Global Policy Forum

By United Nations Non-Governmental Liaison Service (NGLS)

On 26 June 2000 in Geneva, NGLS convened a workshop on "Financing Social Development: Progressive Taxation and Globalization," as part of the Geneva 2000 Forum held in parallel to the UN General Assembly special session to review implementation of the 1995 World Summit on Social Development. Panelists included representatives of Harvard University, the International Council on Social Welfare (ICSW), the Association pour la Taxation des Transactions d'Aide aux Citoyens (ATTAC-France), the Halifax Initiative, War on Want, and Coopération Internationale pour le Développement et la Solidarité (CIDSE).

The workshop took place as the General Assembly was still negotiating a proposal initiated by Canada which called for a study on an international currency transaction tax as a possible means to raise significant additional resources for social development, and which by the same token may also help stem financial volatility.

Overall Context

The fact that a currency transaction tax (or "Tobin tax") was on the official agenda of the Social Summit review could be viewed in itself as the sign of an important evolution of the inter-governmental discourse in the United Nations.

Growing inequalities within and between nations North and South, have been well documented in recent years, notably in the Human Development Reports produced by the United Nations Development Programme (UNDP). The reasons for such increases in income inequalities have been analyzed by the United Nations Conference on Trade and Development (UNCTAD), particularly in its Trade and Development Report, 1997, which explains the association between globalization and growing income inequalities in terms of a shift in the bargaining power between labor and capital. Through widespread financial liberalization in recent years, corporations and private financial institutions have been able (through speculative currency attacks or threats of relocation) to "discipline" national governments' choice of macro-economic policies away from redistributional objectives and the pursuit of full employment policies (understood as full employment measures that do not result in increased flexibilization and casualization of labor conditions). Meanwhile, an increasing proportion of global income (concentrated in fewer hands) is being channeled into high-yielding short-term speculative ventures, which bring little or no benefit to the real economy and job creation. They are rather seen as a source of systemic risks of financial instability and crisis, as was so vividly illustrated during the East Asian crisis beginning in mid-1997.

In light of increasing recognition that globalization is associated with growing inequalities, the official discourse has now emphasized the need for "a more equitable sharing of the benefits of globalization." However, thus far, the main strategies advocated in multilateral fora to address this redistributional objective (besides repeated pronouncements by developed countries that they will strive to meet the 0.7 % overseas development assistance target) has been through measures to attract more private financial flows and to raise export earnings in developing countries. When taxation is mentioned in such a context, it has tended to be treated as an incentive measure -- tax breaks to foreign investors, or trade tariff cuts with the purported objective of stimulating competition and consumer choice -- rather than as a redistributional tool that could be used to counter both the domestic and international unequalising effects of globalization. Against this backdrop the Canadian initiative could be seen as a major breakthrough.

Tax Competition and the Crisis of the Welfare State

While the initial Canadian proposal only deals with a possible tax on currency transactions, it opens the door to addressing a much broader -- yet hitherto often overlooked -- systemic feature of financial globalization and liberalization: tax competition between states brought about by increased global capital mobility.

In his presentation to the workshop, Dr. Reuven Avi-Yonah of Harvard University described how countries have been lowering their tax rates on income earned by foreigners within their borders in order to attract both portfolio and direct investment. Tax competition, in turn, threatens to undermine individual and corporate income taxes, which traditionally have been the main source of revenue (in terms of percentage of total revenue) for modern welfare states. He noted that the response of developed countries in general has been first, to shift the tax burden from (mobile) capital to (less mobile) labor, and second, when further increased taxation of labor becomes politically and economically difficult, to cut the social safety net. Thus globalization and tax competition lead to a fiscal crisis for countries that wish to continue to provide social security to their citizens -- at the same time that increased income inequality, job insecurity, and income volatility that result from globalization render such social insurance more necessary.

Dr. Avi-Yonah noted that from its beginnings, the welfare state has been financed primarily by progressive income taxation (which differs from other forms of taxation such as consumption taxes, because it includes income from capital in the tax base even if it is saved and not consumed). Because the rich save more than the poor, a tax that includes income from capital in its base is more progressive (taxes the rich more heavily) than a tax that excludes income from capital (such as a consumption tax or a payroll tax). He said two recent developments have dramatically modified the ability of states to maintain or develop progressive taxation regimes:

(1) The United States' abolition in 1984 of its withholding tax on interest paid to foreigners meant that no capital importing country has been able to impose such a tax for fear of driving mobile capital elsewhere.

(2) The increasing number of countries (103 as of 1998) to offer tax holidays specifically geared to foreign corporate investors -- "production tax havens" which, given the relative ease with which an integrated multinational company can shift production facilities in response to tax rates, enable multinationals to derive much if not most of their income abroad free of host country taxation.

As a result, countries that used to rely on the revenues from the income tax are forced to increase relatively regressive taxes such as consumption and payroll taxes, in effect shifting the tax burden from capital to labor.

