Taxation is at the centre of development

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The UK’s Department for International Development issued its third white paper since Labour came to power in 1997 yesterday. The theme was clear from the title ‚ÄòEliminating world poverty: making governance work for the poor'.

The argument underpinning the paper is also clear and is that “Unless governance improves, poor people will continue to suffer from a lack of security, public services and economic opportunities.” I agree with that argument.

The government has announced a £100 million fund to improve governance. I welcome that. And I agree with the report that good governance requires, amongst other things the creation of state capability, which it describes as “the extent to which
leaders and governments are able to get things done.”

The report thinks that the following are all dimensions of this:

• Setting good rules and regulations.
• Creating the conditions for investment and trade, and promoting growth in jobs and incomes.
• Managing public finances and putting government policies into practice effectively.
‚Ä¢ Making sure government departments and services meet people’s needs.

I agree with that too, because, and to put it simply, this is an argument I have been promoting through the Tax Justice Network for some time – including in its report “Tax Us If You Can”.

There is no prospect of any of these things happening if developing countries cannot create the capacity to tax sufficiently to meet the needs of their citizens. There is no prospect to an end of the aid culture without that happening either. DfID recognises this and mentions the aid it has given to tax collection agencies as part of the development programme. That’s useful. But the issue is not just one of administration or compliance. It is systemic. DfID has to help tackle the issue at that level as well. And that means that the following have to be tackled:

1. Offshore evasion and corruption, where so much of the tax revenue of these countries is lost, and on which the Tax Justice Network is taking a lead;
2. Accountability by corporations for the profits they make at a local level, as for example promoted by Publish What You Pay;
3. A step back from VAT as the tax solution for these countries when trade tariffs work much better in their case, as the IMF now recognises;
4. Enhanced information exchange between countries to ensure that developing countries learn of the income they should be taxing;
5. The extension of arms length pricing rules to all international trade so that the abuse of developing countries which happens on a day in, day out, basis as a result of multinational companies flouting these rules in developing countries comes to an end;
6. Agreement that these countries should have first right to tax income which is sourced in their states i.e. source taxation rules should be encouraged for local based activities in developing countries.

This is a big programme but it is possible.

The question is, will DfID be willing to tackle the issue at this level?