Tax Justice Research Bulletin 1(6)

June 2015. Surprising everyone by actually arriving within the stated month, here’s the sixth Tax Justice Research Bulletin – a monthly series dedicated to tracking the latest developments in policy-relevant research on national and international tax, available in full over at TJN.

This issue looks at a new paper in The Lancet on the potential links between direct taxation and health outcomes including child mortality; and at research on the suitability or otherwise of accounting data for tax purposes. The Spotlight falls on tobacco taxes, the shameful manipulation of economic arguments by Big Tobacco, and a paper entitled The Single Best Health Policy in the World: Tobacco Taxes. If this issue was any more health-y, you could put a vest on it and send it out to do a half-Iron Man with Owen Barder.

June’s tune, via Sarah Knott, is Jawad Ahmad’s ‘Bhola kya karey – Wo jiay ya marey’. 

The main research event  of the month, nay the year, is the TJN annual research workshop at City University, which you’ve either just attended (great to see you!) or just missed (boo).

This year’s thematic focus was on the flawed notion of “competition” between nation states, and there’s a cracking set of papers from a whole range of disciplines (from philosophy to accounting) and backgrounds (including practitioners, civil society researchers and academics from universities from Hong Kong to Barcelona); and touching on all sorts of tax and non-tax aspects of ‘competition’, with insights into everything from Guernsey’s dominant investment position in annexed Crimea, to the ‘voluntariness’ of migration; and from regulatory responses of commodity traders to the role of KPMG in systemic regulatory arbitrage.

The workshop ended with a really engaged discussion about the relative merits of taking on the entire logic of state competition, versus the practical value of keeping focus on tax.

There’s certainly an important challenge in reclaiming the word ‘competition’ in this context, which has been used almost as a synonym for ‘no government intervention’ – when ensuring competition may well require greater intervention, in order to prevent power abuses leading to further concentration. The creators of the ‘Global Competitiveness Index’, for example, probably don’t see themselves as advocates for a world regulatory body, preventing unfair competition between states…

Submissions for the Bulletin, including tax-related melodic suggestions, are most welcome.

 

Financing for Development: Tax revenues and health outcomes

From the Tax Justice Research Bulletin 1(6).

One of the striking differences between the Millennium Development Goals set in 2000, and the post-2015 Sustainable Development Goals, is the latter’s emphasis on domestic resource mobilisation – set against the aid-centricity of the former. While this is welcome (primarily because of the enhanced potential for domestic “ownership” of priorities, and the ensuing political benefits), it does raise a question.

Figure 1A new paper published in leading health journal, The Lancet, tackles this question. Reeves, Gourtsoyannis, Basu, McCoy, McKee and Stuckler construct a panel of revenue, expenditure and health data for 89 low- and middle-income countries, from 1995-2011, and use it to explore the relevance of different sources of financing.

They reach two main findings. First, as you’d expect, they uncover a fairly strong association between tax revenues and health spending (Figure 1 – click to enlarge): more tax revenue per capita… more public health spending per capita.

Reeves et al Lancet 2015 fig2In a simple model, an additional $100 of GDP per capita is associated with $1.86 of extra health spending; while an additional $100 of tax revenue per capita is associated with $9.86 of health spending. There is also (Figure 2) support for impact on health outcomes.

Second, the authors find that the association hinges on direct tax in particular. They find that $100 of direct tax revenue per capita is associated with $16 of public health spending; whereas consumption and other taxes appear to have a small negative association. Most strikingly (Figure 3) there is an association between consumption taxes (but not direct taxes) and mortality outcomes.

What should we make of these results? (Does VAT kill children?) The authors are cautious about the limitations of World Bank tax data, and about direct causal interpretations of the results. But perhaps still more caution is needed.

Reeves et al Lancet 2015 fig3

Broadly speaking, we expect direct taxes (on income, profits and capital gains) to be more progressive than taxes on consumption – since households with lower incomes inevitably consume more of their income. In addition, there is some evidence to suggest that direct taxes are the most powerful in driving governance improvements associated with greater reliance on tax revenues rather than say natural resources or aid – on which, see Mick Moore’s really useful, critical survey in this ebook. So if direct taxes are a progressive tool associated with better governance, should we expect also to see better public spending outcomes?

