Aid, Tax and Finance for Development
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.
See also the website of the International Center for Tax and Development, here.
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)
The United Nations should broaden and intensify its tax cooperation work and play a greater practical role in dealing with tax matters, including emerging issues that are not presently addressed in other organizations. (para 126)
The Tax Justice Network made its own submission to the UN Tax Committee at a meeting in September 2007 in Rome. Civil Society Organisations in particular, who have hitherto been rather absent from international discussions on tax, need to engage with this fundamentally important issue.
- Dec 2013 - Developing countries and tax incentives: OECD says it like it is. Original here.
- June 15, 2013 - Invested interests: the UK's Overseas Territories' hidden role in developing countries. Original here.
- May 23, 2013 - Almost half of all investment into developing countries goes through tax havens, ActionAid reveals
- Feb 10, 2013 - ActionAid report on the Zambian tax scandal. Original here; news articles here and here.
"We estimate that the tax- haven transactions of just this one British headquartered food multinational has deprived the Zambian public purse of a sum over 14 times larger than the UK aid provided to Zambia to combat hunger and food insecurity in the same period."
- Aug 2, 2011 - Afrodad tax and development reports: Mozambique, Zimbabwe. Originals: Overview, Zimbabwe, Mozambique.
- Aug 1 - 2011 - Transfer pricing and developing countries - new report. Original here.
- July 2011 - Scrap tax incentives, East African civil society and IMF suggest. Original here.
- July 2011 - ActionAid and Eurodad report on tax policies for developing countries as formulated by International Financial Institutions. Originals here and here.
- Nov 2010 - How SAB Miller escapes tax in developing countries. Original here.
- New African tax data from the OECD
- Oct 2010 - new paper: Should we Engage in Development Cooperation with Countries that Have a Notoriously Low Tax Ratio?
- Oct 2010 - New book - Taxation and State Building: Towards a Governance Focused Tax Reform Agenda
- Oct 2010 - World Bank says we know little about tax and developing countries
- Sept 2010 - on Development Finance Institutions in tax havens
- May 2010 analysis of the OECD's African outlook contains much new data.
- Sept 2009 - Actionaid: Accounting for poverty: How international tax rules keep people poor
- This November 2009 paper from the School of Oriental and African Studies provides pointers on why domestic tax revenues have been stagnant in low income countries.
- July 2009: IMF paper noting that lower corporation taxes and tax holidays may not boost growth
- The webstite Raising Tax Revenues (from 2009) contains references to a wide array of academic papers, civil society reports, policy documents and books.
Norwegian Commission on Capital Flight From Developing Countries, June 2009
Invitation to participate in a workshop on Erosion of Public Finances in Developing Countries: Illicit Flows and Commercial Corruption, National Autonomous University of Mexico, September 2009
Update: March 2009. Christian Aid's False Profits: robbing the poor to keep the rich tax-free estimates that between 2005 and 2007, the total amount of capital flow from bilateral trade mispricing into the EU and the US alone from non-EU countries is estimated conservatively at more than US$1.1tn (£581.4bn, €850.1bn).
Update: March 2009. Oxfam estimates that developing countries miss out on up to $124 billion every year in lost income from offshore assets held in tax havens.
Update: Jan 2009. New report from Global Financial Integrity on illicit flows from developing countries. "In 2006, the most recent year of the GFI study, developing countries lost an estimated $858.6 billion – 1.06 trillion in illicit financial outflows."
Nov 2008: OECD Secretary-General attacks tax havens in development context, November 2008. He says: "Developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid."
Nov 2008:Christian Aid report on The impact of the financial crisis on the developing world
Tax and Financing for Development, SOMO, October 2008
Capping Aid: tax and state-building in the FT Economists' Forum > Sept 2008
IMF: in Africa, pay more attention to tax > August 2008
News Flash: speech by South Africa's Trevor Manuel, January 2008
New Estimates of Capital Flight from Sub-Saharan African Countries: Linkages with External Borrowing and Policy Options, an April 2008 research paper from the University of Massachusets, Amherst, investigating the scale of capital flight from Africa from 1970-2004 (read TJN's blog about it, with additional information, here.
- New Book (2008): Taxation and State-Building in Developing Countries: Capacity and Consent, edited by Braütigam, Fjelstad and Moore. Investigating how taxation builds states and foster good government.
- The Precarious State of Public Finance (Jan 2008) by Jens Martens of the Global Policy Forum Europe, looking at tax evasion, capital flight and the misuse of public money in developing countries – and what can be done about it.
- A TJN presentation in Brussels in November 2007 on aid and tax.
"Tax is exciting! And so is accountancy. And both are incredibly important for the development agenda. Then there's the good news: you don't have to understand much about either to understand why."
- A speech in French from a university lecture tour in France by TJN'S John Christensen. La corruption, la pauvrété, et l'économie politique des paradis fiscaux
"Les paradis fiscaux sont au cœur de la mondialisation des marchés de capitaux. L’impact qu’ils ont sur les pays pauvres est totalement désastreux, mais ce problème est ignoré par les agences internationales, par la majorité des gouvernements occidentaux, et (de façon inexcusable) par une grande partie des institutions en charge de l’aide au développement. La société civile doit donc s’unir afin de mettre fin à ce scandale."
- Read Raymond Baker's speech, "The Ugliest Chapter in Global Economic Affairs Since Slavery" which he delivered at a conference at the Center for Strategic and International Studies in Washington in June 2007.
"For the first time in the 200-year run of the free-market system, we have built and expanded an entire integrated global financial structure the basic purpose of which is to shift money from poor to rich."
- In February 2007 TJN produced a report for the Norwegian Ministry of Foreign Affairs, called Closing the Floodgates: Collecting Tax to Pay for Development
"The finance needed for development was once thought to be from aid. Then it was debt relief, and fair trade. All have a role, but it’s clear none can pay for the effort to achieve the Millennium Development Goals. Successive reports have made clear that these can only be paid for by collecting the taxes that are evaded and avoided around the world."
- How does taxation affect the quality of governance? Institute of Development Studies, Working paper, April 2007. It is not just how much tax, but the way it is levied, that affects governance.
- In April 2006 TJN's John Christensen made a presentation to the United Nations called Why Capital Flight? How Plugging the Leaks could Contribute to Poverty Alleviation
"The missing piece of the development equation is the impact of illicit capital flight and the associated tax evasion on global poverty."
(There is more on capital flight on our website in this section called Illicit Capital Flows and the Offshore Economy)
- Oxfam published a seminal report on tax havens and their role in hampering development, called Tax Havens: Releasing the hidden billions for poverty eradication. It is also available here
"This paper argues that off-shore centres are part of the global poverty problem - and that the interests of the poor must be brought onto the reform agenda."
- Frances Horner's seminal article on the need for an International Tax Organisation is here
- TJN's Tax Systems for Poverty Reduction programme, a core TJN programme. See the overall terms of reference here, plus the Ghana Report and the Kenya report here.