Uncategorized – Page 2

13/07/2015

Did NGOs invent a pot of gold? (No.)

A draft paper by Maya Forstater, circulated by the Center for Global Development in time for the Financing for Development conference in Addis, attacks the integrity of many people and NGOs working on tax justice and illicit financial flows.

The claims include:

that (some?) NGOs have “contributed to unrealistic public expectations and an appetite for an overly simplistic narrative about a corporate tax ‘pot of gold’” (p.31);
that (some?) NGOs tolerate “exaggerated interpretations and misunderstandings”(p.33);
that (some?) NGOs do not “engage honestly with debates over economic trade offs [sic]” (p.33); and
that this behaviour is comparable to “the use of exploitative and prejudiced imagery in charity appeals” (p.34).

Blimey.

This is a (really) long post, as I’ll try to cover the breadth and strength of Maya’s many claims. I should say that I took part in the first of two meetings of the group CGD convened to look at the issues. This was really quite a constructive coming together of different viewpoints. But I stood down when the subsequent blog post seemed to ignore most of the common ground and reiterated some earlier attacks on NGOs instead, making some claims about ‘inconvenient truths’ that resurface here. Comparing back, I’m afraid it seems as if the results of the research exercise were pre-determined.

Some main points from the discussion below:

The draft paper makes a series of claims without providing any serious evidence: most importantly, a ‘complex truth’ that tax losses are not of ‘problem-solving’ scale but ‘relatively modest in relation to development needs’. The existing evidence, e.g. from the IMF or – strikingly! – the author’s own analysis in this paper of ActionAid’s work, clearly supports the opposing view.
In the two other cases where ‘received wisdom’ associated with NGOs is contrasted with ‘the complex truth’, there is in fact no direct contradiction – but the presentation in each case creates an implicit straw man of NGO opposition to the truth.
The paper’s main thrust is that there is no ‘pot of gold’ for developing countries – but no substantial evidence is offered to support this assertion. (I’m sympathetic to the idea that this aspect of the tax justice agenda is sometimes overstated, but simply to deny the existing evidence offers no way forward. Indeed this is why I encouraged this work to focus instead on substantive research issues, albeit to no avail.)

I should point out that I was a research fellow at CGD during 2013-2014, and remain grateful to Owen Barder and colleagues for giving me a great deal of space to pursue research in just this area. I hope it may be possible to revise the final draft in such a way that it can make a useful contribution.

Measuring the illicit

The bulk of the attack in the draft paper is dedicated to three elements of ‘received wisdom’, each of which are contrasted with a quite different ‘complex truth’, so I’ll focus on these before coming back to the overarching claims. First, a little bit of context.

As has often been remarked, attempts to estimate illicit financial flows (IFF) are inevitably fraught with difficulty.

By definition, illicit flows are those ‘forbidden by law, rule or custom’: so whether or not they are technically legal, like large-scale tax avoidance, they are always hidden from view where possible. Add to this the fact that the relevant international datasets are often of less than ideal quality and coverage, or sometimes simply held in private by multilateral organisations who should know better, and the problem is of estimating things that are deliberately hidden, on the basis of anomalies in data that are imperfect in any case.

The development of the research field – which has come into being seriously only in the last 15 years – has been led by NGOs, perhaps because academic researchers felt uncomfortable with the degree of uncertainty, or because those at international organisations didn’t see it as a policy priority. At each stage, NGOs and the few academic researchers have challenged international organisations to use their capacity, and ability to access data, to do better; but until this year, there had been no serious response on any aspect of IFF except that of UNODC and the World Bank in their Stolen Assets Recover (StAR) initiative.

The 2009 Illicit Flows report: Eurodad summarising the research contribution of international organisations — Eurodad’s famous 2009 Illicit Financial Flows report, summarising the research contribution of international organisations

Following the G20 meetings in 2009, however, the issues originally promoted by NGOs in the wilderness rocketed to the top of the global agenda. Then in 2013, the G8 and G20 commissioned the OECD to carry out the Base Erosion and Profit Shifting initiative (BEPS), aimed at reducing the misalignment between the location of multinational companies’ economic activity, and where they declare taxable profits.

This year, the resulting research focus of international organisations has borne interesting fruit. The UNCTAD World Investment Report contributes a study estimating developing country revenue losses to one channel of multinational tax abuse at $100 billion per year. Furthermore, researchers at the IMF’s Fiscal Affairs Department suggest, in their Table 6, that the total developing country losses due to BEPS stands at $212 billion per year (in the long-run), or around three times the share of GDP of the losses of OECD members (around $500 billion). It’s worth highlighting that the developing country losses would on average exceed 10% of existing tax revenues.

None of this is to say that we don’t have a long way to go, not least in terms of collating additional datasets, and making existing ones fully available, and in burying down to the country and then the company level; and in methodological improvements, as in any quantitative research field. (Bring it on!) And just because they come from international organisations, these studies themselves are of course not immune from criticism.

But while many aspects of IFF remain ill-estimated at best, and the leading estimates from GFI for example do not include many of the aspects related to multinational tax behaviour, there is no question that thanks to the recent UNCTAD and IMF reports we are in a better position than ever before in terms of understanding the scale of revenue loss associated with multinational tax behaviour in developing countries.

Assessing the ‘received wisdom’

The main section of the paper outlines three ideas, labelled as ‘received wisdom’, and contrasts each with ‘the complex truth’. The three ideas are not specifically attributed to one or more NGOs; rather, “they are a set of perceptions which are often given and reinforced by the overall flow of media reports, infographics, press releases, case studies and campaign publications on this topic and are influential enough to require clarification” (p.9).

The sub-headings here are taken from the draft paper.

Idea 1: ‘Huge amounts’

Let’s consider first the attribution of this idea to NGOs, and second its truth or otherwise.

Of the three quotes to support the claim that NGOs have promulgated the ‘received wisdom’, one is indeed a clear overstatement of the case, taken from an NGO infographic; one is a newspaper headline (which refers to an NGO report that I’m guessing doesn’t make the claim itself, or would have been used directly); and one is a statement (that strikes me as defensible) from Yale professor of philosophy Thomas Pogge.

Even with this level of cherry-picking, these quotes obviously provide less than compelling evidence if you want to make the case for NGO responsibility for the narrative. But to be fair, I’d say that many NGOs and people (like me!) do indeed think the revenue impact could be ‘problem-solving’, if that means something like ‘with the potential to provide a noticeable human development benefit’; so let’s set the paper’s evidentiary approach aside for now.

