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Highlights From the St. Petersburg G20 Leaders Declaration

The G20 Leader’s summit was held in St. Petersburg, Russia over the past 2 days. While much has been made over the lack of an international consensus on Syria, less attention has been given to agreements made on global political economy decisions. Global leaders reinforced the importance of cooperation, transparency and trust on global issues such as renewable energy / climate change, sustainable economic development, financial regulation and tax avoidance.

Furthermore, the international community reaffirmed its commitment to the UN Post-2015 Development Agenda, with a human rights based approach to sustainable human development at it’s core. It also reaffirmed the idea that certain issues (ex tax avoidance, financial regulation) require global policy coordination to be effective, and recognized the G20’s unique ability–by representing 2/3 of the worlds population and 90% of economic output–to hold countries accountable for “cheating” on international agreements.

The resolution reaffirmed the importance of rule of law, transparency, and judicial independence for fostering trust between civil society and governments, and conversely how corruption can undermine both this trust and the trust between governments in global governance mechanisms. In recognition of the destructive power of corruption, the resolution reaffirms a global effort to combat corruption through education campaigns and empowering civil society to practice “social accountability” via ombudsman’s offices / NHRIs.

Below are the highlights of the Saint Petersburg Declaration (as I see them, I realize the post is a bit lengthy, but I was able to capture the 27 page documents essence in about 5 pages–woohoo academic / knowledge management experience). Underneath certain resolutions I included (in parenthesis) how that resolution fits into a common NN theme. For those who wish to read more in depth on G20 resolutions, I suggest the Saint Petersburg Development Outlook, the FSB report on financial reforms, and the Tax Annex to the Saint Petersburg G20 Leaders Declaration.

(It should be noted that grandiose rhetoric is often used in global policy summits. There is a difference between resolutions and implementing / financing programmes to operationalize those resolutions. However, at least on the sustainable economic development and global policy coherence fronts, important groundwork was laid down at the summit)

G20 LEADERS’ DECLARATION
Saint Petersburg Summit
5-6 September 2013
Preamble 

5. We understand that sound and sustainable economic growth will be firmly based on increased and predictable investments, trust and transparency, as well as on effective regulation as part of the market policy and practice.

6. As Leaders of the world’s largest economies, we share responsibility for reinforcing the open and rules-based global economic system. We are committed to working cooperatively to address key global economic challenges:

  • Achieving a stronger recovery while ensuring fiscal sustainability. We have today agreed the St Petersburg Action Plan, which sets out our strategies to achieve strong, sustainable and balanced growth.
  •  Unemployment and underemployment, particularly among young people. We are united in the resolve to achieve better quality and more productive jobs. Coordinated and integrated public policies (macroeconomic, financial, fiscal, education, skills development, innovation, employment and social protection) are key to reach this goal. We today committed to continue our efforts to support inclusive labour markets, with the exchange of country-specific plans or sets of actions, developed as appropriate according to our different constitutional circumstances.

(In line with the principle of self-determination)

  • Free and rules-based trade fosters economic opportunities. We stress the crucial importance of strong multilateral trading system and call on all the WTO members to show the necessary flexibility and reach a successful outcome in this year’s multilateral trade negotiations. We extend our commitment to refrain from protectionist measures and aim at enhancing transparency in trade, including in regional trade agreements.
  • Cross-border tax evasion and avoidance undermine our public finances and our people’s trust in the fairness of the tax system. Today, we endorsed plans to address these problems and committed to take steps to change our rules to tackle tax avoidance, harmful practices, and aggressive tax planning.

We have agreed and are implementing a broad range of financial reforms to address the major fault lines that caused the crisis. We are building more resilient financial institutions, making substantial progress towards ending too-big-to-fail, increasing transparency and market integrity, filling regulatory gaps and addressing the risks from shadow banking. We will pursue our work to build a safe, reliable financial system responsive to the needs of our citizens.

 G20 countries have a responsibility to ensure that all people have an opportunity to gain from strong, sustainable and balanced growth. We endorse the St Petersburg Development Outlook to focus our efforts on concrete steps to improve food security, financial inclusion, infrastructure, human resource development and domestic resource mobilization.

