Tax Justice

The drive for innovative finance for sustainable development has tended to overlook the potential of basic taxation. Most of the world’s poorer countries have low rates of domestic resource mobilisation as a proportion of GDP, in comparison with developed economies.

The OECD suggests that a rate of 15% is the minimum necessary to support a viable social programme. It reports that, in almost 30 of the 75 poorest countries, tax revenues are below this threshold.

Part of the reason is weak institutional capacity to collect tax, a shortcoming that foreign aid offers to address. Developing countries are also encouraged to phase out government subsidies for fuel which disproportionately reward wealthy households and aggravate environmental pollution.

The greater reason for low tax recovery relates to the volume of illicit financial flows across national borders. These fall into two broad categories – the manipulative accounting practices of multinational companies (including those based within Africa and Asia) and the exploitation of overseas tax havens by local elites and criminal gangs.

Quantifying fiscal leakage of this nature is challenging but researchers believe that capital is syphoned out of Africa on a scale that exceeds the inflows of foreign aid or remittances. A tax justice movement has grown over the last decade to campaign for international regulations against these illicit flows.

The rules for international tax have evolved under the authority of the OECD. In response to tax justice advocacy, that body has made recommendations for reform, but its membership comprises only the world’s richest economies.

Unhappy with their exclusion from this process, developing countries have lobbied strongly for a representative UN body to oversee the fairness of cross-border tax regulations. They seek disaggregation of financial results at country level, data exchange between national tax authorities and greater transparency of structures of company ownership.

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more Governance briefings (updated December 2017)
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