Actionaid and Eurodad have co-written an important new report looking at how international financial institutions such as the IMF have been advising developing countries on tax, and how things might be improved.
The paper looks at what has been meant by the Tax ‘Consensus' - a concept which has been used by several authors to describe a consistent template of interlinked policy prescriptions that the International Financial Institutions have applied in their technical assistance and policy advice on tax policy in developing countries.
Tax reforms under this Consensus became an increasingly important part of the Structural Adjustment Programmes promoted by the World Bank and the IMF in developing countries from the late 1980's. Key underlying principles of the tax consensus have been neutrality and simplicity; that taxes should not be used to redistribute wealth because this would distort market signals, and that the number of taxes, tax rates and exemptions should be reduced. Key policies have been to promote trade liberalisation and alongside it to recoup the lost revenue from trade taxes through introducing VAT. In addition there has been strong emphasis on administration.
So developing countries have been urged to reduce trade tariffs, introduce VAT, improve tax administration and remove exemptions. The latest paper also looks at the different ways the IFIs have used to influence tax policy, and then looks at the impacts of these policies.
Until early 2011 neither the IMF nor the World Bank had published an official account of their approach to tax policy in developing countries. This is astonishing, especially given that, as an earlier Actionaid report notes, if all developing countries were able to raise just 15% of their national income as tax revenue — a commonly accepted minimum figure — they could realise at least an additional US$198 billion in revenues - almost double the sums spent on foreign aid.
But things started to change in 2011 with the publication of a new and important paper by the IMF's Fiscal Affairs Department (which the Tax Justice Network commented on here, in a blog entitled "Is the IMF starting to get it on tax and development?"). While the IMF paper didn't contain many huge surprises, it did give credence to the issue of fairness in tax systems. Which is absolutely crucial.
It also recognised the challenge developing countries face in dealing with transfer pricing techniques used by multinationals and recognised that country by country reporting is a means to improve tax transparency that merits further investigation. These are all core concerns of TJN.
Although Eurodad/Actionaid new paper recognises a progressive shift in IMF thinking, one area of remaining concern is the IMF's continued preference for regressive impacts of consumption taxes to be remedied through government spending - even though it admits that the IMF has failed to adequately address this in the past.
There are also ongoing problems with the design of the Doing Business indicator on tax, and despite IMF technical assistance on tax policy and administration growing in scale there is still next to no transparency on the actual content of the advice delivered in this context.
All in all, an important contribution to the literature.
Hat tip to Tax Justice Network
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Dear Richard Murphy,
I am a fan of your blog and read it regularly. Apologies for interrupting your busy schedule. But I’m writing to you partially because of my tax ignorance, which has led me to be alarmed by the recent Office for Budget Responsibility Report (Fiscal Sustainability report) in which it is claimed that greater inequality increases state tax revenue!
On page 92 they write:
“A progressive tax system means that the average rate of tax will increase as a result of changes that shift income towards the top end of the income distribution. So if the recent trend of increasing income inequality were to continue in the future it would potentially drive an increase in personal tax receipts. Conversely, a reversal of income inequality would lead to a fall in revenues. This section provides some illustrative examples of the potential size of these effects. In 2007-08, income taxpayers in the top half of the income distribution (pre-tax incomes exceeding £18,500) accounted for 77.9 per cent of total income and 89.6 per cent of total income tax liabilities. Moving up the scale, these shares The sustainability of tax revenues were 36.0 per cent and 54.3 per cent respectively for the top 10 per cent (covering the majority of higher rate tax payers) and no less than 13.4 per cent and 24.4 per cent respectively for the top 1 per cent (roughly equivalent to those with incomes above today’s £150,000 threshold for the 50p tax band). Including NICs in the analysis lowers these respective proportions somewhat due to the lower 2 per cent rate above the upper earnings/profits limits for employees and the self-employed, but nonetheless the distribution of personal tax liabilities remains highly positively skewed.”
Surely this leads to the peverse incentive for Governments to purposefully promote income inequality to increase so as to in turn increase the public coffers? Unless the OBR report means that an increase of income for those earning above £18,500 (accounting for 89.6% of total income tax liability) without a corresponding increase for those earning below this amount, would lead to increased tax revenue, and assuming that the majority of middle earners would fall into this bracket, that might be seen to be somehow acceptable? Nonetheless the implication is that those who earn below that amount are to be kept earning that amount because there is an incentive for government to want to increase income inequality so as to recoup more income tax!
Have I misunderstood this or does it indeed seem as if the implication is that income inequality is to be encouraged if one wants to increase income tax revemue?
Yours sincerely,
Chris Moye
p.s. I sent you an email not realising you had opened the comments thread – awfully sorry and please ignore it if you receive this!
Chris
That is a fascinating idea, and thank you for drawing it to my attention
The reality is, of course, the fact we do not have a progressive tax system at all. Whilst these people pay more they actually pay lower overall proportions of their income than the poorest in this country. We have a regressive tax system due to VAT, etc
A reform of National Insurance, meaning that it would be paid throughout the income scale, would be a massive step in the right direction for this, although it would need some rejuggling of when higher rate tax came into play to ensure that the middle were not too heavily squeezed