These are the slides for the talk I presented in Beirut this afternoon:

Locating tax risk - the way to tackle illicit financial flows

1 There are illicit financial flows

• This is a fact
• It's also true we will never stop them entirely
• This means everything we say today is about risk mitigation

2 The questions we need to address

• What are the risks?
• How do they arise?
• What can actually be done about them?
• Why is it worth tackling them?
• Why is it worth expending political capital on this?
• What are the tools we need to use?

3 What is tax for?

• It is assumed that pays for government expenditure.
• This is at best only partly true
• Government spending can also be funded by:
  • Borrowing
  • Aid
  • Local currency creation
• So while may have an important role in the funding cycle of government that is not its only use

4 Tax has other uses:

• Creating macroeconomic control of an economy
• This is through fiscal macroeconomic management
• Underpinning the value of the local currency by requiring its use to settle tax liabilities
• Income and wealth redistribution
• Repricing market failure
• Incentivising socially beneficial activities

5 The Joy of Tax

• Put all these facts together and you have what I call The Joy of Tax
• Tax is the single most powerful peaceful instrument a government has to shape the society that it controls
• The challenge of illicit financial flows is that they undermine any government's chance of achieving that goal
• The big challenge of illicit financial flows is not then the money alone - however important that is
• The big challenge of illicit financial flows is that they challenge the ability of the state to deliver a whole range of policy options that it wants to create on behalf of those who live in the jurisdiction for which a government is responsible

6 How to tackle this?

• The choice to date has been to blame some now familiar villains
  • Organised crime
  • Those who are corrupt
  • Multinational corporations
  • Tax havens
• The response is
  • Anti-money laundering measures
  • OECD BEPS
  • Country-by-country reporting
  • Calls for unitary taxation
• Trust me, I buy them all
• But the time has come to go further

7 We need new tools to identify and tackle tax abuse

• There are two key new tools:

1.Measuring tax gaps

2.Undertake tax spillover assessments

• These require political will
• And they require funding - if necessary from the IOs to help achieve this — which is something I am explicitly calling for

8 The tax gap (1)

• The tax gap is a measure of the tax that could be but is not collected by a government
• All countries have a theoretical tax yield they could collect based on current GDP and law
• They don't get it because of the tax gap, which comes in five parts

1 The cost of tax bases not taxed, such as wealth (A)

2 The cost of tax allowances and reliefs a government grants (B)

• Take these two off the theoretical tax base calculated on GDP and you get the technical tax yield. Then deduct

3 Tax evasion (C)

4 Tax avoidance (D)

5 Tax bad debt (E)

• And you get to tax actually paid

9 The tax gap (2)

• The tax policy gap is
• Tax bases not taxed + tax reliefs given away
• = A + B
• The tax compliance gap is
• Tax evasion + tax avoidance + tax evasion
• = C + D + E
• The total tax gap is:
• Theoretical tax base based on GDP
• Take away A + B + C + D + E
• = Tax actually paid
• Every government had to know these figures, I suggest, or they're not in control of their economy

10 Tax spillovers

• Tax spillovers assess the likelihood that one part of a tax system causes harm to another part of a tax system, either domestically or internationally
• Tax spillovers happen domestically and internationally
• They involve all taxes, but especially direct ones
• And they involve the administration of tax as well as the taxes themselves
• The IMF has tried to appraise them quantitatively but this has proved to be very hard
• Professor Andrew Baker of Sheffield University and I now propose a qualitative measure

11 Qualitative tax spillovers - the assessment grid

12 Qualitative tax spillovers - the process

• Four domestic taxes and four tax admin systems are marked for the risk that they create domestically first and internationally second
• Then the domestic tax system is appraised for the risks imposed on it from elsewhere
• The higher the score the bigger the risk
• The colour coding simply helps identify the big risks — they are in red
• The process is designed to identify the biggest targets for reform

13 Qualitative tax spillovers —our suggestion

• It's our suggestion every country could and should do a qualitative tax spillover assessment
• Then they will know what reform is really needed
• And how effective it might really be
• This is the way for all countries — and not just OECD ones — to reclaim the agenda on this issue
• We think it's time to use a systematic tool for each country to create its own demands for reform