Perhaps, and maybe even probably; but let’s be careful. Correlation and causation again. If governments are more or less interested in progressive taxation, and more or less interested in universal service provision, we’d expect those to line up so that governments favouring progressive tax will generally also deliver more broad-based improvements in (e.g.) health. But that’s not the same as saying that if all governments increased direct taxes (by diktat, or from changes in international norms, or – say – improvements in the transparency of multinationals), that they would also all focus more on health improvements.

We know that there are strong correlations between GDP per capita and tax/GDP. We know, too, that this holds most strongly for direct taxes. In addition, the sample period covers what is probably the peak of the “tax consensus” which inter alia encouraged consumption taxes above all others, and the relative neglect of direct taxes. In general, such advice was most powerfully passed into policy in those countries with least capacity and least political space to resist.

By and large, then, we’d expect to see that countries with the lowest per capita incomes and the weakest states exhibit not only low public health spending and poor outcomes, but also low tax revenues and relatively high reliance on consumption tax rather than direct tax — without there necessarily being any link from tax choices to spending outcomes…

This paper is a thought-provoking contribution, but due both to data weaknesses and to the difficulties of establishing causality, it can’t be more than suggestive. The challenge for further research is to address, as far as possible, these two issues. We can’t show that specific tax policies necessarily deliver different spending policies or outcomes (these are separate policy choices); but we may be able to demonstrate the associations more strongly, not least by allowing more effectively for the causal roles of per capita GDP and state capacity, and/or by focusing on specific moments of policy change to understand the effects.

Tobacco tax

From the Tax Justice Research Bulletin 1(6).

Savedoff Alwang 2015 fig3B

Tobacco tax has been largely overlooked in tax justice discussions – perhaps because it’s a relatively niche issue compared to income tax, for example. But there are important reasons why we should see tobacco tax as a significant justice issue, and there may be important political lessons to learn about how leading opponents of effective taxation operate.

My erstwhile CGD colleague Bill Savedoff and Albert Alwang have just published a powerful paper whose title says it all: “The Single Best Health Policy in the World: Tobacco Taxes.”

The authors survey the substantial literature and set out the key findings. Very briefly:

  • tobacco taxes are ‘the single most cost effective way to save lives in developing countries’;
  • the benefits in terms of premature deaths avoided accrue disproportionately to the poorest people (Figure 4);
  • substantial revenues can also be raised; and
  • we know what effective (and ineffective) tobacco taxes look like.

Savedoff Alwang 2015 fig4Why then are the appropriate policies not being pursued in more countries? Savedoff and Alwang address this question too (p.13):

“Tobacco companies have undermined public health efforts to save hundreds of millions of lives by delaying the introduction of tobacco taxes, reducing tax rates, or advising countries to adopt tax policies that are less effective at reducing tobacco consumption. They do so by promoting false or exaggerated concerns related to the effect of tobacco taxes on employment, government revenues, poor people and smuggling.”

Those ‘concerns’ include:

  • The claim that other (less effective) approaches are better than tax;
  • The claim that other (less effective) tax approaches may be better for revenue;
  • The claim that tobacco taxes are regressive, and ultimately borne most by households that policymakers (should) care about; and
  • The claim that tobacco tax will increase illicit tobacco (a phenomenon for which only tobacco companies have been found guilty, repeatedly over time and across the world).

No prizes, I’m afraid, for identifying parallels with some of the more extreme lobbying against multinational corporation tax/transparency measures.

Where these tactics have been successful despite the evidence, it is in large part because the tobacco lobby’s power is unmatched – and it is difficult to create an equivalently focused counter-lobby in defence of those unknown people who will lose their lives unnecessarily in the future.

The need for more effective coordination of advocacy for effective tobacco taxes is clear; where it will come from is not, despite important efforts from Bloomberg Philanthropy and the Gates Foundation. Does it fall to a handful of foundations to take on big tobacco around the world? Where are the World Bank and IMF? Where are leading development donor countries which have done much to reduce their own tobacco consumption?

And where is TJN? Well, watch this space. And let me know if you might want to be involved in something. (See also this post on big tobacco’s influence on World No Tobacco Day, a version of which has just been published in the Philippines daily, BusinessWorld.)

Is accounting data any use (for tax)?

From the Tax Justice Research Bulletin 1(6).

