Taxation, which has been a Cinderella subject in development, has finally been invited to the ball, but the arguments that have helped to push taxation up the finance-for-development agenda may also be in need of clarification.
There is widespread perception that (1) there are huge areas of untaxed or undertaxed economic activity in the poorest countries, (2) undertaxing is mainly a product of clever “tax-dodging” practices of multinational corporations, with armies of lawyers and accountants, and (3) gaps in basic health care, education, and infrastructure could be solved by a few changes to international tax policy and transparency.
These views are often expressed by campaigners who have played a key role in pushing the complex and technical topic of international taxation into the spotlight. They believe that reforming taxation of multinational enterprises would deliver amounts of money that could unlock major development benefits for the poorest countries; enough to offer a path out of poverty for billions of people (Action Aid), get every child into school four times over (Oxfam), end world hunger (IF Campaign) or prevent 3.6 million deaths in the world’s poorest countries (ONE campaign).
It is certainly true that the potential for domestic resource mobilization dwarfs all other forms for financing for public spending, and it is also true that countries have achieved significant gains by concentrating on improving tax collection. But there are methodological issues with some of the calculations of taxes lost, and the particular issues they relate to.
And more broadly there is an inconvenient truth that these ‘big numbers’ (in the region of $100 billion) are just not that big, amounting to a 1 or 2 percent increase in overall tax revenues, according to a recent study by UNCTAD, with the biggest sums concentrated on larger emerging economies. The headlines about bringing billions out of poverty and closing gaps in basic services seem to be based on the assumption that every penny of additional tax raised would go to social spending and would cross borders effortlessly. But taxes raised in countries such as China, Indonesia, and Russia are unlikely to be available for buying mosquito nets and exercise books in Mozambique and Mali. (NGOs are not the only ones to say this: the OECD’s soundbite that developing countries lose three times more to tax havens than they get in aid seems to be based on a similar conflation of big and small economies).
A polarizing dynamic has emerged in which these numbers, and the perception that they represent problem-solving sums of money for the poorest countries, have got a life of their own, and have become a barrier to understanding the problem of domestic resource mobilization. While no one argues that initial rough estimates are sufficient for evidence-based policymaking, criticizing or questioning these estimates often tends to attract rebuttals and accusations of “defending tax dodging”.
That is not constructive. Tax policy discussions should be based on sound analysis. Civil-society advocates, policymakers, and tax experts need some common ground of concepts, definitions, and data to be part of the same conversation.
We are contributing with a small project to determine how estimates related to tax avoidance and tax reforms should be interpreted, what they tell us about the potential for specific policies to raise taxes in specific countries, what we know (with what degree of confidence), and what has just become de facto common knowledge because it has been repeated so often.
The result will be a short report with a long acknowledgements list. As a first step we have drawn together an advisory group including Alan Carter, HMRC; Paddy Carter, ODI; Mike Devereux and Judith Freedman, Oxford Centre for Business Taxation; David McNair, ONE Campaign; Robert Palmer, Global Witness; Wilson Prichard, International Centre for Tax and Development; Heather Self, Pinsent Masons; Mike Truman, recently retired as editor of Taxation; and Marinke van Riet, Publish What You Pay (all participating as individuals). Alex Cobham from the Tax Justice Network also participated in the first meeting to discuss the issues.
There was considerable agreement among the group that better analysis is needed to support nuanced policy discussion but disagreement about whether the initial use of rough-and-ready calculations and name-and-shame accusations was justified as a way to raise attention about a poorly understood and under-resourced policy area.
What do you think? Do the ends justify the means? What is the best way forward to improve domestic resource mobilization?
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.