In a report released the same week by the Policy Department of Oxfam (GB)[1], it is argued that tax havens have contributed to revenue losses for developing countries of at least US$50 billion a year, which is a conservative estimate according to the report, and roughly equivalent to annual aid flows to developing countries. The report notes that the focus should not only be on so-called "offshore" tax havens, but also "onshore" tax havens such as the City of London which hosts the offshore Eurobond market[2]. Multinational corporations benefit from tax havens both indirectly, as tax competition between countries is driven partly by the existence of havens, and directly, as corporations invariably have "paper" affiliates in offshore jurisdictions which can be used for tax avoidance.

According to Oxfam, tax competition, and the implied threat of relocation, has forced developing countries to progressively lower corporate tax rates on foreign investors. Ten years ago, these rates were typically in the range of 30-35% -- broadly equivalent to the prevailing rate in most member countries of the Organization for Economic Co-operation and Development (OECD). Today, few developing countries apply corporate tax rates in excess of 20%. "If developing countries were applying OECD corporate tax rates," the report says, "their revenues would be at least $US50 billion higher."

At the NGLS workshop, Julian Disney of ICSW stressed that another potentially major cause of shrinking state revenue is the growth of tax-free internet services and electronic commerce, particularly in the United States. He said this is not only a major concern from a resource mobilization point of view, but could also be seen as a major "distortion" in the global trading system, what he described as in effect "a new form of protectionism." More generally, he noted that the tendency for the tax burden to shift from capital to labor distorts artificially economic behavior away from employment creation. From a similar angle, the Oxfam report argues that multinational corporations which are prepared to make use of international tax avoidance opportunities are given an unfair competitive advantage over domestic competitors and small and medium-sized enterprises.

Calls for International Tax Cooperation

Many speakers stressed that the disconnect between a globalizing economy on the one hand, and fiscal jurisdictions that remain fundamentally national or sub national in scope on the other, calls for much more pro-active efforts in the area of international tax cooperation. Julian Disney noted that while the OECD has taken a number of initiatives to enhance international tax cooperation and address harmful tax competition, it would be more desirable and effective to develop a UN standard that could apply to all UN member states rather than just the 29 members of the OECD[3]. He noted that the committee of the UN Economic and Social Council (ECOSOC) which deals with international tax cooperation may be an appropriate body to pursue a more inclusive inter-governmental initiative in this area. Such initiative could deal with both "global taxes" that would involve international redistribution, and coordination of national taxation regimes to ensure, for instance, minimum corporate tax rates and other measures designed to reverse the current "race to the bottom" in the area of taxation.

Dr. Avi-Yonah made two proposals: (1) a uniform withholding tax on portfolio investment; and (2) taxation of multinationals based on income from their sales ("consumption-based taxation of multinationals"). The first presents the same characteristics and challenges as a currency transaction tax (see below). The second (by focusing on initial taxation in the location where sales are consumed) aims to bypass multinational companies' use of tax haven-based intermediary affiliates established to escape taxation in production locations by way of transfer pricing -- since the large consumer markets are unlikely to be tax havens. It presents similar practical characteristics as the administration of a destination-based value-added tax (VAT), except that the tax base is net income and not consumption (and thus progressive).

The Oxfam study also proposes a number policy options that could be considered by the international community to help poor countries stem tax evasion and reduce the negative impact of tax havens:

· a multilateral approach on common standards to define the tax base to minimize avoidance opportunities for both TNCs and international investors;

· a multilateral agreement to allow states to tax multinationals on a global unitary basis, with appropriate mechanisms to allocate tax revenues internationally;

· a global tax authority to be set up with the prime objective of ensuring that national tax systems do not have negative global implications;

· an international Convention to facilitate the recovery and repatriation of funds illegally appropriated from national treasuries of poor countries;

· standards on payment of taxation to be included on the corporate responsibility agenda (to complement earlier initiatives on environmental and labor standards); and

· a multilateral agreement to share information on tax administration to help countries, especially poorer ones, to stem tax evasion.

NGO Campaigns on the Tobin Tax

At the NGLS workshop, a number of leading NGOs campaigning for a Tobin tax exchanged their experiences and discussed what they saw as some of the major challenges ahead.

Catherine Matheson from War on Want, which has been very active on the Tobin tax campaign in the UK, said most foreign exchange trading is concentrated in only eight cities. The most recent estimates suggest that some US$2 trillion are traded daily in currency markets, 80% of which make a round-trip of less than seven days. She said a 0.25% currency transaction tax rate would have no discernible effects on longer-term investments and the viability of trade; yet it could raise up to US$250 billion per annum, which could be used for social development and poverty reduction around the world.

Bart Bode, from CIDSE said last year his organization had organized a seminal international expert meeting on the desirability and feasibility of a currency transaction tax. Three robust propositions emerged from the meeting:

· Speculative currency crises have become a major form of human disaster. Preventing them involves reforms that extend beyond domestic financial institutions.

· Through the system of interbank foreign-exchange netting and settlement (to be in place in 2001), a CTT could be reliably applied on virtually all the world's foreign exchange markets -- provided at least the governments issuing the four or five main vehicle-currencies agree to cooperate on applying it. By the same means, a CTT could also be collected unilaterally, by any national authority other than these four or five main issuers of vehicle-currencies, on transactions in its own currency, without fear of shifting transactions to other jurisdictions.