(The universality of human rights based development)

Corruption impedes sustainable economic growth and poverty reduction, threatening financial stability and economy as a whole. We will hold ourselves to our commitment to implement the G20 Anti-Corruption Action Plan, combating domestic and foreign bribery, tackling corruption in high-risk sectors, strengthening international cooperation and promoting public integrity and transparency in the fight against corruption. Recognizing the need for sustained and concerted efforts we endorse the St Petersburg Strategic Framework.

We share a common interest in developing cleaner, more efficient and reliable energy supplies, as well as more transparent physical and financial commodity markets. We commit to enhance energy cooperation, to make energy market data more accurate and available and to take steps to support the development of cleaner and more efficient energy technologies to enhance the efficiency of markets and shift towards a more sustainable energy future. We underscore our commitment to work together to address climate change and environment protection, which is a global problem that requires a global solution.

We will continue to develop comprehensive growth strategies to achieve stronger, more sustainable and balanced growth in the context of fiscal sustainability.

7. Too many of our citizens have yet to participate in the economic global recovery that is underway. The G20 must strive not only for strong, sustainable and balanced growth but also for a more inclusive pattern of growth that will better mobilize the talents of our entire populations. 

(“no-person-left-behind” human rights based approach (HRBA) to development, inclusive growth to reduce inequalities of opportunity / break power asymmetries)

Global Economy and G20 Framework for Strong, Sustainable and Balanced Growth
10. We consider the main challenges to the global economy to be:

  •  Weak growth and persistently high unemployment, particularly among youth, and the need for more inclusive growth in many economies;
  •  Financial market fragmentation in Europe and the decisive implementation of banking union;
  •  Slower growth in some emerging market economies, reflecting in some cases the effect of volatile capital flows, tighter financial conditions and commodity price volatility, as well as domestic structural challenges;
  •  Insufficient levels of private investment in many countries, in part due to continuing market uncertainties, as well as internal rigidities;
  •  High public debt and its sustainability in some countries that need to be addressed while properly supporting the recovery in the near-term, especially in countries with the highest actual and projected debt to GDP levels;
  •  Volatility of capital flows as growth strengthens and there are expectations of eventual monetary policy recalibration in advanced economies;
  •  An incomplete rebalancing of global demand; and
  •  Continued uncertainties about fiscal policy deliberations.

15. We reiterate that excess volatility of financial flows and disorderly movements in exchange rates can have adverse implications for economic and financial stability, as observed recently in some emerging markets. Generally stronger policy frameworks in these countries allow them to better deal with these challenges. Sound macroeconomic policies, structural reforms and strong prudential frameworks will help address an increase in volatility. We will continue to monitor financial market conditions carefully.

16. We commit to cooperate to ensure that policies implemented to support domestic growth also support global growth and financial stability and to manage their spillovers on other countries.

(Accountability for extra-territorial human rights obligations)

Growth through Quality Jobs

26. Policy reforms to support higher employment and facilitate job creation and better matching of skills with job opportunities are central in our growth strategies. We commit to take a broad-ranged action, tailored to national circumstances, to promote more and better jobs:

  • Invest in our people’s skills, quality education and life-long learning programs to give them skill portability and better prospects, to facilitate mobility and enhance employability.

(Human capital investment for sustainable human development)

29. Promoting youth employment is a global priority. We are committed to quality apprenticeship and vocational training programmes, finding innovative ways to encourage firms to hire youth for example by, where appropriate, reducing non-wage labour costs, moving towards early intervention measures and effective job-search assistance for different groups of youth, and motivating youth entrepreneurship and business start-ups. Tailored strategies including youth guarantee approaches, developing school and university curricula that support entrepreneurship, and facilitating exchange of best practices among the G20 countries and the social partners are crucial in this respect.