To get to the substance of the claim, we need to compare what the paper calls the ‘received wisdom’ and ‘the complex truth’. There are two important ideas being combined here. One is about scale: the difference between ‘huge’, or more usefully ‘problem-solving’ amounts of revenue, and the alternative that these are ‘relatively modest in relation to development needs’. The other is about location: the question of whether the revenues that could be available would appear in richer rather than poorer developing countries.

Maya has made some useful points on the latter before, complaining rightly that the aggregation into ‘developing countries’ can hide a mismatch between revenues and development need. This doesn’t take into account the role of inequalities that mean most people living in extreme income poverty do so in middle- rather than low-income countries, but the broader point holds: aggregation can obscure meaning.

From the summary: “Any potential gains are likely to be higher in middle income emerging economies, and lower in the poorest countries, in line with levels of FDI although extractive industry rents are likely to offer a significant focus for greater domestic revenues in some countries” (p.2).

It might have been better to consider the data on FDI. While it is true in general that bigger economies have more FDI, the pattern is much more mixed – even allowing for natural resource wealth. Here’s a quick figure with an arbitrary selection of OECD and West African countries, just to highlight that risks of sweeping generalisations are not limited to NGOs.

And of course if the claim is about the relationship between FDI and revenues, and we know tax/GDP is strongly correlated with per capita GDP, then lower FDI/GDP in poorer countries might still be associated with higher (relative) potential revenue contribution (i.e. the FDI stock, and hence potential revenues, might still be higher in relation to current tax revenues).

In addition, the paper doesn’t provide any evidence for the claim about the scale of development needs, which seems odd. It does not to provide (nor seek to provide) any proof that the amounts involved would not have powerful effects in low-income countries.

Well; in fact, it does in one particular case.

A box on Malawi (page 12) provides probably the clearest example of why I find this paper so disappointing – what could have been offered as a useful check on use of statistics, descends instead into the absurdity of inadvertently demonstrating the truth of the position being attacked.

The box summarises ActionAid’s work [disclosure: I’m on ActionAid UK’s board] on the mining company Paladin, finding that it cut its tax bill by $43 million, and states that in one year this could have paid for “one of the following: 431,000 HIV/AIDS treatments, 17,000 nurses, 8,500 doctors, 39,000 teachers”.

It is then pointed out, accurately I assume, that the tax revenues relate to six years; and argued that it would be more appropriate to identify what could be achieved annually with the relevant share of the money (rather than offering mutually exclusive alternatives).

The annual bundle of potential services that the foregone tax could pay for, according to the draft paper, is this:

a doubling in the number of doctors, AND
a 10% increase in the number of nurses, AND
enough teachers to reduce average class sizes from 130 to 100, AND
2% of needed HIV treatments.

I guess we could argue about whether or not to call this ‘huge’, though it wouldn’t be a very useful argument. But I don’t see how anyone could deny it is a problem-solving level of revenue.

Would ActionAid have been better to present the statistics this way? Perhaps.

Does it detract from the substantive value of the ActionAid report in any way? No.

Does it support the ‘complex truth’ claim that the amounts involved are modest in relation to need? Quite the reverse – it is stark evidence to the contrary.

The draft paper has taken a potentially useful contribution, dressed it up as an attack, and lost most of its value.

Thinking at the global level, and of the 1.7% of GDP that the IMF sees as long-term annual revenue loss: it is perhaps possible to imagine a distribution of those revenues among countries in which the resulting allocation fails to be ‘problem-solving’ for most; but it’s hardly a claim we could provide evidence for at the moment, and this draft paper certainly does not.

Idea 2: Transfer pricing is tax dodging

The second aspect of ‘received wisdom’ attacked in the paper is a little confused. Per the heading and some of the discussion, it is simply the confusion of transfer pricing with tax dodging. Per the box text, however, and other discussion, it is more about whether or not transfer pricing and related rules allow multinationals sufficient room to manipulate prices, via ‘tax havens’, that curtailing this could generate significant revenues elsewhere.

Again, let’s look first at the attribution. The only quotes provided that support the confusion point come from respected academics, rather than NGOs. My feeling is that there is sometimes a confusion of language here, but the fundamental points (that there are rules in place, and that these may sometimes be abused and may sometimes allow distorted outcomes) are widely accepted by the world’s most senior policymakers.

The more interesting distinction is drawn between ‘received wisdom’ that associated revenue implications are large (for countries on either side of ‘profit havens’, as seen in #LuxLeaks); or the ‘complex truth’ that allocating profits within global value chains is difficult.

I must confess I find this one quite confusing. There’s no obvious contradiction between the ‘wisdom’ and ‘truth’. You rarely hear anyone claim international tax rules are simple or easy to comply with (for either multinationals or tax authorities); and it’s almost equally uncommon to hear a suggestion that there aren’t major revenues at risk in a whole range of countries – see e.g. the details of LuxLeaks, or the IMF results shown above.

There just doesn’t seem much disagreement to be had over whether transfer pricing rules are being exploited, to the benefit of many multinationals and a few secrecy jurisdictions, and the (revenue) loss of many countries (with both higher and lower per capita incomes) – at least not in the absence of some pretty striking new evidence.

The existence of complexity doesn’t reduce the revenues at risk, nor justify taking advantage of complexity (nor indeed lobbying to create or retain complexity). And it certainly doesn’t provide evidence against the ‘received wisdom’ suggested, so I think this section really weakens the draft.

The associated paragraphs largely focus on criticisms of some existing work with commodity trade data (including Maya’s very reasonable criticism last year of a Swiss-Zambia mispricing statistic for which I’m responsible). The discussion of the various broader studies in this draft paper is fairly light touch though. It raises a few questions on individual results, and we can easily agree that there is a good case for being cautious about data and methodologies in this area. But what of all the peer-reviewed, academic analysis that is left out?

The failure to engage with the vast bulk of the literature covered in the OECD’s recent BEPS 11 survey, for example, seems odd. The exclusion of pricing issues in relation to management services, intellectual property and debt – for example – seems doubly so. Even if the commodity critique was entirely valid, this section would not provide evidence against the ‘received wisdom’ that it intends to attack. And in addition there is now a range of analyses of individual multinational groups published by forensic investigative journalists of high quality, which go well beyond anecdote.

If we think of international corporate tax rules as the broader set within which TP rules sit, the entire BEPS process is a reflection of significant political and technical consensus on this problem. Do we have enough consistent data, or sufficient quantity of research as a result, to be precise about the scale and overall pattern of the problem? We do not, and this is the subject of much attention at the OECD, Tax Justice Network and elsewhere. Are we unsure about the broad contours of the problem? We are not. Transfer prices of everything from commodities to intellectual property to intra-group debt are manipulated for tax purposes. The scale is large, and uncertain.