· By the device of a two-rate CTT, with the upper penal rate applied only in objectively defined circumstances that might threaten the onset of a currency crisis, the world -- or probably any individual government for its own currency -- could prevent rapid speculative runs on currencies, while at the same time leaving a much lower rate to be applied -- and raised and lowered experimentally so as to discover the best level -- as a means of raising revenue.

For many participants, demonstrating the technical feasibility of a Tobin-type tax is only one part of the challenges ahead. A perhaps even greater challenge is mobilizing sufficient political will in favor of such a tax at national and international levels.

Robin Round, from Halifax Initiative in Canada, explained how her organization in partnership with others helped to bring the Tobin tax so high on the political agenda in Canada. She said that when she first met her finance minister, he said the Tobin tax was a good idea, but there was no constituency in Canada to support it. After a nation-wide campaign involving trade unions, other NGOs, parliamentarians and community groups, the Canadian parliament in 1999 passed a 2-1 motion in favor of a Tobin tax, with all political parties exhibiting a favorable majority vote. She said now similar efforts have been made in other countries such as France, Brazil, Finland, Denmark, the UK, Korea and more recently the United States.

The French NGO Association for the Taxation of Transactions to Aid Citizens (ATTAC-France), one of the fastest growing citizens' movements in Europe, has been instrumental in catalyzing debate on the Tobin tax not only in France, but also in Europe and around the world. This has coincided with the emergence of a growing number of autonomous ATTAC groups in different countries, such as ATTAC-Brazil, or ATTAC-Switzerland -- many of them involving other NGOs, trade unions, academics, newspapers, local authorities and parliamentarians. Christophe Aguiton from ATTAC-France said that unlike other international civil society campaigns on globalization -- which tend to be about opposing and resisting the spread of what he said could be defined as "neoliberal" or "corporate-led" globalization -- the Tobin-tax campaign makes "positive" demands with very practical potential benefits. In the view of ATTAC-France, the Tobin tax has not only the vocation to stem financial volatility and raise significant revenue for social development, it is also a "pedagogical tool" for citizen education and grassroots mobilization. It is a simple entry point for ordinary citizens to begin understanding the complexity of the global economy and discover together ways to regain "citizen and political control" over the current ascendancy of finance and global economic institutions.

At the meeting it was noted that, following the Canadian parliamentary vote and the launch by 100 Brazilian parliamentarians of a "Parliamentarian Front for the Tobin Tax," three members of the European Parliament and one United States Congressman have launched an "International Parliamentarians Call for a Tobin Tax." The objective is to gather over a thousand parliamentarians from five continents to sign the appeal and to have this question tabled in national parliaments as well as at the

G-7 and IMF levels. Similarly, the Center for Economic and Policy Research in Washington is coordinating a "World Economists Call" for a Tobin tax.

A number of workshop participants had participated in the alternative civil society summit that had immediately preceded the General Assembly special session. During that conference, an informal international network of organizations working on the Tobin tax has been established, with a view to better coordinate future national and international campaigns. It was noted that special efforts should be made to support and encourage the involvement of NGOs and movements in the South. At the workshop, the Secretary-General of the Organization of African Trade Union Unity (OATUU), Hassan Adebayo Sunmonu, announced that he intended to launch an Africa-wide trade union campaign in support of the Tobin tax at the next OATUU annual meeting.

Follow-up

Many participants noted that the June 2001 General Assembly session on Financing for Development (FFD) includes in its preliminary agenda an item on "Exploring innovative sources for financing for development: considering innovative global instruments, including tax cooperation and global public goods financing mechanisms." In view of the fact that the FFD process is open to participation of NGOs in consultative status with ECOSOC (and all other NGOs can apply for ad-hoc consultative status to the Prepcom), many participants said they would use this opportunity to further their work -- although there was a general understanding that the most important political work still has to be done at the national and regional levels, but with effective international coordination.

The inter-governmental decision based on Canada's proposal that was finally adopted by the General Assembly special session allows for the conduct of "a rigorous analysis of advantages, disadvantages and other implications of proposals for developing new and innovative sources of funding, both public and private, for dedication to social development and poverty eradication programme." According to one senior UN official, this means "there is to be a study authorized without dissent by the member countries of the UN into a currency transaction tax (CTT), the Tobin tax, and other potential sources of revenue for social development." It could also be said that this broader formulation would enable the study to cover other forms of international tax cooperation within the wider context of tax competition and the fiscal crisis of the welfare state.

NGLS, July 2000

[1] Tax Havens: Releasing the Hidden Billions for Poverty Eradication, Oxfam GB, 2000

[2] In this context, the report argues that this has been at the forefront of the UK's opposition to a European Union proposal for a region-wide withholding tax. "With strong interests in the City of London to protect, the UK government has warned that an EU-wide withholding tax would simply push investments to non-EU jurisdictions, particularly offshore centers."

[3] For a detailed description and critique of the OECD initiative, see R. Avi-Yonah, "Globalization, Tax Competition and the Fiscal Crisis of the Welfare State" in Harvard Law Review, May 2000; see also the above mentioned study by Oxfam GB.

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