| || || |
Give to Caesar what is Caesars: Taxation and the Developing World
In the wake of the financial crisis, tax has become a political hot potato. In particular, we have seen a crackdown on tax havens motivated by industrialised countries seeking to claw back revenue from tax dodgers to pay for expensive bank bailouts, and more recently a Financial Transactions Tax to glean revenue from the financial services industry.
Fundamentally, taxation is about contributing to society in a way which promotes political accountability and representation. The framework of relational theology derived from St John’s gospel and informed by the work of Karl Barth is helpful in this regard, emphasising the need for restored relationships between people and with God. In the case of taxation, relationships between rich and poor are mediated by the state.
Tax revenues pay for state services and enable the redistribution of resources throughout society. In developed countries, this is frequently taken for granted, but in developing countries where tax collection is pitifully weak, developing countries regularly suffer from huge deficits in funding and are unable to provide essential services. As a result, these governments frequently get into debt and are crippled by loan repayments or become dependent on aid.
In the short term, these external sources of finance, coupled with the activities of philanthropists and non-governmental groups, provide essential services to the poorest and most vulnerable. But in the long term, this can undermine both the ability of the state to provide services and the will of citizens to demand political representation.
Where governments are not dependent on their citizens for revenue, but instead rely on resource rents or external aid flows, we have seen again and again how governments have had little or no interest in serving their people. Ultimately, governments should have the sovereign right to tax economic activity which occurs on their shores – and it is up to the people, through the government, to decide the tax rate, and how the resulting revenue is spent.
But how can we in the UK contribute to more sustainable sources of finance for developing countries?
Well, the first thing to say is that aid is important to assist developing countries in the short term. But whether this aid is provided by governments, through a Financial Transactions Tax or through philanthropy and generous individual giving, it can’t be the whole picture. For sustainable development involves the strengthening of state institutions. Aid should in part be used to strengthen the ability of governments in developing countries to raise revenue, and the ability of civil society in those countries to hold their governments to account.
Secondly, we need to plug the leaks. Christian Aid estimates that developing countries lose $160bn each year due to tax dodging by multinational companies: around one-and- a-half times the global aid budget. If this money was available to allocate according to current spending patterns, the increased investment in healthcare could save the lives of 350,000 children each year.
Companies can structure their operations so that profit is shifted from where money is made to where tax rates are low. This is in part facilitated by the way in which companies account for their profits, and by the financial secrecy offered by tax havens.
An international accounting standard which required companies to declare the names of their operations and their profits and tax payments in each country where they operate would allow revenue authorities in developing and developed countries to identify potential cases of profit- shifting which were worthy of further investigation. This country-by-country reporting standard is now being considered by the OECD and has the support of the British government.
Secondly, a truly multilateral agreement on sharing of tax information between countries would equip revenue authorities with information on companies and individuals who are harbouring money offshore.
Significant progress has taken place at the G20, with promises to end financial secrecy in tax havens. Initial commitments involved industrialised countries sharing information. However, due to the work of NGOs globally and the commitment of the Financial Secretary to the Treasury, Stephen Timms, this is the start rather than the end of the process. Going forward, developing countries need to be included in an agreement to share information, alongside a peer-review mechanism to ensure these countries are really benefiting.
The financial crisis has provided us with political the space to think about the way in which finance serves society. Reforming the financial system in ways which empower developing countries to charter their own development will achieve far more in the long term than simply increasing levels of aid. The tax system is a good place to start.
Dr David McNair is Senior Economic Justice Adviser at Christian Aid
To find out more about Christian Aid’s work on tax, visit www.christian-aid.org.uk/tax
Dr. David McNair, 26/11/2009