The author is of course entirely at liberty to take a different view, and it would be welcome to see supporting evidence for such a position. But without presenting some pretty impressive new findings, I can’t understand why one would simply dismiss the broad consensus that exists, or seek to build a difference of opinion on the scale of a problem into an argument that the entire thing is a (deliberately?) misleading ‘narrative’ created by NGOs.

Idea 3: Money for nothing

Perhaps anticipating the reader’s scepticism by this stage, this section begins by noting: “Examples of this belief are rarely seen as direct statements” – this much is certainly true – “but often reflected in the implicit assumptions behind calculations of lost taxes…” (p.18).

The TJN quote offered as supporting evidence is intriguing:

“…tax-sensitive investment is by definition the least useful stuff: accounting nonsense and paper-shuffling that does not involve very much employment creation at all.”

Intriguing for two reasons. First, it doesn’t seem to bear directly on the ‘received wisdom’ claim. But second, because the missing start of the sentence is “But as Section 3.3 explains…” And section 3.3 includes a short literature survey with six references on the incidence and impact of corporate tax. Neither the survey nor any of the references are cited in the draft paper.

Instead, the main thrust of this brief section of the paper is to emphasise that (higher effective) corporate taxes can have negative dynamic effects. A selective survey of a few papers supporting some of these leads to the following conclusion:

“These arguments then, are not reasons to give up on taxing corporations, or necessarily to lower corporate tax rates, but underline the need for tax policy to be supported by economic analysis, rather than based on the assumption that there is ‘money for nothing’” (p.18).

If you believe in the existence of this particular ‘received wisdom’, even without any direct evidence being presented, then this is presumably a useful counter-point: we should be more careful to recognise the wider impacts of taxing corporate profits.

In any case, that’s hard to argue with – so hard, in fact, that you want to ask who would argue to the contrary? Here’s the implicit straw man that the paper has constructed:

“Tax policy should not be supported by economic analysis, but instead be based on the assumption that there is ‘money for nothing’.”

There may be a group of people who believe this (or there may not); and if there were, such a group might object to ‘the complex truth’ of policymakers actually having multiple objectives.

But if there is such a group, it presumably has little overlap with those people and NGOs like TJN that have been researching and advocating over the last fifteen years for a tax policy agenda based on economic analysis, rather than one that ignored the growing reality of abusive multinational tax practices; and for the importance of taking into account multiple objectives such as distribution.

It’s disappointing, and difficult to understand, that the paper would seek to attribute this straw man to those people and NGOs.

Summary: Straw men

It’s hard to see the contribution of this main section of the paper. The ‘complex truth’ with respect to idea 1 is a set of assertions lacking evidence, while any remaining objections to the ‘received wisdom’ are questions of scale that must be addressed by serious research. The ‘complex truth’ in relation to ideas 2 and 3 is hardly disputed, but does not contradict the main points of the ‘received wisdom’.

So the overall effect is to suggest that NGOs hold, or have promoted, extreme or unnuanced views that somehow contradict the known facts. That there is, if you like, in fact a received wisdom which the NGO narrative continually contradicts.

There are two main problems with this. First, the paper does not provide any serious evidence either for its own assertions (on which the entire argument hangs), or that any wrong views (disagreeing with an actually true ‘complex truth’) are in fact held or promoted by NGOs.

And second, even if a new draft were to do so – I’m just not sure that this is a useful way to make an argument: defining the righteous view, and implying that others disagree (or perhaps that they dishonestly pretend to).

That pot of gold

Ultimately, the CGD paper makes the argument that NGOs have exaggerated the ‘pot of gold’ that developing countries could obtain by better taxation of multinationals.

To be upfront on this, I share something of this concern. Specifically, I think the balance of attention here, compared to other aspects of tax systems, has not always been right. (At the same time, I can see good arguments for emphasising this aspect in certain policy situations.)

What do we actually know about the size of that pot though? Notwithstanding all the uncertainties discussed, and the importance of new data and continuing to improve methodologies, the best guess at the moment is probably somewhere near the latest IMF researchers’ piece: that developing country annual revenue losses might be around $200 billion, or north of 1.5% of GDP. Given average total tax revenues less than ten times that size, it’s a pretty big pot. (And all without mentioning the trend for rising shares of profits to GDP, and generally stable or falling corporate income tax revenues…)

That doesn’t mean the pot is all obtainable, or that important advances in other areas aren’t also possible, and clearly we need country-level analyses to understand the specific possibilities. But on the CGD paper’s terms, and in respect of its central claim, this is a decent pot of gold. And not one that rests on the work (or the word) of NGOs, if that’s a concern.

So if we put the mischaracterisation of the narrative, and the role of NGOs aside, the central claim of the paper just does not stand up well itself.

My final sadness about the paper is this. The last section proposes some recommendations for NGOs to improve their ways of working that are really worth discussing.

It may be difficult to move towards positive engagement based on their inclusion in a paper that makes this kind of sustained integrity attack, but I hope it may somehow prove possible to take the conversation forward in a different context.

Last thought: Does it matter?

Despite the claim to be serving the cause of better evidence and clearer debate, the draft paper muddies the waters on the potential revenue benefit from improved taxing of multinationals in developing countries – even as the evidence base has recently been further strengthened.

The timing of its being published, at the kick-off of the Financing for Development conference – the best UN opportunity in years (ever?) to lock in greater policy space for the taxing of multinationals by developing countries – is unfortunate.

The Center for Global Development is an important development think tank, and so this paper, even in draft, may well catch the attention of policymakers at Addis. And while CGD publish individual views rather than institutional ones, this may be seen as more than an individual view because it comes from a CGD process with an advisory group.

For the avoidance of doubt, I don’t think there’s any agenda at CGD – so I guess the content of this paper, its timing and any potential impact on FFD progress is just bad luck.

I very much hope that the final draft of the paper, if indeed there is one, will be quite different. A removal of the most polarising claims, where these are made on the basis of limited or no evidence, would be a good start. What would be valuable instead is a concerted examination of the data and methodologies that have been used for various aspects of revenue loss and other IFF estimates, in order to point the way forward to a strengthening evidence base over time. I hope this is a possibility; but I fear the paper may end up as a missed opportunity to contribute to an important policy research debate.

But: be not downhearted: there is substantial policy focus around the world on taxing multinationals, the research field is healthy and the agenda for new work is plentiful!

And, you know…

Hello Addis! That’s right #globaltaxbody is in…#FFD3 pic.twitter.com/V5ZSYBZ1NK

— Global Tax Body (@GlobalTaxBody) July 13, 2015

08/07/2015

#Budget2015 UK corporate tax cuts: No benefits expected?

