Improving Taxation in 21st century economies
As Guyana and many other nations around the world face several fiscal challenges, the conversation on addressing taxation for successful 21st century economies becomes more relevant than ever. And there are two important ingredients when it comes to dealing with taxation in this light.
The first one is the ability of countries to generate robust government revenue. This is, of course, the lifeblood of modern states. This is what allows governments to provide public goods that support strong and durable growth.
The policeman on the streets in the line of fire, the nurse who is attending to a patient, the teacher who is inspiring young minds, the scientist who is conducting cutting-edge basic research: these are only some of the people who could not do their work without reliable government income.
But let’s face it, in most, if not all countries, there is a pressing need to generate higher and more reliable revenue, although not necessarily for the same reason.
For example, oil exporting-countries are adapting to a new reality of low commodity prices. Developing economies need more domestically generated revenue to achieve the new Sustainable Development Goals. And some advanced economies, especially in Europe, need higher fiscal revenue to bolster their economic recovery and financial stability.
The second ingredient of successful 21st-century economies is international taxation. This is an essential means by which governments mobilize their revenues in a globalized economy.
Recent headlines about Google, Starbucks, and Ikea have underlined that an international tax system needs to work for everybody. We need a system that discourages the artificial shifting of profits and assets to low-tax locations. And we need a system that discourages overly aggressive tax competition among countries.
In other words, we need a tax system in which ordinary citizens are convinced that multinational companies and wealthy individuals are contributing a fair share to the public purse, to the common good.
While talking about these two angles of taxation, the Managing Director of the International Monetary Fund (IMF) , Ms. Christine Lagarde said that the entity has a role to play in helping countries achieve the best possible form of government financing—one that is reliable, fair, and efficient.
So let us start with the first ingredient of successful 21st century economies—revenue mobilization—which is on the minds of so many policymakers.
According to Lagarde, higher government revenues would create much-needed fiscal room for maneuver and allow for more spending on all the things that drive potential growth over the medium term, including infrastructure, healthcare, and education. In addition, she posits that more reliable sources of revenue would help avoid volatility in public expenditure and procyclical fiscal policy.
She notes that this is particularly important for oil-exporting countries that have been heavily affected by the recent plunge in oil prices.
Last year, for example, oil exporters in the MENA region lost more than US$340 billion in oil revenue from their budgets, amounting to 20 percent of their combined GDP.
Not only have oil prices fallen by around two-thirds from their most recent peak, but supply and demand-side factors suggest that they are likely to stay low for an extended period. The size and likely persistence of this external shock means that all oil exporters will have to adjust by reducing spending and increasing revenue.
Of course, the fiscal adjustment needs vary from country to country. For instance, thanks to their prudent policies, most members of the Gulf Cooperation Council (GCC) are now in a position where they can pace their adjustment over several years and thus limit the impact on growth.
It is also worth remembering that GCC economies have made large fiscal adjustments in the past—and I am confident that they can do it again.
At the same time, Lagarde asserts that these economies need to strengthen their fiscal frameworks and reengineer their tax systems—by reducing their heavy reliance on oil revenues and by boosting non-hydrocarbon sources of revenues.
The IMF Boss said that this would help bolster growth and job creation and, at the same time, help to maintain debt sustainability and strengthen resilience. She said that it also provides a unique opportunity to design tax systems that emphasize fairness, simplicity, and efficiency.
How can GCC countries achieve this? Well, Lagarde posits that it can do so by putting in place a simple system that initially focuses on VAT—ideally, a harmonized regional VAT. Even at a low single-digit rate, such a tax could raise up to two percent of GDP. She said that the GCC can also add to this, a greater emphasis on corporate income taxes, as well as property and excise taxes. She said that it continue to invest in building tax administration capacity that could eventually allow for the introduction of personal income taxes.
The IMF boss noted that progress is already visible in many countries.
Turning her attention to international taxation, the IMF Chief expressed that while taxation is the tool that allows governments to mobilize their revenues, these vital efforts can be undermined by overly aggressive tax competition among countries. She cautioned that this beggar-thy-neighbor strategy hurts everybody.
She said, “As you know, tax evasion and avoidance is not only hitting the headlines recently, but is also at the top of the global policy agenda. This reflects frustration in many countries at a time of rising fiscal pressures and modest global growth. It also reflects anger among many ordinary citizens around the world over rising inequality of income and wealth.”
Lagarde continued, “In fact, there is a widely shared recognition that too many multinational companies and wealthy individuals are ‘gaming’ a creaking system of international taxation that is no longer fit for the modern global economy.”
The Managing Director added, “Let me be clear: significant progress has been made in recent years. A good example is the automatic exchange of taxpayer information among governments. This new global standard will make it harder for wealthy individuals to avoid income and wealth taxes by moving assets to offshore locations.”
Lagarde said that these low-tax locations have become part of the increasingly vigorous debate on excessive income and wealth inequality. She noted that according to one estimate, about 30 percent of Africa’s financial wealth is held offshore—and the percentages are thought to be even higher in some major oil-producing countries.
She then expounded on the Fund’s role in achieving fair and reliable government financing which is based on its unique experience of working with member countries over more than 70 years. Lagarde said that this gives the IMF the ability to cover the full spectrum of fiscal issues—through research, policy advice, and direct technical assistance and training. She noted that the lion’s share of its technical assistance is provided to low- and middle-income members. Over the past five years, the IMF’s worldwide technical assistance on revenue mobilization has more than doubled and it plans to further expand this work as it responds to strong demand from its members.
The IMF Boss said, “While our members are learning from us, we constantly learn from them, too. We enrich our policy advice by making use of the wealth of data from our technical assistance work and our close links with our members on fiscal issues.”
Lagarde stressed that creating successful 21st century economies requires robust government revenues and an international tax system that works for everybody. These ingredients she said, are essential for growth, fairness, and development. The IMF Chief stated that they provide the fertile ground for the prosperity of nations. And the IMF is ready to play its part for the benefit of its 189 members.