Letter from America
April 25th, 2011
April 25th, 2011
Extreme turbulence and black clouds were the order of the day as I flew through a storm into Washington, DC. Ironic, then, that I was on my way to the institution tasked with picking up the pieces of the financial crisis and managing these turbulent economic times.
But the International Monetary Fund (IMF) itself has not escaped from the crisis unchanged. The new ‘fund’ seems less driven by economic orthodoxy at the expense of other perspectives and more open to criticism – to a point.
So as more than 160 delegates, from government ministers to academics and diplomats met to discuss the challenge of ‘domestic resource mobilisation’ in developing countries (raising taxes, to you and me), there was a spirit of learning and cooperation in the air. Good news, given that the IMF has just launched two massive topical trust funds designed to raise money to strengthen IMF technical advice on tax policy and administration, and taxation of natural resources.
It is probably foolish to underestimate the power that IMF economists have over the tax policies of many countries across the world – and not just developing countries (see Ireland for details). The power dynamic was not lost on me. Sitting beside delegations from developing countries, I could hear whispered conversations and criticisms throughout, but when they were asked for their perspectives, many were silent.
NGOs have, in the past, been critical of the fund for pushing a ‘one size fits all’ policy onto developing countries. In the 90s, the Fund seemed bent on pushing a reduction in trade tariffs and corporate taxes and increasing VAT regardless of the situation or needs of the country. But in the new IMF, senior staff recognize the need to avoid a one size fits all policy, in favor of considering country characteristics like history, geography, legislative legacies and so on.
The new (and welcome) trend of tax and state-building, was a strong theme throughout the conference with credence given to the crucial role of civil society in making tax systems work. Countries like Bangladesh and Uganda have been leading the way – holding tax festivals which encourage people to declare their income, giving elites a reward for paying tax (invitations to state functions and the like), all in an effort to change the tax culture.
There was a consensus that tax incentives are a bad thing and should be eliminated. One delegate described them as the junk food of tax policy – everyone knows it’s unhealthy, but they are still offered. County after country testified to the fact that un-transparent and disgressionary incentives had undermined their tax bases, the public trust in the system and the amount on cash available for essential services. In particular fund officials were calling for all incentives to be declared publicly.
Tax equity was a strong theme, with the fund suggesting that personal income taxes had largely failed to deliver in developing countries, while VAT had been perhaps too successful leading to a “VAT curse” where other kinds of taxes were neglected. Is VAT regressive? The fund parted company with some civil society delegates, arguing that, compared to trade tariffs, it isn’t. If you offer VAT exemptions to make it more progressive, they argue it can backfire, with the majority of that money going to the rich who consume more. The Inter American Development Bank suggested that any regressive effects can be addressed spending the money on cash transfers. But this can only work when the state bureaucracy is strong enough to make sure this money gets to the poorest.
When it came to the issue of technical advice and actually implementing what the fund considers good practice, it was fascinating to hear the very basic challenges of implementing IT systems effectively, human resource issues, and basic information sharing.
It was this practical dynamic which I picked up on in my comments to the fund. To understand the unintended consequences of advice, the fund needs to understand the internal dynamics in a tax system and indeed, in a country. As long as the fund seeks to solve problems by flying in for two weeks, offering advice, and flying out again, it is hard to see this situation changing dramatically. And if citizens don’t know what the IMF is saying to countries, it is hardly consistent with the strong sentiments expressed regarding the need for citizens to engage in public debate regarding tax policy – though here perhaps the onus lies on governments themselves to disclose their tax strategies to citizens.
When it came to discussion the IMF’s input into the G20 there was a clear sentiment that the international community needs to distinguish between the good things they can and are doing to help on one hand, and on the other, the ways in which policies and international regulations undermine the ability of countries to raise revenue. For the first part, the G20 countries can lead the way in being transparent about their own tax incentives, offering technical assistance to developing countries and by helping deal with ‘free zones’. For the latter, ensuring corporate responsibility in tax planning and country-by-country reporting were top of the list.