One of many happy things about the Tax Justice Network is the range of experts involved, by discipline and by professional background. And one of the great things this gives rise to is analysis that is often so far ahead of the immediate public policy discussion that you might not even be able to see it from over there. For example…

Two TJN stalwarts from the accounting side – one an academic, Prof. Prem Sikka, and the other practitioner-turned-campaigner, Richard Murphy – have come together to address the prickly question of whether accounting data can actually be part of the solution to the corporate tax base erosion and profit shifting of multinationals.

Their working paper is published by the International Centre for Tax and Development, in its important series addressing unitary taxation. [Full disclosure, just in case it’s not completely clear already that I’m biased: I have an unrelated paper in that project, and am working with the ICTD on other stuff too.]

A little background: TJN started up in 2003 with a project to promote country-by-country reporting by multinationals (notably, Richard’s draft standard), as a major transparency tool to limit tax abuse. Since then this esoteric proposal has moved steadily from the extremist fringes to centre stage, with the 2013 meetings of the G8 and G20 directing the OECD to produce such a standard for global use.

One effect of this is that accounting data has probably become more central to high-level political proposals (and scrutiny) than – well, perhaps ever. (I still remember a meeting of the International Accounting Standards Board in the mid-late 2000s, marked by the then-revolutionary presence of NGOs which pointed the way forward to that greater public interest. Happy days…)

The tendency, conscious or otherwise, has been to assume that accounting data is accurate (though not necessarily addressing the right things), and at least broadly consistent across jurisdictions. As such, it can provide the basis for powerful measure such as country-by-country reporting (for both red-flagging by tax authorities, and holding to account by civil society).

Sikka Murphy 2015 tab1 abridgedBut if there’s one, top line message from the new Sikka & Murphy (2015), it’s this: accounting data does not at present provide a good basis for this greater understanding of tax. Rather, accounting data not only provides a means by which tax positions can be obscured from view; it also provides an additional vector by which tax positions can be manipulated.

How so? The abridged Table 1 gives a sense of it (scroll down or click for larger version). The differences around the world in accounting treatment for tax purposes are manifold and fundamental. The opportunities are legion for multinationals to exploit differences in national treatment, in order to achieve preferred global tax outcomes.

Now since “no jurisdiction which we can identify relies upon unadjusted traditional accounting profit as a basis for the taxation of corporate income”, and reliance on International Financial Reporting Standards would exacerbate not ameliorate the problem, the authors argue that “tax-specific measures of income and expenses for taxation purposes need to be defined” – not least, for any proposal for a full shift towards unitary taxation of MNEs. Their specific suggestion is this:

“[W]e think it possible that a taxation base for unitary taxation that is broadly, but not precisely, equivalent to the accounting concept of EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) could be developed. This resulting tax base before offset of locally-determined allowances could then be apportioned in accordance with a formula that is likely to exclude assets, because relief for expenditure on capital will be given locally and capital costs do not therefore need to be considered for formula purposes.”

Even more than usual, this summary is nowhere close to doing justice to the deep and rich set of questions that the paper raises. It’s a difficult paper, technically challenging in more than one way and requiring the reader to think well ahead. And it’s an important paper. We may not hear much about it for a while, but it wouldn’t be at all surprising to see it being referred back to as a foundational piece of problematisation in years to come.
Sikka Murphy 2015 tab1 abridged

A tracker for the new UK government’s tax commitments

The new UK government comes to power with what is probably the most ambitious package of international tax commitments of any elected party, anywhere, ever.

And Prime Minister David Cameron has been absolutely explicit that they will deliver on their promises.

So, in the spirit of public service, and of this blog in making sure things don’t go uncounted, here’s a cut-out-and-keep guide to each of the three main commitments on international tax and transparency, and some proposed measures of progress.

Commitment 1: We will lead international efforts to ensure global companies pay their fair share of tax

  1. External analysis of UK positions in OECD BEPS initiative
  2. Evaluation of UK policies in BEPS areas
  3. Evaluation of BEPS outcomes (BEPS Monitoring Group)
  4. Progress in reducing BEPS (tracked by BEPS 11 or alternatives if this Action Point itself fails)

Commitment 2: We will review the implementation of the new international country-by-country tax reporting rules and consider the case for making this information publicly available on a multilateral basis

  1. Review takes place
  2. Review engages seriously with views of multilateral partners, especially EU where discussion is currently ahead of UK
  3. Review findings are well supported by evidence on costs and benefits of publication

Commitment 3: We will ensure developing countries have full access to global automatic tax information exchange systems

  1. UK provides full access to developing countries
  2. UK ensures its territories and dependencies provide full access to developing countries
  3. UK works to ensure other leading economies and financial centres provide full access to developing countries
  4. Extent to which each developing country ultimately has access to automatic tax information exchange (e.g. % of world GDP, or share of global financial services exports, of those providing information to each country)

cons manifesto-tax 2015

OECD country-by-country reporting: Strangled at birth

Update: this post featured in passing in a Financial Times interview with OECD tax chief Pascal St-Amans. (Spoiler: he’s more optimistic than I am.)