Documents published with the UK’s budget today suggest that the proposed corporate tax cuts are not expected to produce any increase in (taxable) activity – so represent a significant revenue loss with no apparent compensatory benefits.

1. The rationale for corporate tax cuts

The first document to note is that of HM Revenue and Customs, summarising the revenue effect and intended impacts of the proposed further reduction in the headline rate, to 18% by the 2020.

The rationale is clear: the aim of the cuts is to attract businesses to locate activity.

Additionally, it is recognised that the measure will also increase the incentive for multinationals to shift profits generated from activity located elsewhere into the UK – a phenomenon the UK had committed to fight, in the OECD Base Erosion and Profit Shifting process (albeit there has recently been open criticism from the US Treasury of the UK’s obstructiveness).

2. The projected impact

So the central aim is the attraction of new activity. Success in either this aspect, or the attraction of profits from activity located elsewhere, will increase the base. A sufficient increase in the base size will trigger those semi-mythical Laffer-type effects, with a rate cut leading to a revenue increase.

The second document, from the authoritative Office for Budget Responsibility, addresses just this point. The figure below, a reworking of the OBR’s figure C4.3, distinguishes between the rate effects and base effects of the various tax changes in the budget. (An aside: while the UK in the previous parliament was the only leading economy not to raise taxes as part of its austerity measures – in fact, the reverse, so that spending cuts exceeded progress in deficit reduction – the plan for this parliament sees a tax increase overall of 0.9% of GDP.)

The figure shows that the planned corporate tax (‘Onshore CT’) rate cuts produce the largest revenue loss of any measure.

More surprisingly, perhaps, the OBR also project a 0% change in the tax base: that is, a best guess of zero behavioural change (increases in either UK location of business activity, or profit-shifting into the UK). Still, many companies are already considering hiring firms like GeekBooks to ensure that they are handling their tax situation correctly in these circumstances in order to prevent mistakes.

Overall, this means the budget is projected to raise individual income tax (yes, including NICs) substantially, while reducing the contribution of corporate income tax to no apparent benefit. When a business runs the payroll for its employees, often, they will deduct income tax which can be a time-consuming process – choosing the best payroll company with effective software to make use of can streamline this process and take a load off those in charge of HR.

The previous parliament had already cut corporate tax revenues by around 20%, or around £7.5 billion a year by 2015/16, with unclear benefits. The cuts announced today will cost a further £2.5 billion a year by 2020/21, so it will be disappointing if there is not at least some further scrutiny of this policy choice.

Postscript: tangentially related good news is that the European Parliament has voted in support of serious, public country-by-country reporting. Bring it on.

15/06/2015

The politics of country-by-country reporting

Since the OECD approved a decent country-by-country reporting standard, the lobbying to undermine it in practice has really kicked on. Here’s an update on some of the politics of country-by-country, including the manoeuvring in OECD, US, EU and UN processes; and on what may follow…

OECD

First, the OECD standard for country-by-country reporting is pretty good – probably all that could have been hoped for in the context of a process designed to defend arm’s length pricing.

As I wrote last week, though, and the Financial Times (£) picked up, the standard has been strangled at birth by the changes to BEPS Action Point 13. Lobbying on implementation has very substantially eroded the potential value of the measure, because data:

will only be provided directly to home country tax authorities;
will only be shared with other tax authorities under slow and uncertain information exchange processes; and
will never be made public.

I miss the old days, when country-by-country reporting was a transparency measure…

These deliberately inserted weaknesses mean that most tax authorities (especially but not only those of developing countries) will not receive timely data (i.e. within the tax year under investigation) for most of the MNE affiliates in their jurisdiction; and there will be no greater possibility of civil society holding tax authorities or MNEs to account.

In addition, the erosions of the standard mean there will be no central repository or access mechanism for the data. This means that the OECD has, in effect, agreed to fail to meet its commitment under BEPS Action Point 11 – which requires the establishment of a baseline for the extent of profit-shifting, and the tracking of progress over time. The very good team working on BEPS 11, who have comprehensively shown how no existing data can do the job, appear to have been completely undermined.

US

US MNEs have been highly effective in their lobbying, but evidence of serious, remaining concerns emerged last week. In a joint letter to Treasury Secretary Jack Lew, the chairs of the Senate Finance Committee and the House Ways and Means Committee (Republicans Orrin Hatch and Paul Ryan, respectively) set out a range of concerns about the BEPS process – and make a fairly explicit threat to take a different path from the administration:

Regardless of what the Treasury Department agrees to as part of the BEPS project, Congress will craft the tax rules that it believes work best for U.S. companies and the U.S. economy… We expect that as we move forward on U.S. tax reform, U.S. tax policy will not be constrained by any concessions to other nations in the BEPS project to which Congress has not agreed.

It is the specifics which are most revealing. While there are passing references to rules on permanent establishment and controlled foreign companies, the bulk of the text refers to concerns over country-by-country reporting.

[W]e are concerned about the country-by-country (CbC) reporting standards that will contain sensitive information related to a U.S. multinational’s group operations. We are also concerned that Treasury has appeared to agree that foreign governments will be able to collect the so-called “master file” information directly from U.S. multinationals without any assurances of confidentiality or that the information collection is needed. The master file contains information well beyond what could be obtained in public filings and that is even more sensitive for privately-held multinational companies. […]

Some recent press reports have indicated that the Treasury Department believes it currently has the authority under the Internal Revenue Code to require CbC reporting by certain U.S. companies and that Internal Revenue Service (IRS) guidance on this reporting will be released later this year. We believe the authority to request, collect, and share this information with foreign governments is questionable. In addition, the benefits to the U.S. government from agreeing to these new reporting requirements are unclear, particularly since the IRS already has access to much of this information to administer U.S. tax laws. Therefore, we request that, before finalizing any decisions, the Treasury Department and IRS provide the tax-writing committees with a legal memorandum detailing its authority for requesting and collecting this CbC information from certain U.S. multinationals and master file information from U.S. subsidiaries of foreign multinationals. We also request that you provide a document: (i) identifying how the CbC reporting and other transfer pricing documentation obtained by the IRS on foreign multinationals operating in the United States will be utilized, and; (ii) providing the justification for agreeing that sensitive master file information on U.S. multinationals can be collected directly by foreign governments. In the event we do not receive such information, Congress will consider whether to take action to prevent the collection of the CbC and master file information.

The push is on to prevent even the OECD’s now limited, and probably unworkable mechanism to provide CbC information to non-US tax authorities.