(Recognizing youth as a critical stage of personal and professional development, and adequate investment reflecting this recognition)

Growth through Quality Jobs
81. Supporting strong, sustainable, inclusive and resilient growth and narrowing the development gap remain critical to our overall objective for jobs and growth. In this regard, we welcome the progress within the forum achieved this year, in particular on:

  • Food Security: Support to the Secure Nutrition Knowledge Platform, exchange of best practices through the seminar on “Food Security through Social Safety Nets and Risk Management”, and convening the second G20 Meeting of Agricultural Chief Scientists, along with its ongoing work to identify global research priorities and targets and support results-based agricultural research in 2014.
  • Infrastructure: Completion of the Assessment of Project Preparation Facilities (PPFs) for Infrastructure in Africa; a toolkit on Urban Mass Transportation Infrastructure Projects in Medium and Large Cities by the World Bank and the ADB; and a public-private partnerships (PPP) sourcebook by the World Bank, IDB and ADB, and progress in implementing the recommendations of the High Level Panel on Infrastructure.

(PPP for physical and human capital investments. Both governments and businesses rely on productive societies for growth.)

  • Financial Inclusion: Enhanced coherence with the G20 finance track through the Global Partnership for Financial Inclusion (GPFI) to pursue efforts to strengthen financial inclusion including work to further reducing the global average cost of transferring remittances to 5% including through innovative result-based mechanisms, to enhance financial literacy and consumer protection for the poor and to foster access to finance for investment, for SMEs for growth, job creation and poverty reduction; and together with the IFC launching the Women Finance Hub.
  • Human Resource Development: Launch of a global public-private knowledge sharing platform on skills for employment and the development of national actions plans on skills for employment in LICs and of a database on skills indicators.
  •  Inclusive Green Growth: Further development, dissemination and implementation of the non-prescriptive, voluntary toolkit of policy options for inclusive green growth in the context of sustainable development, including a workshop with developing countries, and initiation of the G20 Dialogue Platform on Inclusive Green Investments for sustainable development and poverty eradication.
  • Domestic Resource Mobilization: Continued work on strengthening tax administrations in developing countries, particularly LIC’s, through both bilateral and multilateral programs, such as the work of the OECD and G20 members on BEPS, automatic exchange of information, the Global Forum on Transparency and Exchange of Information for Tax Purposes and “Tax Inspectors without Borders” and the expansion of the work of the World Bank Group and the IMF to support developing countries’ ability to raise domestic resources. 

83. We welcome the Saint Petersburg Accountability Report on G20 Development Commitments, which sets out the progress achieved since we adopted the 2010 Seoul Multi-Year Action Plan on Development (MYAP) (Annex). This report demonstrates that many of our development commitments have now been implemented and identifies lessons learned and it highlights the successes achieved. The Accountability Report underlines the importance of continued monitoring and identifies areas where we must continue to work and opportunities to strengthen and streamline the G20 development agenda.

84. In this spirit, we endorse the Saint Petersburg Development Outlook, which states our core priorities, new initiatives and ongoing commitments (Annex). Building on the foundation of the 2010 Seoul Development Consensus for Shared Growth, the Outlook frames the approach to our future work. We ask the Development Working Group to focus on concrete actions under the core priorities of food security, financial inclusion and remittances, infrastructure, human resource development and domestic resource mobilization, and to deliver specific outcomes at the Brisbane summit. We commit to improve working practices for more effective outcomes by:

  •  concentrating on fewer key areas where action and reform remain most critical to ensure inclusive and sustainable growth in developing countries;
  •  enhancing policy coordination across different G20 work streams in order to ensure greater impact on developing countries;
  •  implementing a forward accountability process to improve monitoring and coordination, and ensure greater transparency of our work;
  •  continuing to expand engagement and partnerships with stakeholders, including non-G20 countries (especially LICs), international organizations, the private sector    and civil society; ensuring flexible approaches to respond to new priorities and circumstances

(Post-2015 development agenda consultations—human rights (political and social empowerment) for inclusive global and national agenda setting)

85. We welcome the substantial progress towards achieving the Millennium Development Goals (MDGs) since 2000 and the success in galvanizing global action to reach specific targets globally, as well as in individual countries, particularly in eradicating extreme poverty and promoting development. However, the prospects for achieving all of the MDGs differ sharply across and within countries and regions. We remain committed to accelerating progress towards achieving the MDGs, particularly through the implementation of our development agenda and our focus on promoting strong, sustainable, inclusive and resilient growth.