This is a bad day for international tax transparency, and for those who steered the great G8 agreement through in 2013.

The OECD has released details of how the standard for country-by-country reporting by multinationals will be implemented. The short answer is: to the minimum possible benefit of developing countries.

The slightly longer answer, drawing on the details of the package, is that the agreement on this important measure to provide transparency and limit the extent of unashamed profit shifting, has been diluted in such important ways that, as Richard Murphy has blogged, means that it will not meet the remit given to the OECD by the G8 group of countries in 2013.

Major issues include the large exclusions (a threshold of EUR 750m in annual turnover), but most importantly the hamstringing of effective transparency. Data will only be collected by host countries, and then exchanged through bureaucratic, formal processes where the necessary inter-state instruments exist.

The effect is to exclude many developing countries which will not have such instruments in place with home countries of the multinationals they host; and to ensure the impossibility of timely information provision in the other cases, meaning that tax authorities will not have the data during the tax year they might wish to investigate.

While this clearly increases uncertainty for multinationals, the lobbying for this outcome may reflect a belief that in many case tax authorities simply won’t bother to ask for, or to use belatedly, any information that is eventually provided.

In addition, there will be no sharing of the data in a common database or IATI-type registry, so it will be impossible for OECD or other international experts to use the data – as I’ve written would be required for BEPS 11, for example – in order to track progress in reducing multinational tax avoidance.

And, ironically or otherwise, the US and UK are apparently behind the high exclusion threshold – because of a claim to be worried about the administrative costs, as home countries for many multinationals. So: exclude any good mechanism for info-sharing, and then use the costs that result as a justification to limit the amount of data actually available. Well done chaps.

So, what is almost certainly the greatest multinational corporate transparency measure to be agreed by international policymakers in recent decades, has been strangled at birth.

The OECD’s country-by-country reporting mechanism, unless there is a dramatic late change, will not provide the information for developing countries (and many others) to reduce multinational corporate tax-dodging effectively. Nor will it allow national or global progress to be monitored or evaluated.

But – the lobbyists against effective tax transparency may want to hold off a while on their celebrations. Such is the extent of their success that in most developing countries, from a transparency point of view, it will simply be business as usual.

By which I mean, the transparency will be minimal and so too will many of the MNE tax payments. So this doesn’t seem likely to be the end.

It’s not hard to imagine that some developing countries at least will simply cut out the middle man, by demanding the country-by-country information directly from the MNEs they host. And perhaps even publishing it, who knows? Not to mention thinking about using it for formulary apportionment approaches. All these things which were safely excluded from the OECD approach by successful lobbying, might come back on the table at the national level…

International commission calls for corporate tax reform

When we look back, might today be the day that momentum swung decisively against current international tax rules? An independent commission made up of leading international economists, development thinkers and tax experts (see graphic) has called for a radical overhaul of international rules for corporate taxation.   ICRICT declaration commissioner stirip

There are six main recommendations, set out below. Taken together, it’s possible that they will provide the basis for the kind of comprehensive reworking of tax rules that the G20 and G8 signally failed to deliver when they allowed the OECD mandate on BEPS (corporate tax Base Erosion and Profit-Shifting) to be watered down to a tweaking of the current system. Here’s the start of the Commission’s press release:

Trento, IT – Today, the Independent Commission for the Reform of International Corporate Taxation (ICRICT) launched a global declaration calling for an overhaul of the outdated international corporate tax system and demanding broad, sweeping changes in the current rules and governing institutions. The declaration will be discussed later today by a panel of ICRICT commissioners at the Trento Festival of Economics in Trento, Italy beginning at 5pm CET.

“Multinational corporations act and therefore should be taxed as single and unified firms – It is time for our leaders to be bold and recognize the legal fiction of the separate entity principle,” said Joseph Stiglitz, professor and Nobel Prize winning economist. “During the transition, leading developed nations should impose a global minimum corporate tax rate to stop the race to the bottom.”