EU

Meanwhile… the European Commission’s repeatedly trumpeted new package on tax avoidance has been leaked, and falls substantially this side of impressive. On CbC in particular, prevarication around public data continues – now with a proposed consultation.

Similarly, the UK government reiterated at a conference on Friday its manifesto commitment to consider the possibility of public CbC.

The European Parliament will debate the issue again on 7 July, with a possible vote to follow, and so this now becomes a major test.

UN process

Finally, it seems that public CbC has been excised from the latest draft of the draft Financing for Development text for the UN conference to be held in Addis, in July, leaving a line on CbC for tax authorities which adds nothing to the OECD position. Sigh.

Where does this leave us?

Is this the end for hopes for CbC as a meaningful international transparency and accountability measure? I don’t think so.

What has already been achieved, lest we forget, is the overcoming of what was always presented as the greatest obstacle: compliance costs. Aside from the possibility of US withdrawal, the OECD standard pretty much locks in the collation of the necessary data, by more or less all MNEs worldwide.

The claims around costs were always inflated (who remembers one of the big four accounting firms suggesting it could add 25% to their bill?), and so once the political tide turned the objection did not hold much water.

And this is why, of course, the US letter reflects a shift towards the real underlying issue: an objection to transparency itself. An interesting though unexpressed implication of the concern is that US MNEs are apparently willing to operate in multiple jurisdictions where they would not trust the authorities with even quite basic data about their global operations.

An alternative view, of course, is that US MNEs are aware of the potential for such data to lead to material changes in their effective taxation rate, in multiple jurisdictions and perhaps at the global level too.

(In fact ongoing research suggests that the US is such a big loser from the profit-shifting of its own MNEs, that BEPS success in reducing profit ‘misalignment’ would produce substantial additional revenues there – as well as in many other jurisdictions. It’s arguably a real mark of lobbying success that there hasn’t yet emerged an all-conquering coalition of countries in favour of much deeper change.)

What happens next in the politics of country-by-country?

Are we approaching that point where the anti-transparency lobbying has been so successful that supporters should give up? Or once this becomes clear in practice, might one or more host countries simply demand CbC data directly, starting the crucial leak in the dam?

Such a move might well circumvent the OECD caveat around not using the data for formulary apportionment, which would open up all sorts of interesting further possibilities.

Or will the EU resist the lobbying and go for public CbC? This would not only set a standard for others, demonstrating the absence of armageddon-level side-effects and also undermining any ‘competitive’ arguments for opacity.

It would also, on its own, provide a great deal of the globally relevant data for other tax authorities and civil society to use. Expect 3 weeks of (more) intense lobbying…

One way or another, the current period is likely to mark an important turning point in international tax transparency.

The weakening of the OECD standard in practice has been a resounding counter-strike against transparency. The question is whether that remains the story – or if it is overturned at the European level, or incrementally by individual countries.

A final thought: not too much has been heard in these moments from the private sector advocates of transparency. Whether the likes of Paul Polman, head of Unilever, who has called explicitly for MNEs to pay tax where they do their business; or from investors and analysts who have identified the risks of tax opacity increasingly clearly; or from professional services firms including some of the big four accounting firms, who seemed to have identified the advantages of country-by-country. Now would seem like a good time…

02/06/201502/06/2015

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.

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:

Tax multinationals as single firms
Curb tax competition
Strengthen enforcement
Increase transparency
Reform tax treaties
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.

29/05/201501/11/2019

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. Learn more about tobacco and the health consequences of smoking at https://www.cahi.org/

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. It’s somewhat similar to how the cigarette producers keep trying to attack those who use and make E liquide cigarette electronique options due to the draw away from their market share.

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. If you know that smoking can kill, the need to do this is not something that everyone can understand. But I’m sure we can all agree on the fact that quitting is the best solution for every smoker and everyone around them. Finding alternative methods to smoking is not as difficult as you think. A new and widely regarded option for a different way of smoking is through something like a JUUL, which is a form of e-cigarette. You can have a look at something like this juul device only here for more information. But this isn’t the only smoking alternative that is available to you. For example, when it comes to vaping, all you have to do to get started is purchase a vaping device (that doesn’t have to be expensive) juice.

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. If this isn’t something to stop you from smoking, then I don’t know what is. Out of all the health concerns that smoking is associated with, the result of dying shows how dangerous this can be. Plus, being a smoker will eventually play a part when you decide to apply for life insurance, through companies like Money Expert. As a non-smoker or someone who has recently quit, you may find that your insurance cover is lower than someone who smokes daily or even occasionally, due to all the health risks that comes with smoking. There is a lot to think about, but the most important thing you should consider is your health. What better way to do this than to quit?

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.

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.

20/05/2015

Nepal, and the importance of being local

I’m honoured to have become a trustee of ActionAid UK – not least because of the way that the organisation has sought to live its theory of change, consciously shifting genuine power in the federation away from the UK (which is the source of much of the funds); and its emphasis on structural causes of inequalities, including in relation to gender.

Not entirely unrelated to that theory of change, an update on ActionAid’s work in Nepal since the first earthquake highlighted the importance of real local presence. Two examples:

Effective response. The ActionAid Nepal team, which has been around for 30-odd years, was contacted almost immediately after the quake about Patan hospital, where costs of around £50,000 allowed a new operating theatre to be kitted out – where, inter alia, more than 200 babies have since been delivered.
Effective delivery. Richard Miller (ActionAid International’s humanitarian director) kindly shared this photo from the Nepal team’s daily briefing one day. What it shows is the difference between the road transport of tarpaulins, food and other emergency items to remote communities (a few kilometres between each); and the several hours of climbing, to get material from the road to the communities themselves. Big NGO trucks need not apply; only through local links with women’s groups, other CBOs, unions etc., will the material reach where it’s needed.

Anecdotally (by which I mean I can’t find a link), something like 4,000 international rescue workers arrived in the country; and 14 people were pulled alive from the rubble. Hugely important, and of course an enormous amount of other work will have been done too. But worth thinking, perhaps, about the marginal value of – say – the last 1,000, compared to what equivalent local resourcing might have offered?

None of this is new to humanitarian aid folks of course, and the emphasis on accountability is well developed there. The word ‘local’ appears 58 times in the most recent review of the Humanitarian Accountability Partnership; although this is rather (too?) often to mark failures (e.g. p.40):

A community member in Sri Lanka expressed it concisely, saying: ‘Why don’t you value local knowledge and capacity? We have engineers and experts too’

18/05/2015

Should tax targets for post-2015 be rejected?