86. We support the ongoing efforts in the UN for the elaboration of the post-2015 development agenda. We commit to participate actively in this process and engage in the discussion on the direction of the new framework and its key principles and ideas and effectively contribute to the timely conclusion of the process. The final outcome will be determined through an intergovernmental process in which we will all participate, but much preparatory work is still underway. We welcome the contribution of the report prepared by the High-Level Panel of Eminent Persons on the Post-2015 Development Agenda, which sets out some illustrative goals We also welcome the ongoing work of the UN General Assembly Open Working Group on Sustainable Development Goals and Intergovernmental Committee of Experts on Sustainable Development Financing. We stress the crucial importance of collective action, including international development cooperation, based on the principles outlined in the Millennium Declaration, the 2012 Rio+20 outcome document “The Future We Want”, the Istanbul Declaration and Programme of Action of the Fourth UN Conference on Least Developed Countries and the outcomes of other relevant UN Conferences and Summits in the economic, social and environmental fields.

87. We call for an agreement on an integrated post-2015 development agenda with concise, implementable and measurable goals taking into account different national realities and levels of development and respecting national policies and priorities, focused both on the eradication of extreme poverty, promoting development and on balancing the environmental, economic and social dimensions of sustainable development. We commit to ensure that G20 activities beyond 2015 are coherent with the new development framework. 

Sustainable Energy Policy and Resilience of Global Commodity Markets

95. Sizable investment, including from private sources, will be needed in the G20 and other economies in energy infrastructure in the years ahead to support global growth and development. It is our common interest to assess existing obstacles and identify opportunities to facilitate more investment into more smart and low-carbon energy infrastructure, particularly in clean and sustainable electricity infrastructure where feasible. In this regard we encourage a closer engagement of private sector and multilateral development banks with the G20 Energy Sustainability Working Group (ESWG) and call for a dialogue to be launched on its basis in 2014 that will bring interested public sector, market players and international organizations together to discuss the factors hindering energy investment, including in clean and energy efficient technologies and to scope possible measures needed to promote sustainable, affordable, efficient and secure energy supply.

Intensifying Fight Against Corruption

103. Corruption is a severe impediment to sustainable economic growth and poverty reduction and can threaten financial stability and the economy as a whole. Corruption is corrosive, destroying public trust, distorting the allocation of resources and undermining the rule of law. To provide a better understanding of the factors constraining the economic potential of countries affected by corruption, we make available the Issues Paper on Anti-Corruption and Economic Growth and encourage the OECD, in collaboration with the World Bank to continue work in this area.

104. As a group of the world’s largest economies, the G20 has the potential to create unstoppable momentum towards a global culture of intolerance towards corruption. We will redouble our efforts to achieve this goal, in particular by enhancing transparency and closing implementation and enforcement gaps.

108. We renew our commitment to ensure the independence of the judiciary, as well as to share best practices and enforce legislation to protect whistleblowers, ensure the effectiveness of anti-corruption authorities free from any undue influence, and promote the integrity of public officials.

109. We also place a high value on implementing and raising awareness regarding effective anti-corruption education programs to build and reinforce a culture of intolerance towards corruption.

(The importance of “social accountability” and access to information in combating corruption, claiming human rights / holding violators accountable)

112. We recognize that a culture of intolerance towards corruption will only be achieved if we work in partnership with business and civil society. We commit to maintain and build on the enhanced dialogue between the G20 Anti-Corruption Working Group and the B20 and C20, and have taken note of the recommendations of these two groups. In particular, we welcome the business community’s initiatives to enhance anti-corruption collective actions and to develop institutional arrangements to promote anti-corruption compliance in the private sector.

(Consultative policy setting agenda, PPPs for shared programme financing, accountability / oversight, and technical assistance in realization of different stakeholders comparative advantages and common goals) 

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Transparency Report: The Global Partnership for Development, Global Commons, and Common But Differentiated Responsibilities.