So far, the media coverage has been impressive – from Handelsblatt, La Repubblica and Le Monde, to Reuters, CNN and the Wall St Journal. With the launch event about to get underway, more is likely to follow. [Update: more in the Guardian – thanks Rhiannon, and a cracking write-up in the Financial Times.]

Drawing on expert consultations held in New York in March this year, the ICRICT Declaration (pdf) contains recommendations for reform in six areas:

  1. Tax multinationals as single firms
  2. Curb tax competition
  3. Strengthen enforcement
  4. Increase transparency
  5. Reform tax treaties
  6. Build inclusivity into international tax cooperation

I can only recommend reading the full piece, but a few points stand out.

  • Unitary taxation: States should ‘reject the artifice’ of current separate accounting, and tax MNEs as a single unit, apportioning profit among the jurisdictions in which they operate according to the relative scale of their economic activity in each.
  • Public country-by-country reporting: States should make country-by-country reports (of MNEs’ economic activity, profits and tax) available to the public within 30 days of filing.
  • Public beneficial ownership: states should include the names of ultimate beneficial owners (the warm-blooded type) in public corporate registries.

Following the IMF paper showing how developing countries appear to lose around three times as much revenue as OECD members (1.7% of GDP, or more than $200 billion), the pressure is really on the BEPS process to deliver wider progress.

At present, despite the best efforts of OECD staff working on Action Point 11, it remains unclear if the final BEPS recommendations will include even sufficient transparency measures to allow the tracking of progress.

Politically, it seems that there was a victory before BEPS began for those who did not wish to see the rules opened up more widely; and some further success within the process, not least in terms of preventing (thus far) public reporting of country-by-country disclosures.

But if leading opinion continues to sway towards seeing the current approach as part of the problem, and the resulting process opens up the entire basis of international tax rules, it may turn out to have been a pyrrhic victory indeed.

Full disclosure: TJN is one of the organisations that helped to establish ICRICT, and I’m a member of the preparatory group – but nobody should imagine the commissioners have anything but carefully developed personal views on these issues. 

Tax Justice Research Bulletin 1(5)

May 2015. Welcome to the fifth Tax Justice Research Bulletin, a monthly series dedicated to tracking the latest developments in policy-relevant research on national and international taxation. (Full version coming over at TJN, naturally!)

BEPS 13 comment letters - Corlin Christensen fig16This issue looks at a fascinating thesis on the different people and organisations that influence the OECD revision of corporate tax rules; and a new analysis from the IMF on the scale of corporate profit-shifting, with particular attention to developing countries’ revenue losses. The Spotlight falls on the Financial Secrecy Index, which has just been published in Economic Geography.

This month’s backing track, suggested by Nick Shaxson, goes out to free-riders everywhere: ‘Paid in Full’:

Just one thing to flag this month – the imminent launch of the report of the Independent Commission on Reform of International Corporate Taxation (ICRICT).

I can’t say for sure what Joe Stiglitz and colleagues (economists, tax folks and others) from around the world will have made of their analysis of current tax rules, but it can only be useful to have a high-level, critical expert intervention. Those closed circles of tax professionals may be useful for channeling a certain policy convergence, but perhaps less so for the kind of wider thinking that may be needed.

As ever, submissions for the Bulletin, including musical offerings, are most welcome.

Tax professionals: Who makes the international rules?

From the Tax Justice Research Bulletin 1(5).

Last month, TJRB 1(4) looked at the OECD’s review of research on base erosion and profit-shifting (BEPS) by multinational enterprises (MNEs). That review revealed a dearth of findings in a number of areas, as well as broad consensus on the importance of the problem. Untouched in that review, and little researched in generally, is the process by which policy on BEPS is made.

The historical record, back to the League of Nations and beyond, has been laid out by Prof. Sol Picciotto. Sol, one of our senior advisers, now leads the BEPS Monitoring Group, the hub for technical submissions to BEPS from civil society.  And the BEPS process itself has now been subject to a detailed process analysis, in a seriously impressive Copenhagen Business School Master’s thesis by Rasmus Corlin Christensen.

