Global Policy Forum

By Donald J. Johnston*

Taxation, the battle cry of the American Revolution, the fall of the Roman Empire, what other major historic events could one ascribe to taxation? Probably many. But today taxation should be seen as a building block of society, provided it has the necessary attributes of transparency and fairness. Let me expand on that thought.

Since my arrival at the OECD I have sought to emphasise the importance of the triangular paradigm of social progress. That means keeping economic growth, social cohesion and good governance in balance with each other. Without any one of these elements social progress risks being arrested, or at least retarded.

The broadly supported agenda of free trade and investment is an extremely effective engine of economic growth. Its ability to create wealth is virtually irrefutable. Yet there are many increasingly articulate constituencies who resist globalisation. Why? In part because they have not yet seen benefits flowing to them. They see riches on Wall Street, but not necessarily on Main Street. Gains will come from liberalisation, but if we are to maintain the momentum in liberalisation of markets worldwide, those gains must be felt by all. How? There is no simple answer, but education, training, and social programmes that facilitate adjustment will all contribute. And most of them will be financed through taxation. However, taxation is not an easy area to get right. It never has been and it probably never will. But when collected judiciously and deployed effectively, tax acts as a tool of good governance, allowing economies to grow while helping to improve society as a whole.

One key point is that taxation is no longer simply the territory of individual governments.The removal of capital controls and the continuing liberalisation of the financial markets together with the emergence of global communication technologies have accelerated the pace of integration of national economies. They have increased the cross-border mobility of capital and investment and also encouraged large corporations and financial institutions to develop global strategies.

Not surprisingly, globalisation has had a major impact on the international tax environment. As other obstacles to the free flow of capital have been dismantled, business decisions have become more sensitive to tax differentials. This has led both developed and developing countries to use taxation more aggressively – perhaps sometimes too aggressively – to attract foreign capital and investment.

The mobility of national tax bases has meant that international considerations have to be taken on board when shaping national tax policies. Inevitably therefore, governments of both developed and developing countries have begun seeking greater international co-operation to ensure that their domestic tax systems work as they are intended to work. Globalisation has raised the urgency of developing some ‘rules of the game' upon which the whole world tax community can agree and rely. After all, to apply global solutions global action is needed.

It is not possible to implement sound economic policy without having appropriate tax rules and the capacity to apply those rules in practice. Otherwise our triangular paradigm will lose its balance. The role of the OECD, through its Committee on Fiscal Affairs, has been to develop these international tax principles and to provide a forum for exchange of opinions and experiences between member countries. One of the most important achievements so far has been the OECD Model Tax Convention on Income and Capital. There has also been pioneering work on transfer pricing which resulted in revised OECD Guidelines in 1996. More recently the OECD issued a set of recommendations to counter harmful tax practices. This is one of the important questions we examine in the Spotlight of this edition of the Observer. Other key areas considered by our fiscal affairs experts include globalisation, electronic commerce, the euro, VAT in financial services and the OECD's thinking on Russian tax reform.

But the collection of taxes is only one vitally important part of the fiscal conundrum. The other is how to spend the tax income among the competing needs of modern democracies in a way that assures and enhances the conditions of wealth creation without intervening in the process of wealth creation itself. That is probably the most daunting challenge for governments as we enter the 21st century. Only by meeting it will we be able to keep the triangular paradigm in balance.

About the Author: Donald J. Johnston is Secretary-General of the OECD.

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