A recurring topic here at NN is how globalization has shifted some of the most pressing political economy decisions away from national governments and into the global governance arena, where the rules are largely being drawn up as we go. Never has the world been as globalized as it is today, and we can be certain that tomorrow will only lead to further integration. 

A number of problems inherently arise in issues of global governance. There are innumerable public and private interests at work, none of which want to give up their legal/structural advantage for the greater global good. Politicians must balance the short-run interests of domestic actors with the long run interests of the global community (but only one of those groups is responsible for that politicians future job prospects). This may lead to a “free rider problem”, where a country may decide it will simply reap the benefits of global governance (which tend to be non-excludable), while not contributing anything (and by further complicating an already complex and differentiated international legal/policy/taxation order, undermining global governance initiatives). Differences in national regulations can lead to capital flight to low cost countries, creating another incentive to “cheat” on global commitments.

One way to overcome free-rider problems is to create forums or groups where countries can coordinate their policies and voice grievances with one another (and shine a spotlight on “cheaters” and “free riders”). The G-20 is one such organization. The 3G Global Governance Group is a similar group comprised of 30 more countries. Critics and proponents of such groups often bicker over the merits and limitations of inclusivity versus exclusivity–I am of the mind that if the stated goal is coordination, cooperation, and some element of global policy coherence, then the more the merrier. This does not mean we need a G-193; groups can determine for themselves their level of exclusivity, as long as they can interact together through global mechanisms such as the United Nations.

The concept of “common but differentiated responsibilities” in reference to the “global common”, has until this point been used almost exclusively in the environmental and natural resource arena. I would argue that both of these terms have a much wider application. Global commons should refer to any non-excludable good / service, with positive / negative externalities, whose effective management requires global coordination (to overcome cheater and free-riders). This new definition would include, among other things: environmental regulation, trade openness, financial and tax policies, issues of regional and global security and human rights concerns (and yes these are all interrelated issues, further boosting the argument for global coordination in tackling them).

By re-framing the concept of global commons, a new global partnership for development can take root through the UN Post-2015 Development Agenda, with the concept of common but differentiated responsibilities at its core. This concept itself will make countries more willing to coordinate on global commons issues. By acknowledging that countries are accountable to different degrees for the current state of global affairs, a basis for financing global initiatives that is fair yet acknowledges common goals all countries should be working towards can emerge. By “common but differentiated” I do not mean that countries should have different policies–quite the contrary. The “common” aspect refers to creating programs with global policy coherence, the “differentiated” aspect refers to how those programs will be financed in a way that allows them to fully realize their goals (as opposed to unfulfilled commitments that have dominated global agreements in the past).

Perhaps such commitments would be a more sustainable and effective way for donor countries to channel ODA, freeing up fiscal space for national governments in developing countries to finance their own domestic development programs without the distorting effects that large aid inflows can have.  

The G-20 is currently focusing on the issue of corporate tax evasion. (for a refresher, in a previous blog I explored the costs to society of corporate tax evasion)

“Government officials from the world’s largest and richest economies on Friday for the first time endorsed a blueprint to curb widely used tax avoidance strategies that allow some multinational corporations to pay only a pittance in income taxes.”

“In light of such practices – which are entirely legal, but take advantage of differing tax rules around the world – the Organization for Economic Cooperation and Development has proposed that all nations adopt 15 new tax principles for corporations. The plan focuses only on corporations and would, if adopted widely, shift some of the global tax burden toward large companies — the ones big and rich enough to devise complex tax-reduction strategies — and away from small businesses and individuals, which tend to spend a much bigger share of their incomes on taxes.

“Shifting profits to low-tax countries and costs to high-tax countries is less an option for small businesses and individuals, who inevitably wind up carrying more of the tax burden as a result. In the United States, for example, taxes on corporate profit contributed 40 percent of all income tax to the United States Treasury 50 years ago. Today, corporations contribute less than 20 percent, with the slack taken up by small companies and those paying individual income tax.”

“In contrast, the owners of a small coffee shop would probably not able to reduce its tax liability by claiming they had paid royalty fees to an overseas company owning the copyright to their cafe’s name.