The main focus is on BEPS 13, which deals with transfer pricing documentation including country-by-country reporting (CBCR), and the findings reflect many interviews as well as analysis of submissions and consultations. The summary of literature, and detail of the methods, are well worth the time.
BEPS 13 comment letters - Corlin Christensen figs1-2Figures 1 and 2 show the simple range of submissions to BEPS 13, in terms of organisation type and geographical origin. There’s little surprise to find that less than 10% of submissions came from academia and civil society; and even less from South America, Africa and Asia combined.

Similarly, figures 3 and 4 confirm that business groups and professional services firms expressed preference for much more restricted transfer pricing documentation than did academia or civil society. Figure 5 shows tax practitioners with the greatest intra-group variation of views expressed, compared to other private sector groupings, with business lobbies the least; while academia provided the most varied range of views, and civil society the least. The latter point is perhaps unsurprising given the technical nature of the process (hence relatively limited engagement); and that BEPS 13 addresses an area in which civil society consensus has emerged over a decade or so. {Indeed, the content of BEPS 13 is in good part a product of successful influence by civil society in non-specialist, political processes, not least in the UK – but that would be a whole other study.}

BEPS 13 comment letters - Corlin Christensen figs3-5The analysis goes to a much more detailed level, tracing the paths of leading individuals in the process, identifying ‘professional competition’ as a key factor, where “influence in highly technical policy discussions is contingent upon expertise (being able to speak authoritatively) and networks (being listened to)… I distinguish two types of influential professional: career diverse professionals (“octopuses”) and well-connected specialists (“arrows”). The former are influential because of their varied expertise, the latter because they are respected through key tax/transfer pricing networks.”  In figure 16 (click to expand, as ever), the red dots indicate organisations with a ‘managing professional’ who is influential in the process.

BEPS 13 comment letters - Corlin Christensen fig16The full thesis contains a great deal more, including on the career paths of influentials. These are just some of the broad conclusions:

[A]nalysis of the BEPS Action 13 consultation shows that it was dominated by Western tax advisers and business representatives, that there was a general preference for a limited [transfer pricing documentation] package, and that there was significant variation in attitudes between similar participating organisations. Furthermore, the discussions were highly complex, requiring substantial technical expertise, and thus limiting the range of participating organisations… Looking at the pool of BEPS Action 13 professionals’ expertises, I find that while legal and private sector views are important in the reform, several other expertises are also relevant, signifying the need for varied expertise in order to obtain policy influence…

Finally, the significance of access to the right expertise and networks is visible in another articulation of professional competition in BEPS Action 13: lobby centres. Lobby centres are specific interest groups where different professionals and organisations collectively engage the policy process, spearheaded by one particular professional, who most often is influential. Peripheral professionals and groups without access will use this lobbying strategy to leverage the expertise and networks of influential professionals. This strategy highlights the importance of being able to access the right professional expertise and networks in order to make engage successfully in policy debates. However, this importance is not sufficiently recognised by the interest group literature, which emphasises organisational finances or issue attributes.

World No Tobacco Day: Marching to Big Tobacco’s tune?

Has World No Tobacco Day 2015 – this Sunday – been manipulated by Big Tobacco’s lobbying agenda? Where the tobacco lobby is concerned, it would be naive to think there’s smoke without fire.

One of the dirtier secrets of the international tax world – and yes, the bar is quite high – is the role of tobacco companies in seeking to manipulate policies that might reduce the number of people smoking dying because they consume tobacco.

The main angle taken by the lobby has been to direct attention towards ‘illicit’ tobacco, where customs duties and tax may not have been paid.

Now I care a lot about tax, but even I can see that whether tobacco was taxed before being consumed is barely even a second-order issue, when compared to the question of whether people are dying because of their consumption – which they are, and will continue to do, in their millions.

But the thematic focus of the World Health Organisation’s World No Tobacco Day 2015 is not directly on stopping tobacco consumption, as the name might suggest.

Instead it turns out to be… ‘Stop the illicit trade in tobacco products‘.

This is a long post, looking at the human impact of tobacco consumption, the role of the tobacco lobby, and the substantive basis for arguments to address ‘illicit’ tobacco trade. 

The conclusion is two-fold:

  • First, while the WHO has sought to resist Big Tobacco, it seems that the focus of World No Tobacco Day is nonetheless a reflection of the lobby’s concerted efforts to shift policy attention away from measures that cut consumption (and death).
  • Second, the tobacco lobby benefits from the effective support – inadvertent or otherwise – of some major players (corporate and individual) in international tax, who should be taking a long, hard look at their role. 

