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In this blog, economist and IRC's head of innovation and international programme Catarina Fonseca argues that taxation is crucial in reaching the post-2015 development agenda. "Tax is a prerequisite for governments to become truly democratically accountable to their people," she says.
Across the development sector there is at the moment one hot topic: the Financing for Development Conference in Addis, in July. Over the last months a phenomenal number of policy briefs, event reports and consultation have taken place. Why is it so relevant? Because high level politicians, civil society representatives, private financiers and the big multinational corporations will need to agree on an outcome that will support the implementation of the post-2015 development agenda. This will also define how the new SDGs, including the ones for water and sanitation can be financed. Not surprisingly, there are many divergent interests at stake.
No sustainable development goal for fiscal sustainability
Arguably, the two biggest global development challenges at the moment are the increasing wealth inequalities between individuals and the environmental impact of unrestrained growth. Solving these global challenges will require global solutions and a lot of well targeted money: but from where? There is no Sustainable Development Goal around domestic resource mobilisation and the need for countries to raise enough taxes to be fiscally standing on their own. Yet improving domestic resource mobilisation through taxation is a prerequisite if governments are to raise their own revenue and become more truly democratically accountable to their people.
An additional complication is that there is not a global institution which has the mandate to sort out all the financial loopholes that are limiting domestic resource mobilization. When mining corporations deprive countries of tax revenues and are pushed to pay at least some taxes (ie Zambia), the corporations sue the country because they are being deprived of future earnings. When a French civil servant whistle-blows the illegal banking practices in Luxembourg allowing several companies not to pay their due taxes, he faces a jail sentence and a hefty fine. When the Government of Nigeria wants to track the wealth, property and money of one citizen, (which, with a properly functioning revenue authority can take up to two years to track) because the citizen in question has to be notified, by the time the fortune has been tracked it has already been moved elsewhere.
These were some of the loopholes and lack of capacity of tax authorities discussed at the Tax to Promote Social Justice conference on the 24th February 2015 in Vienna. By lunch time many of us were feeling rather deflated at the complexity, the ramifications and the feeling of impotence. Most of the tax avoidance at global scale is actually "legal". There are some countries, like the Netherlands, which are supporting low income countries to improve their tax raising ability but the money spent on this from development cooperation is very limited. Strengthening a tax authority is simply not very sexy.
Who is the "international court" for tax avoidance at global scale?
Who is protecting us all from capitalism going out of control? Why do we care? We care because taxation is the price we pay for a civilised society, it's the revenue that governments use to build infrastructure, to deliver basic social services to its citizens: education, health, water and sanitation and environmental services. And these are some of the more important issues at stake in the Finance for Development meeting.
The glimpses of hope are that the OECD is working on an Automatic Information Exchange. Among the many faultlines, the problem is that ALL countries in the World need to sign up to it (the US is not signing it for instance), the information can only be used for tax purposes (and not for criminal corruption charges). The corporate lobby has managed to include many exceptions such as, that only passive financial entities will need to report to the AIE which means that if a large financial corporation opens a small "pizzeria" it is then considered an active financial entity and does not have to report. But the main issue raised is that the OECD defends only the interest of a few rich countries. There are calls for the UN to step in, and for the time being we need to live with a flawed system which is still in its infancy. The meeting in Addis provides an opportunity to shape these matters but will require strong positions from non-OECD countries and powerful civil society lobby groups.
This is all too big and complex, what can we do in the water sector?
For those of us working in the water and sanitation sector, what does this mean? First, ensure transparency of financial flows to the sector. This is a must because it decreases opportunities for corruption (passive or active). Not only transparency of national budgets and aid flows but additionally and increasingly the flows that de facto reach the districts, the off-budget investments from NGOs and the share of public and private finance in the recent Public Private Partnerships. Recent (unpublished) reports indicate that the share of private finance is about 5% in these partnerships which means that on one hand we are using public finance much more than we like to admit in the water and sanitation sector (and we should not be shy about it!) and on the other hand that we should be wary of using so much public finance to finance market entry of not yet proven business models, especially if the public finance is being diverted away from proven successful support to public services such as capacity building of district water staff and supporting country monitoring systems.
The most expensive way for governments to raise finance is through capital markets while the cheapest is through taxes
Secondly, increase the domestic revenue base. The most expensive way for governments to raise finance is through capital markets while the cheapest is through taxes. Donor agencies need to provide support to increase the tax base – which can only be reached if the water and sanitation services being provided are good and people want to pay for them. Better aid will need to support domestic resource mobilisation and to professionalise revenue collection capacity – which can also be done through water sector stakeholders. The Netherlands has a long experience with Water Banks which provide cheap accessible finance (blend of public and private) to municipalities to improve their services. Similar options could be explored in several countries which would fulfil a minimum threshold of financial and service providers regulation.
Thirdly we can aim to influence the allocation of public finance for water and sanitation services. We can lobby decision makers directly, we can generate evidence to convince them that investing further in the long term sustainability of services makes economic sense and we can provide technical support to government institutions on how to increase tax revenues for allocation to water and sanitation services.
Over the coming months many resources on how to tackle these issues will be published in the Public Finance for WASH website. Public Finance for WASH was set up by Water & Sanitation for the Urban Poor, IRC and Trémolet Consulting. It is a research and advocacy initiative around domestic public finance for water and sanitation. We believe (and it's supported by evidence!) that sustainable universal provision of high-quality water and sanitation services is fundamentally dependent on well-functioning taxation and redistribution systems.
Thank you to the speakers and the great discussions between researchers and campaigners that have inspired this blog at the Tax to Promote Social Justice conference hosted on the 24th February 2015 by the Vienna Institute for International Dialogue and Cooperation and the Department of Development Studies of the University of Vienna.
At IRC we have strong opinions and we value honest and frank discussion, so you won't be surprised to hear that not all the opinions on this site represent our official policy.