In a strident blog at the International Centre for Tax and Development, Mick Moore, Nora Lustig, Richard Bird, Nancy Birdsall, Odd-Helge Fjeldstad, Richard Manning and Wilson Prichard have called for the rejection of post-2015 tax targets. (Full disclosure – I work with the ICTD, including on the Government Revenue Dataset.)

Seven leading thinkers on development and tax can’t be wrong – can they?

The case against

The Zero Draft of the Outcome Document suggests that “… Countries with government revenue below 20 per cent of GDP agree to progressively increase tax revenues, with the aim of halving the gap towards 20 per cent by 2025.…”

It would be a great mistake to encourage quantitative tax targeting of any kind. It would be like reintroducing the kind of production targets that did so much damage in the former Soviet Union.

This position rests on three arguments:

First, it is already a significant problem in developing countries that most tax agencies are already subject to a single performance measure: the extent to which they achieve the cash targets for revenue raising set by ministries of finance…

Second, increasing revenue collection will likely in some countries lead to an increase in poverty… It is not uncommon that the net effect of all governments taxing and spending is to leave the poor worse off…

The third objection is that, in many cases, the figures used to assess performance in relation to these targets may be almost meaningless.

Background

I’ve posted on this before, in response to a request on what would be the best post-2015 tax targets (taking for granted that there would be some kind of a tax target).

The limitations of the tax/GDP ratio should give us pause, and so it is useful to consider alternative denominators in particular – not least the tax/total revenues ratio, which is associated with improvements in governance. This was the conclusion:

[F]or all its issues, the tax/GDP ratio is probably worth sticking with; while the tax/total revenues ratio is an important complement.

But maybe I should have been more cautious about having any target at all…

A useful intervention

There is a legitimate debate about whether there are too many goals and targets in the proposed SDGs (not to be confused with the pretty feeble argument sometimes heard that we should ‘stick with the Millennium Development Goals (MDGs)’, and ignore difficult things like inequality).

There has been a tendency to think that any important issue needs a target – and it may not be true.

Not all important issues have a clear consensus on the right value to target. Even a pure ‘bad’ like infant mortality may more usefully have a positive, rather than a zero target. So it’s possible that tax – reflecting the complexities of state-citizen relations as well as economic structure – simply doesn’t lend itself to a target.

But: the individual elements of the critique seem overstated, so it becomes hard to support the authors’ stark conclusions.

To recap, they argue that a tax target is a bad idea because

it’s a blunt tool that risks the wrong prioritisation;
tax may be bad for poverty, so more of it may be worse; and
we measure both components of the proposed tax/GDP target too badly.

Criticism 1. Too blunt?

The first criticism is that the tax/GDP target is too blunt. Tax authorities can already face too much pressure around a single measure (cash collections). Might tax authorities be put under such pressure to reach a tax/GDP target that they undermined broader progress on e.g. taxpayer trust, revenue diversification or stability?

Diversifying the performance criteria for tax collectors is vital. Some developing countries are making progress. Any kind of international blessing for archaic practices would be a mistake – and perverse in terms of the Sustainable Development Goals.

This is clearly a legitimate concern. But it’s hard to feel comfortable with it being used to draw such a stark, final conclusion as that there should be no target at all.

The whole SDG process requires finding the best individual targets to reflect political priority in important areas. Almost by definition, these cannot reflect the perfect, broader dynamics in any of those areas. And this is not their role.

Would a tax/GDP target really be ‘archaic’, and ‘perverse’?

As the authors note, there is currently excess pressure on cash collection targets. Could one international target (among many) overtake this existing domestic political pressure? If it did, would a tax/GDP target (for which there is some evidence of association with development) be worse than a cash collection pressure (for which there is none)?

And what if the target was instead on tax/total revenue – which tends to support accountability over time? Or what if we included additional targets (as I suggested), or nested indicators, that reflected some of the other aspects?

Criticism 2. Bad for poverty?

This criticism rests on Nora Lustig’s important findings from the valuable Commitment to Equity (CEQ) project, namely that some countries’ tax and transfer systems leave people living in poverty worse off.

This is clearly of great importance. If more tax led to more poverty, a (positive) tax target would be obscene.

But I don’t think the authors of this post hold that view – in fact, quite the reverse. As Mick wrote earlier this year: “The developmental benefits of governments taxing citizens, even for modest sums, are often disregarded.”

And nor does the evidence support a broad pattern of taxation worsening poverty.

The problem that the blog authors highlight is that “the number of poor people who are made poorer through the taxing and spending activities of governments exceeds the number who actually benefit”, in Armenia, Bolivia, Brazil, El Salvador, Ethiopia and Guatemala.

I couldn’t see the claim stated as such in the CEQ paper linked, so it’s a little hard to be sure. But what it does show is the pattern of net receivers and net payers in figure 6:

Now where the $2.50 absolute poverty line falls above the blue/red changeover in the cases mentioned, it implies that some of the people below that line are absolute losers from the tax and expenditure system. (Directly only – the analysis doesn’t look at broader benefits of taxation, such as improved long-term government accountability, which may be of particular benefit to those living in poverty, as opposed to elite insiders.)

The CEQ analysis also finds that expenditures in developing countries are broadly progressive, and becoming more so. What we can tell from figure 6 is that in all cases examined, the poorest appear to do best (that is, net receivers are always at lower income levels than net payers). Where there are high levels of absolute poverty, some systems are insufficiently progressive to ensure that the better-off of those living below the poverty line are also net winners.

From this, the blog authors conclude:

The big risk in setting tax targets is that governments will then strive to reach them – and in the process impoverish poor people even further.

Clearly, there is a risk that governments raise (more) tax without making it (more) progressive. But is this really ‘the big risk’?

Consider draft SDG target 10.1:

by 2030 progressively achieve and sustain income growth of the bottom 40% of the population at a rate higher than the national average

Indicators under discussion for this include pre- and post-tax and transfer income shares of the top 10% and bottom 40% (yay Palma).

It seems unlikely that a tax/GDP target would take precedent over 10.1, such that regressive taxation is pursued in order to hit the tax target. And on balance, you’d expect the progressive of taxes and transfers to improve (or at least, not to deteriorate) with a rising tax/GDP ratio.

So again, I think the authors raise an important point to think about, but then draw such a stark conclusion that it’s hard to support.

Criticism 3. Too badly measured

The third criticism made is that GDP in particular is too badly measured, and tax too open to manipulation, for tax/GDP to provide a decent basis for target. (Per my earlier piece, the denominator is also not in policymakers’ control.)

The authors note the extent of GDP mismeasurement, and what I hope is a uniquely egregious example of tax timing manipulation, as well as the instability associated with e.g. resource revenue volatility.