Human impact of tobacco

Tobacco kills. And overwhelmingly, it kills poorer rather than richer people; and as time goes by, it kills people in poorer rather than richer countries.

My former Center for Global Development colleague Bill Savedoff has been doing great work highlighting the human and development cost of tobacco – see e.g. his latest blog and a great podcast, from which this section draws.

In a rich country like the United States, leading researcher Prabhat Jha and colleagues find that:

the rate of death from any cause among current smokers was about three times that among those who had never smoked… The probability of surviving from 25 to 79 years of age was about twice as great in those who had never smoked as in current smokers (70% vs. 38% among women and 61% vs. 26% among men). Life expectancy was shortened by more than 10 years among the current smokers, as compared with those who had never smoked.

Overall, the study suggests that smoking may be responsible for a quarter of deaths of those aged 25-69.

But it is in lower-income countries where most smokers and other tobacco consumers are, and will be – and the same for tobacco-related deaths (data from Tobacco Atlas, figure from CGD). Over 4 million a year, more than TB, malaria and HIV/AIDS combined.

tobacco_corrected - CGD

And the costs are likely only to rise, since the number of daily smokers continues to grow, from 721 million in 1980 to 967 million in 2012 (despite a drop in smoking prevalence).

So call it a billion daily smokers. That’s a big market, for something expensive and addictive, where most people who start are unlikely to cease. (Well, not until they themselves do.)

The role of the tobacco lobby…

The most visible activity of the tobacco lobby is that carried out by the International Tax and Investment Center. The Financial Times covered the ITIC in October, under the headline ‘Tobacco lobby aims to derail WHO on tax increases‘:

A tobacco-industry funded lobby group will attempt to derail a World Health Organisation summit aimed at agreeing increased taxes on smoking, according to leaked documents seen by the Financial Times.

The International Tax and Investment Center, which is sponsored by all four major tobacco groups, will meet on the eve of the WHO’s global summit on tobacco policy in Moscow later this month in a bid to head off unwanted duty increases.

The article goes on to identify the four tobacco groups: “British American Tobacco, Philip Morris International, Japan Tobacco and Imperial Tobacco are sponsors of the ITIC and have representatives on its board of directors, along with other large multinationals.”

The WHO sees the ITIC’s actions as so extreme that it has called for governments not even to engage with them:

Itic have used their international conferences, such as in Moscow in 2014 and in New Delhi earlier this month, to lobby government officials against tobacco taxation. This is despite tobacco taxation being the most effective and efficient measure to reduce demand for tobacco products. Parties to the WHO framework convention on tobacco control are obliged to protect their public health policies from interference by the tobacco industry and its allies. In this light, WHO urges all countries to follow a non-engagement policy with Itic.

This is damning. With such a position taken by a major UN body, the ITIC cannot be seen as legitimate in its claim to provide objective analysis to governments around the world.

…and the international tax arena

But within the tax sphere, many leading actors work with the ITIC.

As the Observer highlighted, the former permanent secretary of HM Revenue and Customs (head of the UK tax authority) became a director of ITIC just a year after stepping down. His justification, given to the paper, was that he is not an executive director and is unpaid; and that around 50 other “leading figures in taxation” are involved in the same way.

The ITIC’s ‘Senior Advisors‘ list is certainly an impressive one from the tax perspective, including a number of respected researchers and tax officials, with Jeffrey Owens – former head of the OECD’s tax arm, the Centre for Tax Policy and Administration – singled out as a ‘Distinguished Fellow’.

I haven’t spoken with any of these people about ITIC, and can only imagine (and hope) that they simply haven’t registered that the ITIC is a tobacco lobby group. The ITIC certainly doesn’t present itself as such.

Similarly, it’s unclear why non-tobacco multinationals like Goldman Sachs or ExxonMobil would want to associate themselves with this lobby, not to mention the professional services firms which include big 4 accounting firms, and lawyers such as Pinsent Masons.

The ITIC explains it this way: “Sponsors recognize the tremendous value added by ITIC in the countries in which they operate, through the promotion of an environment that welcomes business.”

But commercial organisations of this size can surely promote such an environment without the taint of tobacco lobbying.

There could hardly be a clearer message for the sponsors and fellows to find an alternative to the ITIC, than for a major UN organisation like the WHO actively warning governments not even to engage with it.

