Principles of tax policy - Treasury Contents


Written evidence submitted by Christian Aid

1.  Introduction

1.1  Christian Aid is a Christian organisation that insists the world can and must be swiftly changed to one where everyone can live a full life, free from poverty. We work globally in over 40 countries for profound change that eradicates the causes of poverty, striving to achieve equality, dignity and freedom for all, regardless of faith or nationality. We are part of a wider movement for social justice. We provide urgent, practical and effective assistance where need is great, tackling the effects of poverty as well as its root causes.

1.2  We welcome the opportunity to provide written evidence to the Treasury Select Committee on the Fundamental Principles of Tax Policy. We are happy to provide further written or oral evidence on any of the subjects covered in this submission via Melanie Ward, Senior UK Political Advisor on meward@christian-aid.org or 020 7523 2467.

2.  Christian Aid's perspective on the principles of tax policy

2.1  Christian Aid's interest in tax policy lies in the role of taxation in strengthening good governance, economic development and provision of essential services in developing countries. There is a growing recognition within the development debates that developing countries need to move "beyond aid" to finance their own development.

2.2  Too much dependency upon development assistance is not sustainable, particularly as aid comes under increasing pressure in donor countries. In addition, over-dependence on aid can result in problems such as lower incentives to improve tax collection and a tendency of donors to condition aid upon a country's acceptance of their policy "advice". This potentially undermines the sovereignty of states and governments' accountability to their citizens. A further problem is that if aid is channelled towards projects that would otherwise have been paid for by tax revenues, those tax revenues may be diverted to corruption.

2.3  Tax systems should be progressive, transparent, predictable and efficient. In doing so they should provide essential revenue for public services and infrastructure without undermining economic development and innovation. However, in developed and developing countries, the situation is quite different.

2.4  In considering the fundamentals of tax policy we must consider how countries like the UK can assist developing countries in effectively raising revenue. In addition, we must consider if and how the UK and international tax regimes either support or undermine the ability of developing countries to raise revenue. This is in the long-term interest of both developing countries and the UK, as these countries may be future trading partners. Aid is vitally important and the government's decision to increase the aid budget to 0.7%of GNI by 2013 is undoubtedly the right one—but it is clearly in the UK's own long-term economic interest to move towards a situation where developing countries are no longer dependent on aid.

3.  What are the key principles which should underlie tax policy?

3.1  Christian Aid sees four primary objectives to taxation. Revenue: to deliver the services citizens need; redistribution: to address poverty and inequality; representation: building accountability of governments to citizens; and re-pricing: limiting harmful behaviours and incentivising "good" behaviours.

3.1.1  Revenue: tax is a vital source of revenue for most governments, enabling them to fund essential services and infrastructure for their citizens. Of course, revenues will not automatically be used for such social goods. But when governments get revenue from tax, citizens are in a far stronger position to exert pressure that it be spent on the services to which they are entitled.

3.1.2  Redistribution: the provision of services discussed in section 2 above is one way of addressing poverty and inequality through taxation—as it is the poor that tend to depend more on key services such as publicly funded health and education. In reality tax systems the world over are often regressive. This is even more likely to be the case in many Southern countries which tend to have particularly low levels of taxation on income and an over-reliance on consumption taxes.

3.1.3  Representation: a broad tax base, and the public debate that accompanies this, creates a "social contract" between members of society who are paying taxes and voting for political parties, and officials who are expected to raise and spend those revenues in a manner that benefits the constituents who elected the government. Taxes make government more immediate and visible, and ultimately more accountable, thus challenging corruption.

3.2  Taxes can be used to ensure that all social costs and benefits of production or consumption of a particular good are reflected in the market price. The design of a tax system can contribute to the achievement of other social goods by making it costly to engage in actions considered socially undesirable, or by incentivising behaviour that is considered beneficial to society. For example, in the context of climate change, it is clear that market mechanisms do not price our consumption and production in a way that considers the impact on future generations.

4.  How can tax policy best support growth?

4.1  In fulfilling the objectives referred to in section 3, tax systems should encourage rather than hinder innovation and economic development. As such, tax codes should be simple, transparent and clearly linked to government expenditures.

4.2  Tax policy should strengthen the efficient operation of markets through financial transparency. Public revenue figures and expenditures should be published in a regular and timely manner.

4.3  Any contracts agreed between governments and business granting tax concessions should be transparent. This is particularly important with regard to the extractives sector. Such contracts should be published in advance, and be open to scrutiny in parliament.

4.4  The tax positions of companies should be clear and transparent. Companies should publish in their annual accounts details of their profits, tax payments and other financial details on a country-by-country basis as proposed by the Taskforce on Financial Integrity and Economic Development.[40] Such transparency would assist in making governments more transparent for the revenues which they receive and would expose potentially abusive behaviour on behalf of companies in relation to trade-related tax evasion and aggressive tax avoidance. International bodies such as the OECD recognise that this abuse is likely to cost developing countries more than they receive in aid. Christian Aid estimates this to be around $160 billion annually. Given the sums of money involved, taking an international lead to resolve this issue would dovetail with government concerns around value for money for UK taxpayers as in the long term it would help move away from aid dependency.

4.5  The UK is uniquely placed to negotiate such a standard within the G20, EU and other fora, following the lead of the US, which recently implemented a similar standard for US listed companies operating in the extractives sector under the Wall Street Reform and Consumer Protection Act (Dodd-Frank provision).

4.6  In addition, international tax cooperation is crucial. Financial secrecy in Offshore Financial Centres can result in significant outflows of capital and tax evasion and avoidance in developed and developing countries alike. The UK took a lead on this issue at the G20 London Summit in 2009, but despite significant progress, the commitment to help developing countries benefit from a new co-operative tax environment is yet to be fulfilled. The UK is therefore well placed to take a lead in challenging financial secrecy through pursuing a new multilateral agreement for exchange of tax information (including a provision for automatic exchange) at future G20 meetings, starting with the forthcoming summit in France in November 2011—this should be a priority goal for the UK government.

5.  To what extent should the tax system be structured to support other specific policy goals?

5.1  As referred to in section 3, Christian Aid sees a broad range of benefits to the tax system. It is recognised that effective revenue mobilisation is the primary objective of tax policy. However, there should always be a consideration of how this objective interacts with the objectives of equity, governance and re-pricing.

6.  How much account should be taken of the ease and efficiency with which a particular tax can be imposed and collected?

6.1  Complexity in a tax system leaves the system open to abuse and can act as a disincentive for companies and individuals to comply. As such tax systems should be simple, whilst still ensuring progressivity in both indirect and direct taxes.

7.  Are there aspects of the current tax system which are particularly distorting?

7.1  Christian Aid has no comments on this question.

January 2011


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