Accounting and reporting games are already being played around tax collection targets. If the international community were to popularise the idea that an improved ratio of tax collection to GDP is intrinsically a good thing, we can expect more such games.

This seems to be the strongest, and also the least over-stated, criticism.

Here’s the thing though: substitute other words for ‘tax collection’ in the quote, and it still makes sense.

The measurement of a great many aspects of the MDGs – never mind the SDGs – is open to manipulation. Tying this to public accountability for performance is, yes, likely to result in more manipulation (see e.g. the contrasting measures of educational enrolment in Kenya; or consider how the much-celebrated dollar-a-day poverty target was successively re-engineered to allow increases of hundreds of millions of people in the target numbers living in extreme poverty).

In addition, there are a great many proposed SDG targets for which data is – currently – not good enough. I hope there is also a general consensus that this time, the targets should be chosen on merit and the measurement then addressed; rather than allowing the existence of data to dictate what targets are set, as with the MDGs.

So the criticism is fair, but it doesn’t follow that this is a reason not to have a target. (If it were such a reason, the entire SDGs project – and the MDGs before them – would be open to question…)

Long story short(ish)

The intervention from the seven authors of the ICTD blog raises a set of important questions, and these merit further attention in the design of a post-2015 tax target. As they suggest, tax should almost certainly be better and more diversely measured, as well as more progressive.

What the intervention does not, however, provide, is substantial support for the conclusion that introducing a tax target would be a mistake.

Like the MDGs, the SDG targets will not be universally pursued – never mind achieved. What they will do, if successful, is establish important norms that will in turn drive broad progress.

There’s no question that the MDG model was seriously flawed in its reliance on aid as the implicit source of finance. Flawed, because aid could only ever have formed a small part of the solution; and flawed because of the politics (note that progress only really got going in sub-Saharan Africa, for example, with the mid-2000s adoption of MDG targets into national planning processes – where they began to exert substantial influence on budget decisions).

We can, and should, design better tax targets. But domestic taxation must be central to Financing for Development in post-2015.

Dropping tax targets completely would be, by far, the bigger mistake.

11/05/2015

Framing and social construction: A UK proposal, post-election

[A long post, building to an Uncounted proposal on UK inequalities monitoring and data.]

Last week’s UK election produced a majority for the centre-right Conservatives – a majority of parliamentary seats, that is, albeit with 36.9% of votes.

Framing a victory

The winning framing seems to have been one of Conservative economic competence, set against two claimed threats from change:

a ‘coalition of chaos’ featuring Labour and the Scottish National Party (despite the 2010-2015 Conservative-Liberal Democrat coalition having set something of a modern precedent in UK politics, and both Labour and the SNP having explicitly ruled out a coalition); and
a return to Labour’s crisis-inducing economic incompetence (despite a fairly broad expert and academic consensus that Labour’s economic policy before and through the crisis was pretty reasonable; and that the the 2010 coalition’s austerity measures, largely abandoned in 2012, were a triumph of ideology over economic commonsense, with predictable macroeconomic and human costs).

Much has been written, and much more will be, on the reasons for the framing success – including the breadth of media support for a Conservative victory, and not unrelated, the ‘mediamacro myths‘ per Simon Wren-Lewis that ensured popular perceptions of economic (mis)management remained far adrift of expert analyses.

Lost in construction?

The campaign featured more heat than light on the impacts of austerity, and the related inequalities. Everyone said they’d reduce tax avoidance, some said they’d reduce tax evasion, but there was barely a specific policy proposal among the lot.

Nobody mentioned that the 2010 UK government had been the only major economy to cut tax during austerity – so that spending cuts were, uniquely, greater than the deficit reduction that was achieved.

In terms of either broad inequalities (e.g. income and wealth), or specific ones facing marginalised groups such as people living with disabilities, the campaign featured little in the way of detailed discussion.

Marginalisation in (as?) policy design

Jim Coe has written a typically thought-provoking piece on the challenges facing broadly progressive activists in the UK now.

Jim looks at a model of four groups in terms of (i) their respective power and (ii) the extent to which they are ‘socially constructed’ as deserving policy support or not:

Coe power matrix

Advantaged groups – such as small businesses, or homeowners – are treated with respect and perfectly placed to receive policy benefits.

Contender groups – such as some in big business (bankers etc) – are not seen so positively. But, because they are powerful, they can gain hidden benefits whilst resisting attempts to impose policy sanctions.

Dependents – groups who require some kind of support, students, workers on low pay – are seen generally positively but lack political power. They may be viewed as ‘good people’ but the support offered will often be inadequate, and they lack the influence to make enhanced claims.

‘Deviants’ both lack power and are negatively perceived. The list of groups who fall in this category seems to be ever-growing. Criminals, drug users, and, increasingly, many migrant groups, and families in poverty, etc. etc. Few speak on their behalf and policy makers are reluctant to be seen providing ‘good things to bad people’.

Jim’s post is well worth reading, as he builds from here to discuss the ways in which positions can be self-reinforcing over time, and what the strategies may improve the prospects for reversal or resistance in particular aspects. I want to make a comment and a proposal.

Austerity and uncounting

There is presumably always pressure, in the model above, to squeeze those in the low power group deemed deserving of policy support, into the undeserving group: in the model’s terminology, to see dependents increasingly as deviants.

In the context of a commitment to austerity – whether economically sensible or not – there is a specific need to reduce the total of policy support, potentially giving rise to a political climate which sets those with power (more) strongly against those without.

In the UK the growth in abuse directed at people living with disabilities, including learning disabilities, is a particularly damning feature of this trend – along with the disproportionate cuts in benefits applied. The rise of explicitly anti-immigrant positions across the major political parties is another.

A flipside of this that one might expect to see is a (quiet) reduction in the fiscal contribution of those with power – perhaps explaining the UK’s real reduction in tax revenues, though not necessarily why the UK is an international outlier in this regard.

The incoming government has committed to sharper cuts than it managed in the previous parliament: with a similar revenue trajectory, the risk is of a significant worsening in inequalities, and the weakening more generally of the state’s capacity to deliver support to ‘dependent’ groups.

Finally, Jim’s model provides one more way of thinking about the phenomenon of Uncounted (the importance of power for being counted, and vice versa).

This last parliament has seen some fairly striking uncounting – none more so than the decision to stop collecting statistics on the deaths of those receiving certain benefits, but the continuing failure to implement fully the government’s own review recommendations about statistics on lives and deaths of people living with learning disabilities should not be overlooked either.

Failing to count bad group outcomes represents a substantial worsening of the inequalities faced – but often a politically beneficial one for governments.