The ‘illicit’ tobacco argument

So far you might say I’ve played the man, rather than the ball. What about the substantive basis for the arguments made by the ITIC?

The main claim made is that taxing tobacco creates incentives for illegal tobacco trade. This in turn reduces the revenue benefits of the tax, and also encourages criminal activity:

“This growing and dangerous problem is not just a tax issue – beyond substantial government revenue losses, the impact of illegal trade constrains economic development and raises barriers and costs for international trade,” said Daniel Witt, President of the International Tax and Investment Center (ITIC). “It also poses significant health risks, and presents numerous challenges for law enforcement, from violations of intellectual property rights to money laundering and organized crime activity.”

I’m all for development, and the curtailing of illicit financial flows. But does this position stand up to scrutiny?

Arguments along these lines have been used in seeking to influence tax policy – that is, against higher tobacco taxes – from Ukraine to the Philippines, with critics arguing that the estimates provided tend to systematically overstate the case.

A recent study published in the British Medical Journal’s Tobacco Control, for example, looks at estimates produced for Hong Kong, and finds that

The industry-funded estimate was inflated by 133–337% of the probable true value.

And as Bill Savedoff highlights in this CGD podcast, the broader evidence simply does not support the claim that higher tobacco taxes lead to illicit tobacco trade. Significant tax rises over the last 10-15 years have not been associated with any increase in the proportion of tobacco that is illicit (about 9%-11%). Other factors like enforcement and effective tax administration seem much more important.

In addition, as Bill puts it:

What’s particularly ironic about this argument from the tobacco companies is that they are the ones that have been responsible for most smuggling…

Essentially, to get the magnitude of smuggling that you would need, to have an impact on the tobacco tax, or consumption,  you have to have the complicity, if not the actual responsibility, of the tobacco companies themselves.

The EU, UK, other countries had huge settlements with tobacco companies about their responsibility for smuggling in the 90s, and now they’re turning around and saying ‘Smuggling is the reason you shouldn’t tax our industry’? I don’t think they have much credibility on that score.

Bill also shreds the claim that tobacco taxation is regressive. In fact the majority of tobacco tax revenues will come from richer, not poorer people. And the behavioural responses mean that poorer people benefit disproportionately in health terms. So this is that rare thing, a sales tax which is progressive – and powerfully so.

Finally Bill, and also Michal Stoklosa of the American Cancer Society in this great Tobacco Atlas piece, argue that tobacco taxation has been shown to be the most effective tool to reduce tobacco consumption.

Stoklosa puts the overall point: “most importantly, it is clear that the measures that aim at reducing demand for cigarettes more generally are crucial in reducing the illicit trade problem.”

So even if we buy the importance of the illicit trade here, we should keep doing what we’re doing, including higher taxes.

Conclusions

There is no doubt that illicit trade in tobacco exists; and nobody argues it’s a good thing. But it’s clearly not the big issue about tobacco consumption – that would be, er, tobacco consumption.

Illicitness, in this case, is not associated with any greater health damage. And overall tax revenues losses do not seem to result from well-administered rises in tobacco taxation that cuts consumption, because illicit trade has tended not to increase. (As an aside: unlike some  taxes, revenue is not the prime reason for ‘sin’  taxes – in this case the aim is, explicitly, to reduce the tax base and eventually the revenues, by curtailing damaging behaviour.)

Should the WHO then use their biggest awareness-raising moment of the year to focus on illicit trade? From the outside, it seems clear that ‘No Tobacco’ would have found a stronger expression in a theme that sought to reduce all tobacco consumption.

I don’t mean to suggest anything illicit in the WHO’s adoption of this theme. Clearly they have taken a very direct stance against the well-funded lobbying of the ITIC.

But if we ask whether this theme would have been chosen, absent ITIC lobbying over recent years, it seems likely the answer is no. I hope the WTO can stick to the mission of the day – that is, of No Tobacco.

For now, chalk one up for the ITIC.

But then ask: Of the many individuals; the chairmen, co-chairmen and directors; and the professional services firms and non-tobacco multinationals that are working with the ITIC, how many would see this as a win?

Do they each mean to lend their names and reputation to an organisation that has consistently lobbied individual governments, especially in developing countries, and international organisations, against tax measures that are proven to reduce tobacco consumption, and all the health damage and needless death that results?

If not – and I very much hope not – then World No Tobacco Day 2015 seems like a fine time to step away from the ITIC.