The reform is intended to address such inequities, the finance ministers said Friday”

“‘It’s a matter of justice and fairness,’ Angel Gurría, the secretary general of the O.E.C.D., said at the presentation of the new plan with the finance ministers of France, Britain, Germany and Russia.”

The list, presented Friday at a meeting of finance ministers of the Group of 20 countries in Moscow, includes ideas to prevent corporations from “treaty shopping” to find countries with the lowest taxes and then find ways to book their profits there, even when much the money is made elsewhere.”

“The details, however, may prove daunting and will be subject to intense lobbying by corporations. In addition, countries have long used tax policies in efforts to lure businesses to locate operations there. The O.E.C.D. plan would not seek to end such competition entirely – any country would be free to charge lower rates than others did — but it would try to keep countries from essentially offering companies ways to avoid paying taxes anywhere, something critics say Ireland did in reaching agreements with Apple.”

“The O.E.C.D. does not expect to complete work on the proposals until the fall of 2015, and after that it would be up to governments and legislatures to implement them by passing new tax laws.”

Government are coming together to address the issue of corporate tax avoidance, which could not be addressed unilaterally. Reform will take a long time and run into intense opposition, but it has to start somewhere, and the G-20 is that somewhere. If the worlds biggest economies agree on rules, smaller countries will follow suit (powerful countries often use economic leverage to secure policy changes). In time, with nowhere left to run, large corporations will have no option but to pay their fare share–to the benefit of all.


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Economic Outlook: Tax Dodging, Tax Havens, Fiscal Space and Human Rights

Two related pieces caught my eye this morning. Both pieces explore how owners of wealth (be it large corporations, wealthy individuals, or autocratic rulers) benefit from “offshore” financial centers.

The first piece, from the NYT, emphasizes how corporate tax avoidance disproportionately shifts the burden of paying for government services to regular people:

“As muddled and broken as the individual income tax system may be, the rules under which the government collects corporate levies are far more loophole-ridden and counterproductive.

That’s not entirely Washington’s fault. Unlike individuals, multinational corporations can shuttle profits — and sometimes even their headquarters — around the globe in search of the jurisdiction willing to cut them the best deal on taxes (and often other economic incentives).

Much of this occurs under the guise of “transfer pricing,” the terms under which one subsidiary of a multinational sells products to another subsidiary. The goal is to generate as high a share of profit as possible in the lowest-taxed jurisdictions.

A study by the Congressional Research Service found that subsidiaries of United States corporations operating in the top five tax havens (the Netherlands, Ireland, Bermuda, Switzerland and Luxembourg) generated 43 percent of their foreign profits in those countries in 2008, but had only 4 percent of their foreign employees and 7 percent of their foreign investment located there.

All in all, it is a race to the bottom on the part of revenue-starved governments eager to attract even a relatively small number of new jobs.

As a consequence, the effective corporate tax rate in the United States fell to 17.8 percent in 2012 from 42.5 percent in 1960, according to the Federal Reserve Bank of St. Louis. (The share of federal revenues arriving at the Treasury from companies has fallen even more sharply, in part because an increasing number of businesses are taxed as individuals rather than as corporations.)

That’s just not fair at a time of soaring corporate profits and stagnant family incomes.”

“Happily, the gaming of the tax system is becoming a global concern, with an action plan coming from the Organization for Economic Cooperation and Development in July. The O.E.C.D. should work toward taxing business profits where they actually occur, not where they’ve been shifted by some tax adviser.

As we strive for a global solution, we should take a number of interim steps, including better policing of transfer pricing.”

Another piece, written by Jeff Sachs at the Earth Institute, expands on this topic to bring other forms of money-laundering into the mix, as well as crystallizing the fiscal space / austerity argument against tax evasion:

“In recent weeks, citizens in many countries suffering from government budget cutbacks have been learning more and more about one of the biggest and most dangerous scams in the world: the global web of tax havens that U.S. and European politicians and bankers have nurtured over the years. The only real purpose of these havens is to facilitate tax evasion, money laundering, bribery, and lack of accountability for environmental and social calamities inflicted by international companies.”

