The Tax Factor:Why that special ‘something’ is missing from development

Alex Cobham (acobham@christian-aid.org)

‘The Missing Millions’, Edinburgh7 October 2009

Outlinei. Background: impact of the crisis

ii. The Tax Factor: why it matters

iii. Missing Millions: how much is lost

iv. A silver lining? Exploiting the crisis

i. Background: impact of the crisis

Collapse in development finance■ foreign private capital flows (falling by

more than half) ■ trade (double-digit falls) ■ remittances (slightly more resilient)■ aid (under pressure)

i. Background: impact of the crisis

Economic impact

i. Background: impact of the crisis

Human impact – some estimates■ World Bank: 55 million more people will

live on less than $1.25 a day (LICs to miss MDG1)

■ FAO: world hunger will reach historic high in 2009 with 1,020 million people going hungry every day (growing 11%).

■ World Bank: an extra 30,00-50,000 infant deaths in sub-Saharan Africa

A NOTE – marginal v absolute

[warning – marketing pitch imminent]

Christian Aid has launched Poverty Over – join ushttp://povertyover.christianaid.org.uk

i. Background: impact of the crisis

Conclusion■ Significant human costs of financial crisis

for which developing countries and their citizens bear no responsibility

■ Underlying problem so much larger that we can’t just try to address these immediate costs

■ [role of tax havens in causing the crisis: see The Morning After the Night Before on our website]

ii. The Tax Factor: why it matters

Tax is at the heart of development ■The only sustainable source of revenue

• As vs aid, natural resources?■The key to democratic accountability

• Magna Carta to panel regressions■The underpinning of economic progress

• Level playing fields, the missing middle

iii. Missing Millions: how much is lost

The global picture■ What’s lost■ How

Countries supported by Scottish gov’t■ Estimates of losses■ Wider impact

iii. Missing Millions: how much is lost

Illicit outflows driven by commercial tax evasion:

$300 - $520 billion

Criminal proceeds:$150 – $280 billion

Corruption of public officials: $15-24 billion

Aid: $50 - $80 billion

INFLOWS OUTFLOWS

Christian Aid estimate of tax revenue loss to developing

countries: $160 billion/year

(Death and Taxes, False Profits)

iii. Missing Millions: how much is lost

iii. Missing Millions: how much is lost

Zambia - life without tax“we have empty medicine cabinets.”

Bolivia – tax works!“if we didn’t have our state pension, how would we survive?’

iv. A silver lining? Exploiting the crisis

Obstacles to effective taxation■Domestic: capacity, capacity■ International: opacity, rapacity

Solutions?■Domestic■International

■Corporate transparency■Jurisdictional transparency

A brief window at the G20 Tax information exchange

■ Multilateral, automatic

Corporate reporting■ Country-by-country accounting standard

What’s lacking? ■ You! ■ Political pressure

The Tax Factor

No taxation without representation?Those who pay taxes have a perception of having a

stake in the government, particularly democratic government – so taxation fosters representation

Result 1: Higher tax relative to government expenditures (not to incomes) “tend to make states more democratic” Ross (2004)Result 2: Higher share of direct taxation is key (Mahon 2005) to process of democratisationFull literature: see The Morning After

Tax/GDP ratios: EU-15 SSA

0

5

10

15

20

25

30

35

1970-79 1980-89 1990-99

Direct tax Sales taxTrade tax Other tax

0

5

10

15

20

25

30

35

1970-79 1980-89 1990-99

Direct tax Sales taxTrade tax Other tax

Opportunities for change?

"There's a building in the Cayman Islands that houses supposedly 12,000 US-based corporations. That's either the biggest building in the world or the biggest tax scam in the world."

“we must have a new Bretton Woods - building a new international financial architecture for the years

ahead"