GLOBALISATION, TAX AND DEVELOPMENT

Francine Mestrum, PhDinfo@GlobalSocialJustice.com

In the first part of this article, it is stressed that taxes are important in order tofight poverty and inequality. In the second part, attention is given to the negativeconsequences of tax evasion and avoidance for developing countries. This text was used for an intervention in the Senate of The Netherlands in June 2009(Symposium on Tax Justice)

Taxation is one of the most neglected and yet one of the most important issuesthat should be tackled if we want to defend a fair globalization, a sustainabledevelopment and a more just, equitable world.All our western European states have rather well developed tax systems. Theydid not come about spontaneously but are the result of many decades – maybecenturies - of social and political struggle. Taxes are indeed at the heart of anyprocess of state building and of democracy. They are very closely linked to issuesthat, today, we call ‘good governance’, ‘accountability’ and ‘public goods’. At firstsight, there is no urgent reason to fundamentally change our tax systems, andyet, they are under extreme pressure or already have undergone severecutbacks. Yet, we need strong and stable tax systems if we want to solve theserious problems we are faced with today. Let me just mention three majorarguments.First of all, there is globalization. This means: mobility of capital, goods andservices, though not of people. It is easy to see a first major consequence of thismobility: since tax systems are based on the principle of state sovereignty andterritoriality, mobile factors can escape taxation if some states are willing toabandon or significantly lower their tax rates. People, who, in general, are far lessmobile, cannot avoid them. This means that transnational companies can notonly avoid national social and environmental regulations, but that they can alsoavoid paying taxes. Let me briefly refer to the many tax havens that exist as wellas the many mechanisms that are used to avoid taxes, like mispricing andtransfer pricing. The consequences of this whole system are unfair competition,less tax revenue for states and privatization of benefits, which means that manytransnational companies only contribute to the welfare creation in the countriesthey work in through the employment they create. They hardly contribute to thepublic finances of these countries.In fact, these problems are easy to solve: tax havens can be abandoned, poorcountries can introduce stricter regulations and tax rules, even some global taxescan be introduced, as is explained in our book. However, these obvious solutionsare hindered by power relations and the lack of policy autonomy of poorcountries. Even if tax havens are today on the international political agenda, therecent G20 meeting in London has shown that only ‘illegal practices’ are beingconsidered, whereas most tax avoidance practices have been made perfectlylegal though they are not, I want to argue, equitable.

My second argument is linked to the above: democracy and citizenship. Both aredelicate and sensitive concepts that refer to the relationship between people andtheir states. Even if states can be defined in many divergent ways, one of theirmajor tasks remains the responsibility for the external and domestic protectionand well-being of their populations. This is even recognized by the World Bank. Itmeans that states have to provide public goods, such as defense and a legalsystem, but also macro-economic stability, a stable price system, a healthyenvironment, education, health services and other public services. It does notmean that governments have to produce these goods themselves, but they areresponsible for their organization, their regulation and their provision. It is clearthat in order to do this, they need resources, and these resources come fromtaxes. In any democratic system, citizens, who pay these taxes, can also demandtheir governments to efficiently provide all these public goods and they candemand accountability. Now, if states, because of an international aid system orbecause of commodity exports that create royalties, do not need to levy taxes,the accountability chain is broken, the reciprocity between states and people isinterrupted, and democracy cannot emerge. This is precisely what is happeningtoday in poor countries and it is even worsened by the deterritorialization and thetransnationalization of capital. Demanding ‘good governance’ and ‘accountability’in Africa is incoherent with a simultaneous demand for the reduction of publicservices, the free movement of capital, free trade and what is called an ‘enablingenvironment’ for business.As we will see in the second part of this contribution, there is a contradictionbetween the current system of development aid and democracy and citizenship.My third argument is again a consequence of what has already been said. Itconcerns social citizenship and the redistribution of incomes. Social citizenship isat the heart of the European social model. It implies that civil and political rightscannot meaningfully be respected if the economic inequality between citizens istoo important. People who cannot read or write cannot use their right to vote.People who are hungry cannot defend their right to life. This is why, in the20

century, all our European countries have developed systems of socialprotection and social citizenship based on the legal equality and the equal valueof individuals, protection against markets and the decommodification of certaingoods, such as those mentioned in my former point. Again, these policiesdemand resources and resources normally are provided by tax systems. Here,one could argue that any resources, including development aid and royalties areadequate for achieving this goal in poor countries. However, the importance of domestic and global democracy and accountability cannot be underestimated.What I want to stress therefore is the importance of reducing inequality and of redistributing incomes.Let me briefly mention the main reasons for this. The first reason is theimportance of economic growth and poverty reduction. The World Bank hasshown that growth and poverty reduction are seriously hampered if not madeimpossible if income inequalities are too important. The second reason is moralindignation, not only because of the magnitude of income inequalities in today’sworld, but also because of the profound feeling of injustice many people in the

third world have. Jean Ziegler, the former UN representative on the right to foodspeaks of an emerging ‘hatred of the western world’. Half of the population indeveloping countries lives under the poverty line of 2 $ a day and one quarterlives under the poverty line of 1.25 $ a day. One million people in today’s worldhave more than 30 million $ in financial assets. And half of the world’s workersare working poor, earning less than 2 $ a day. My third reason, then, is linked topolitical and social stability. Terrorism is not linked to extreme poverty, sinceextremely poor people are too busy trying to survive. But it may be linked toinequality, to middle classes threatened by impoverishment, to young graduateswith no employment perspectives, to professionals faced with the unkeptpromises of development and modernity. The fourth reason is the fact thateconomic difference implies asymmetric power relations, at the level of individuals as well as at the level of countries. Inequality erodes the democraticfunctioning of states and of the international state system. The fifth reason is alsolinked to globalization and the paradoxical need of borders in order to stopmigration. If one believes in the desirability of one world community in which notonly goods and capital but also people can move freely, inequality is clearly amajor problem. Finally, rich countries do have a debt towards poor countries.Colonialism and slavery are probably the most controversial aspects of this debt. The structural adjustment policies of the more recent history have also favoredrich countries and have impoverished the poor. Rich countries also have anenormous ecological debt. Again, this is about the survival of rich as well as poorcountries. We do live in an interdependent world. If we want to survive, we shouldreduce the gap that divides us. Two points remain to be mentioned. The first is: how to reduce inequality? By andlarge, there are two possibilities. One can reduce the incomes of the wealthy orone can improve the incomes of the poor. Unfortunately, we know that there arelimits to this latter solution, since we are already faced with an ecological crisisand we know that the possibility of generalizing our own standard of living isabsolutely impossible. The ecological crisis, then, is also a social crisis. It meanswe mainly have to look at the side of wealthy countries, transnational companiesand individuals to contribute to a global redistributive system in order to reduceincome inequalities. The second question is: is taxation the only possible mechanism to do this? Iwant to argue that it is not the only mechanism but that it is the best and mostefficient mechanism. Tax systems need to be improved in poor countries andneed to be restored in rich countries. New global taxes can help to solve some of the more difficult problems of globalization. Eliminating tax havens and stronglyreducing the possibilities for capital flight and tax avoidance are among the mostefficient ways to raise money for development. And no, not all taxation distortsmarkets.We should know that poverty reduction can help people to survive, but that itdoes not lead to a fair globalization and a more just world. We need to tackle thehuge income inequalities. Development aid and cooperation are useless as longas poor countries have no policy autonomy to develop their own domesticdevelopment programs and as long as they have no resources. Tax justice at the