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Closing the Gap: Addressing Imbalances in Global Finance (January 2009)

Rethinking Bretton Woods | Tue, Jan 13, 2009

By CIDSE
 

In comparison to debt, trade, aid and investment, taxation has been the subject of very little attention by the international development community. In a new paper, "Closing the Gap: Addressing Imbalances in Global Finance", CIDSE sets down detailed arguments, for issues of capital flight, tax competition and systems of taxation to be put at the heart of the development agenda. Recommendations on how this can be done follow the arguments.


 

Summary

 

In the last decade, a net transfer of financial resources from poor to rich countries has developed and steadily increased, but it recently turned negative to developing countries. As an international network of Catholic development organizations advocating for wealth to be distributed more equally within and among countries, CIDSE considers that taxation should be at the heart of development finance.

 

The principles of CST (Catholic Social Teaching) can give a sound basis for a strong taxation system with a view to providing basic services to the poor and redistributing wealth among people. In other word, Catholic Social Teaching principles such as the dignity of the human being question in depth current mainstream economic think, which tends to consider private property as an absolute right and taxes as a cost to society.

 

Taxation serves important functions that contribute to development and closely relate to the spirit of Catholic Social Teaching. These could be summarized as the 5 ‘Rs’: Revenue, Redistribution, Regulation, Re-pricing, Representation. Nevertheless, in this changing world, inequality between countries, social groups, and woman and men has been increasing even though there were various attempts, such as the Millennium Development Goals (MDGs), to fulfill the economic and social human rights. So CIDSE recommends that national tax systems be more favorable to the poor and calls for the creation of an international tax system to combat widening international inequalities. 

 

Other issues relevant to redistribution are externally-driven tax losses and tax exemptions. For example, the World Bank and the IMF require a tax exemption on VAT on import and personal income tax for both its foreign and local employees, which tend to be regressive, and benefit the wealthy. Moreover, the weakening of multilateral economic institutions opens a situation of much uncertainty. It probably allows for more autonomy in some cases, but the weakest countries are most likely to lose out in unfair bilateral deals. 

 

On the contrary, Trans-national Corporations try to maximize profit by shifting their profits from high-tax to low-tax countries or territories. One of the obvious examples are the mispricing strategies that TNCs take advantage of throughout the considerable trade between their multiple companies, in order to avoid paying taxes. Furthermore, TNCs keep demanding and competing for access to natural resources. Unfortunately, contracts for exploiting extractive resources are signed while environmental concerns and the interest of the population are set aside. Nevertheless, there are some positive actions for corporate social responsibility. CIDSE joins the call for TNCs to be accountable for their social and environmental responsibilities, which includes at the forefront the due payment of taxes.

 

Another problem is the tax havens, tax evasion and corruption. There is moderate or light financial regulation and high anonymity or secrecy in bank matters with little data transparency. There are also judicial havens, since they almost systematically refuse to cooperate with foreign tax and judicial administrations. No matter what the single factor is that would bring more financial transparency and regulation, it would bring much wider benefits. Progress is likely to come from any of the following three streams of opportunity: Financial Crisis, Rising Discontent over Tax Evasion and Money Laundering and Corruption.

 

The global dimension of the tax issue should also be considered. In this changing context, taxes also are a possible instrument of global regulation. Instability in the international financial system and combating climate change are two global challenges generating growing consensus about the insufficiency of current global responses to them. This offers both uncertainty and  opportunities for change. As an example, the current financial crisis clearly shows the risks of an internationally more integrated market without adequate global regulation, but the current financial crisis has also resulted in strong calls for the overhaul of global financial architecture. In terms of climate change, economically-developed countries have accelerated natural weather cycles which in turn are devastating some of the poorest and most vulnerable people. In this way, the impact of their action being global, their responsibility also needs to be addressed at a global level.

 

In the face of such widespread challenges, the responses the world has given have been very limited. There have been various possible responses that entail a global dimension such as Global Taxation, Currency Transaction Tax (CTT), and Financial Transaction Tax (FTT) which is levied on a whole range of financial transaction. Especially, CTT has been consistently advocated by CIDSE for more equitable distribution of wealth and a more stable financial climate. When it comes to FTT, there are three main functions: Regulation, Revenue-generation, and Redistribution. As a result of these efforts, global institutional responses appear to progress in the long run, although at a very slow pace and ongoing discussions on the need for an international tax organization and on international taxes are already on the way.

 

As stepping stones towards international tax justice, there are primary five recommendations. Firstly, progressive and gender-sensitive national tax systems should be at the heart of democratic national development financing strategies combined with regional coordination. Following the point mentioned above, donors must support building or reinforcing progressive national taxation systems. Another important recommendations are that the international fight against tax evasion and competition should be made a development priority and a range of measures must be taken to enhance the transparency of revenues of TNCs. Finally, global taxes must be adopted as a viable response to scale up redistribution and respond to emerging global challenges.

 

While considering the significant impact of globalization on poverty and injustice in this paper, CIDSE believes that globalization has also created opportunities for renewed action to address these problems given their global magnitude. At the same time, they are convinced that the financing for development agenda should be more than a mere needs-fulfillment exercise. Additionally, CIDSE recommends the development of international taxes. CIDSE particularly advocates the adoption of a CTT, or a more general FTT along with a host of other environmental taxes that are urgently needed to address the specific demands posed by the rapid and damaging consequences of climate change.

 

Download full paper.