“During the boom years, the rich and powerful kept the public distracted from the tax haven reality. Yet now with budget austerity, the public is having a close look at tax evasion by the rich and powerful. As a result, the veil over the tax havens has started to slip, and the sight is not lovely.”

“The politicians of rich nations who protect the exorbitant privileges of bankers and hedge-fund managers, who wink at mega-tax evasion by billionaires, and who tolerate unpardonable games played by major companies, are playing with fire. We are now all sharing austerity. The havens represent unacceptable privilege and abuse, not fair sharing.”

“Developing countries too are saying that enough is enough. For decades they’ve been on the receiving end of hypocritical lectures about good governance. For them, the tax havens have served the purpose of paying bribes to potentates, and providing easy ways for elites to keep their money safe from tax collectors. Yet it is the rich countries that have fostered that system.”

The existence of tax havens represent the political power of the ultra-wealthy and the collective-action problem facing the rest of the world. However, the internet and watchdog groups, along with crushing austerity programs in the wake of The Great Recession, have thrust tax-avoidance into the spotlight. This is the first step towards pressuring governments for real, coordinated action against this unfair practice. 

At best, tax-havens allow wealthy people to avoid paying their fair share of taxes. Every dollar not paid in taxes is a dollar more of debt for a government, a dollar less available for an important social program. Forget the moral and ethical implications of this “reverse-Robin-Hood” system for a minute. Economically speaking, this system leads to stagnant growth. Less wealthy people have a higher average and marginal propensity to consume, and tend to keep their money in their home country. Also, diminishing marginal utility of money states that less wealthy people (in the aggregate, there is of course there is anecdotal evidence against this point), spend a greater percentage of their money on things that are beneficial for social welfare. The current system provides for less, more wasteful consumption. It corrodes the “American Dream” by reducing social mobility and perpetuates income inequality. And this is what I would consider the “best case scenario”.

At worst, tax-havens offer a stable place for oppressive regimes to park their money. Elites can amass rents from a variety of places (most commonly extractive industries, or through black-markets / drug trade), and know that they have a safe place to keep that money. This money can then be used for personal reasons, or to build up a military to further entrench Elite control–particularly in less developed countries where democracy does not exist. It is not difficult to draw the link between entrenching autocratic, rent-seeking regimes, and human rights abuses.

A Reuters blog about the book “Treasure Islands”, by Nicholas Shaxton, articulates this point very well. “The broad brush — and this is a simplication of the overall argument — is that tax havens enable the flight of scarce capital from Africa to other regions, stunting the continent’s ability to develop on a range of fronts. Such havens inclue not only tropical destinations like the Cayman Islands but the City of London and the U.S. state of Delaware.” The book “Offshore: Tax Havens and the Rule of Global Crime”, by Alain Deneault, makes a similar argument.

The U.N. recently passed an Arms Treaty, with human rights considerations at it’s core. While arms trade was a natural starting point,  I believe this is a strong model for all international transactions. Any time large amounts of money are transferred, be it tax-avoidance or the hiding or ill-gotten gains, this money has the potential to fund / perpetuate human rights abuses. The sooner the international community realizes this, and acts in a coordinated fashion to review and (act on) the human rights implications of ALL financial flows, the sooner we will see a meaningful reduction in human rights abuses around the globe.

The U.S. famously prosecuted Al Capone, not for criminal activities, but because of tax avoidance. Autocratic regimes are in many ways similar to mafias, and they enjoy the additional protection of “national sovereignty” which allows them to continue to abuse human rights with relative impunity. Maybe we can take a page from history and allow the paper-trail bring down some of today’s worst human-rights abusers. Of course this would require a strong international justice system–with real punitive powers–which unfortunately does not currently exist.

The best case scenario of tax-avoidance is it unfairly shifts the burden of paying for government services from the wealthy to the not-wealthy, which compromises the ability of governments to pay for social programs. The worst case scenario is the perpetuation of human-rights violations. Obviously neither of these outcomes should be tolerable–we can only hope that a silver-lining of The Great Recession is that it will force governments to work together to tackle the issue of tax-avoidance and offshore financial centers, which affects developed and developing countries alike.          

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