Select Committee on Treasury Written Evidence


Memorandum from the Tax Justice Network

BACKGROUND

  The Tax Justice Network is a global network of academics, NGOs, financial professionals, economists, journalists, trade unions, faith groups, and other civil society representatives. More information about the network and how it functions is available at www.taxjustice.net and from our briefing document, tax us if you can, which outlines our broader concerns about how the globalised international financial system in its current state facilitates capital flight, tax evasion and tax avoidance. tax us if you can is available as a free download from our website.

  Our principal concerns in respect of the Treasury Committee's Inquiry into Globalisation: the role of the International Monetary Fund relate to (i) capital flight to offshore tax havens and the consequent tax evasion, and (ii) the fiscal impacts on developing countries of trade liberalisation programmes pursued by the IMF.

THE IMF AND CAPITAL FLIGHT

  The scale of capital flight to the offshore economy is immense. According to research undertaken on behalf of the Tax Justice Network, US$11.5 trillion of personal wealth was held offshore at end 2004. The tax revenue losses from this capital flight are estimated at $255 billion annually, more than sufficient to fully finance the Millenium Development Goal of halving world poverty by 2015.

  The current architecture of the global financial architecture facilitates capital flight and encourages tax evasion. This architecture must be redesigned. The solution to capital flight and tax evasion is to over ride banking secrecy arrangements and to implement an international framework for automatic information exchange of tax related data. This was proposed by both Lord Keynes and Harry White during the negotiations at Bretton Woods in 1944 but was fiercely resisted by banking lobbies and consequently never implemented. This failure has become the Achille's Heel of financial globalisation, encouraging and facilitating the laundering of the proceeds of crime, corruption and illicit commercial activities, including tax avoidance.

  As David Spencer argues in the attached paper The IMF and Capital Flight: Redesigning the International Financial Architecture, the IMF should consider policies relating to information exchange in tax matters, banking secrecy and automatic reporting of information as significant factors when undertaking assessments of financial sector regulation in the context of its Reports on the Observance of Standards and Codes (ROSCS).

THE IMF AND THE FISCAL IMPACTS OF TRADE LIBERALISATION

  In June 2005 an IMF working paper prepared by two Fund economists revealed that for every $1 of trade tax revenue lost to the governments of lower income countries as a result of trade liberalisation programmes promoted by the IMF, those governments have recovered, at best, 30 cents from taxes (principally sales taxes like VAT) substituted to replace trade taxes. The Fund economists, Baunsgaard and Keen, find that lower income countries, which are generally more dependent upon trade taxes than middle income or developed countries, have "very largely failed to recover from domestic sources such revenues as they have lost from trade reform." Faced with these important findings they conclude that the "auspices for further trade liberalisation are troubling." A copy of the Baunsgaard/Keen paper is attached for the Committee's information. [51]

  This research has confirmed what members of the Tax Justice Network have contended for some years. In promoting trade liberalisation programmes to developing countries the IMF has paid insufficient attention to the fiscal impacts of these programmes and has worked on the untested assumption that the longer term economic benefits of trade liberalisation might compensate for the immediate revenue losses arising from cuts in trade tax revenues. Baunsgaard and Keen acknowledge this assumption in their paper when they comment: "It is possible that indirect effects (of trade liberalisation) have more than offset the direct loss of revenue." But as Alex Cobham (Oxford Council on Good Governance) comments in his recent paper (attached)[52]: "Even if the more optimistic Baunsgaard and Keen result is used . . . the growth effects of liberalisation would have to be large indeed to justify the policy if revenue sustainability is treated as a serious goal."

  The IMF's preference for substituting sales taxes for trade taxes is especially harmful in low income countries because of the generally regressive nature of sales taxes in both a social and macroeconomic sense. In the context of low and middle income countries, the majority of the poorer households spend proportionately far more of their total household disposable income on consumption and therefore pay more of their income on tax as a result. This tendency is illustrated by data from Brazil which shows that the lowest income households pay 26.5% of their disposable income on VAT whereas the highest income households pay only 7.3%. Furthermore, higher income households tend to spend far more of their disposable income on luxury, imported goods (Brazil providing ample evidence of this propensity).

CONCLUSIONS AND RECOMMENDATIONS

  It seems that revenue sustainability has not been treated as a serious goal of the IMF. In pursuit of the twin objectives of trade and capital account liberalisation, Fund advisers appear to have largely discounted the problems caused by capital flight, tax evasion and revenue losses. In combination these problems have undermined the potential for low income countries to mobilise domestic resources to finance their developmental objectives, which has had the outcome of increasing their dependence on (volatile) aid flows and (expensive) external debt.

  The IMF should attach far greater weight to these issues when assessing the impacts of liberalisation on the countries they advise. Until present the assumption that indirect effects of liberalisation might in the long term outweigh the losses from capital flight, tax evasion and falling trade tax revenues, remains untested. The Baunsgaard/Keen paper suggests that this assumption might be incorrect. We would argue that the onus now lies with the IMF to prove that the growth benefits to developing countries of liberalisation outweigh the overall loss of their domestic resources, and in all cases to seek viable remedies to these losses.

John Christensen

January 2006








51   Not printed. Back

52   Not printed. Back


 
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