A modest proposal

Without getting into party political issues of leadership direction, are there reasonable measures that would support greater accountability to limit damaging inequalities in the current parliament, and promote greater attention to these issues in future political debate?

The one that springs to mind is simply to track the data – its existence or otherwise, and its values where it does exist – on each of the major inequalities in the UK.

The high-level group that David Cameron co-chaired on the post-2015 successor to the Millennium Development Goals was absolutely clear on the importance of disaggregated data to ensure that all groups and people benefit:

The suggested targets are bold, yet practical. Like the MDGs, they would not be binding, but should be monitored closely. The indicators that track them should be disaggregated to ensure no one is left behind and targets should only be considered ‘achieved’ if they are met for all relevant income and social groups. We recommend that any new goals should be accompanied by an independent and rigorous monitoring system, with regular opportunities to report on progress and shortcomings at a high political level. We also call for a data revolution for sustainable development, with a new international initiative to improve the quality of statistics and information available to citizens.

My pie in the sky is that groups like the Resolution Foundation, Centre for Welfare Reform, #JusticeforLB, National Institute of Economic and Social Research, UK Women’s Budget Group and others, might collaborate to ensure the following:

A baseline of available UK data on a full range of aspects of human development, fully disaggregated as Cameron’s panel demanded, showing levels of inequalities and also gaps in data, as at 7 May 2015; and
A tracking and ongoing analysis of changes in that data and its availability over the course of the current parliament (and ideally beyond).

Naturally, this would be a fully open data pie in the sky, and ideally one or more groups like Open Knowledge Foundation would play a role too.

02/04/2015

Immigrant life and death in Europe, uncounted

Just as immigrants to Europe are often undocumented, so too their deaths. The UK’s Institute of Race Relations has published a study looking at the known cases in recent years, and it makes for terrible reading from the title onwards: ‘Unwanted, unnoticed: An audit of 160 asylum and immigration-related deaths in Europe’.

Aside from the typically harrowing detail of each case, the study puts together an overview of the main patterns.

How can people be uncounted up to the point, even, of their death? Out of 160 cases, not even the cause of death is known for 32 people. Not. Even. For 43 people, even the basic information of nationality remains unknown.

Table 2 shows the main factors where these are known.

IRR uncounted migrant death 2015 tab2

These findings aren’t only important because, well, people died. As the authors put it:

If there is no publicly accessible record of deaths, how can states be held accountable?

Life as an immigrant can be tough. This is true even in the western world. For example, getting a Green Card to live and work in the US is a complex process. Quite often family ties are one of the most popular ways to secure a Green Card.

Under United States immigration law, foreign nationals can obtain a family-based Green Card if they are related to a US citizen or permanent resident. Correspondingly, form I-130 (Petition for Alien Relative) is a US Citizenship and Immigration Services (USCIS) form that is used to prove a valid family relationship exists between a foreign national intending to immigrate to the United States and a US citizen or permanent resident.

Ultimately, the eligibility and ineligibility requirements for form i-130 are complex. If you need help determining who is eligible and ineligible or any other assistance, it might be worthwhile contacting an immigration attorney.

The report calls to mind the CIPOLD review in the UK: the Confidential Inquiry into the premature deaths of people with learning disabilities. Through tracing individual stories of lives and deaths, the study created a set of baseline results that remain the best we have – including:

men with learning disabilities die, on average, 13 years younger than men in the general population; and
women with learning disabilities die, on average, 20 years younger than women in the general population. (Intersecting inequalities, anyone?)

These differences are not, to be clear, just a direct result of learning disabilities. They reflect society’s treatment of people who live with learning disabilities. The report finds, for example, that 37% of deaths would have been potentially avoidable if good quality healthcare had been provided (and see Chris Hatton’s powerful comment on discrimination by health specialists). This is awful. People shouldn’t be treated any differently due to learning disabilities. However, as evidence has shown that it may happen more often than we might think, it might be worthwhile for those with learning disabilities to consider taking the time to compare life insurance and find an affordable plan. This should allow people to leave their families with money to cover funeral costs if they pass away prematurely. People can click here to learn some other benefits of life insurance too.

There’s an earlier post here on how the problem of being uncounted with learning disabilities hasn’t been addressed in the UK since CIPOLD, and despite various high-profile scandals.

Not always, but often, an important part of not counting is not caring. And all the more so when the uncounted is a particular group. The phenomenon of Uncounted is not a technical one, but a profoundly political one.

Back to migrants in Europe. Uncounted, from beginning:

IRR uncounted migrant death 2015 tab1 To end:

IRR uncounted migrant death 2015 tab3

Link to the full study.

23/03/201524/03/2015

3 ways to remove obstacles to effective taxation: #FFD3ECE

Update 24 March:

An interesting conference, including Amina Mohamed’s stressing of the urgency for development finance of tackling tax evasion and illicit financial flows. Of the three elements I discussed, it was governance that generated the most interest (perhaps in part because the suggestions on norms and transparency fall more clearly under post-2015 targets).

There felt to be quite broad consensus that simply upgrading the UN tax committee to intergovernmental standing would not do – resources are crucial if this is to become the globally representative, rule-setting body. To think about how much resourcing is required, think of the OECD’s current capacity on tax – and then scale up to global level.

But much supportive capacity already exists, if so mandated – for example, James Zhan of UNCTAD was on the same panel and spoke impressively about the work they have done on ensuring investment is not pursued for its own sake, nor maximised in terms of quantity, but rather seen as an important tool in the pursuit of the sustainable development. UNCTAD’s expertise in, for example, assessing investment and tax treaties in terms of their overall development benefit can be of value.

Is the required level of resourcing realistic? I’m not sure. But one suggestion from IBIS seems the right starting point: to hold a ministerial panel on the subject during the Financing for Development summit in Addis in July. If there is sufficiently broad desire to address the failed international governance of taxation, it should start in Addis – and if nobody turns up, I guess that’s the signal that the same failure will be accepted for the next wee while…

The pdf of my slides, in case the viewer below is too fiddly.

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Here are the slides I’m presenting at the UNECE regional consultation on Financing for Development in Geneva today (click on them to see the controls to move forwards). I’m arguing for a bit of focus in FfD on changing norms, governance and transparency at the international level, in order to open up space for effective taxation at the domestic level.

The slides are a little basic, because (a) I am, and (b) I’ve only got 7 minutes. With those excuses in place, comments are very welcome. And the hashtag is #FFD3ECE…

Alex-Cobham-UNECE-Geneva-FfD-230315

A couple of bits of related reading:

A paper on three zero targets for financial opacity;
A post on possible tax targets; and
Eurodad’s FfD briefing, which calls for an intergovernmental tax body.