taxation could fill the gap. They suggest two types of response:
- global reforms to support domestic tax generation and
- globally-levied taxes.
The authors reckon that tax revenues worth $ 600-650 billion are lost due to multinational corporations’ tax avoidance and evasion every year. Developing countries are hit in particular. For the sake of more transparency, corporations must be required to report profits and sales country by country, the authors demand. Better taxation of personal income and wealth is another way to increase revenues. This approach is, in principle, endorsed by the OECD (Organisation for Economic Co-operation and Development), the umbrella organisation of donor governments. The NGO authors go further, however, contemplating something like a global register of financial wealth.
Most relevant measures can be implemented by national policymakers, Cobham and Klees state, but they argue that a globally representative, intergovernmental tax body might help to deliver results. They point out that the established governance arrangement favours a small group of rich countries, mainly OECD members (see Mick Moore in D+C/E+Z e-Paper 2018/01, p. 25).
A global institution could boost transparency and serve as a forum to define tax rules. Options would include:
- a global wealth tax and/or measures to support domestically-levied wealth taxes and
- a global financial transactions tax and/or measures to support regionally-levied financial transactions taxes.
The authors reckon that a global wealth tax levied at one percent annually could cover the entire SDG financing gap that is estimated at $ 1.4 trillion, while a global financial transactions tax may generate up to $ 360 billion. A downside of globally-levied taxes, Cobham and Klees admit, is that they might affect governance at the nation-state level. The reason is that strong national taxation systems are interrelated with representative democracy. A global system would thus have to be transparent and made accountable to the public.
State-building and social justice
On behalf of the G20, the group of 20 leading economies, a team of experts from multilateral institutions have assessed how to improve external support for tax-related capacity building. Like the NGO authors, they argue that more government revenues are needed for the SDGs to be achieved. In their eyes, however, some progress has been made in terms of mobilising domestic revenues in developing countries. According to their report the median tax ratio in low-income countries rose from about 10 % of gross domestic product in the early 1990s to 13 % in 2013. Lasting growth, however, is said to be difficult to achieve with a tax ratio below 15 %. The implication is that many countries are not collecting enough tax money.
The experts work for the International Monetary Fund (IMF), the OECD, the World Bank Group and the UN. Their paper does not express the four international organisations’ official policy, but the authors emphasise that it reflects broad consensus among them. A core message is that “strong tax systems are key for both equity objectives and enhancing state building”.
The authors stress that short-term revenue maximisation is likely to trigger bad administrative practices such as harassment of tax payers. They insist that mid-term strategies spanning five to ten years are needed to shore up a country’s tax system. Policies must be redefined, the administration must be modernised, and laws must be rewritten in a coherent way.
The report reiterates that success depends on “enthusiastic” national ownership. Donor action is set to fail unless it is closely aligned to the target country’s policymaking. As country ownership cannot be taken for granted, however, the report urges multilateral and bilateral donors to contribute to bringing it about. They want donors to convince various stakeholders of the need for tax reforms and recommend cooperation with business leaders, civil-society organisations and the media. They warn that failure is likely if the general public considers the reform agenda unfair or unreasonable.
The snag, which the paper does not acknowledge, is that, according to the principles first spelled out in the Paris Declaration on Aid Effectiveness of 2005, country ownership is something donors must respect, not bring about. If they appreciate the partner country’s sovereignty, shaping and creating country ownership cannot be their job. Perhaps they can endorse policies a national government is embarking on, but it would be inappropriate to counteract that government.
Donor harmonisation is another lasting challenge of the aid-effectiveness agenda. According to the report, a multitude of donor agencies are involved in tax matters in developing countries. The IMF is reported to have counted 208 related programmes and 50 providers in sub-Saharan Africa alone, with five to six agencies actively involved per country on average.
The expert team states that cooperation and coordination of donors has improved. The main reason is that they rely on innovative benchmarking systems such as TADAT (Tax Administration Diagnostic Tool) and ISORA (International Survey of Revenue Administrations). Nonetheless, the report bemoans that the information flow among donor agencies tends to be haphazard and often depends on individual staff members’ personal networks.
To improve matters, more systematic interaction is recommended. In particular, the tax experts appreciate cooperation with regional tax organisations. In their view, donor agencies are well advised to involve initiatives like the African Tax Administration Forum (ATAF) or the Pacific Islands Tax Administrators Association (PITAA). Important reasons are that these organisations are familiar with their world region’s problems and attitudes, serve information sharing and help to reinforce country ownership. The authors stress that a G20 priority of recent years was to involve developing countries in decision-making concerning the global tax system. The international tax landscape is said to be changing fast, with developing countries having much to gain because “they suffer, in relative terms, the largest revenue losses from cross-border corporate tax avoidance”. The expert team acknowledges that several developing countries are joining relevant networks and fora, but warns that making these structures work effectively “requires more than just membership”.
As is typical for documents produced by multilateral relations, the report shies away from discussing member countries’ conflicts of interest. In this case, it matters that donor governments are not necessarily keen on modifying the international tax system in ways that makes major corporations, that are based within their borders, pay more taxes in developing countries (see Dereje Alemayehu in D+C/E+Z e-Paper 2018/01, p.28, and Catherine Ngina Mutava in D+C/E+Z e-Paper 2018/01, p.30). Perhaps the experts had this in mind when they wrote that effective support for building tax systems requires whole-of-government approaches on all sides.
Monika Hellstern is an assistant editor with D+C/E+Z.
Hans Dembowski is the editor in chief of D+C/E+Z.
Cobham, A., and Klees, S., 2016: Global taxation – Financing education and the other Sustainable Development Goals.
IMF, OECD, UN, World Bank Group, 2016: Enhancing the effectiveness of external support in building tax capacity in developing countries.