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[This report first appeared in the July 23, 2001, edition of Tax Notes International] U.N. Report Calls for New Spirituality: The Creation of Two By Bruce Zagaris The United Nations released a report on 6 July calling for the examination of creating an Economic Security Council (ESC) and an International Tax Organization (ITO), whose powers would include helping to strengthen tax administration and curb international tax evasion, tax avoidance, and harmful tax competition. 1 The report supplements the adoption in September 2000 of the Millennium Declaration by the U.N. General Assembly. The declaration collectively committed the U.N. members to work to free the world of extreme poverty and, towards that end, endorsed International Development Goals for 2015: a reduction in half of the proportion of persons living in extreme poverty, those who are hungry, and those who lack access to safe drinking water; the achievement of universal primary education and gender equality in education; universal primary education and gender equality in education; achievement of a three fourths decline in maternal mortality and a twothirds decline in mortality among children under five; reversal of the incidence and spread of HIV/AIDS and provision of special assistance to AIDS orphans; and improvement of the lives of 100 million slum dwellers. The report calls for various important new initiatives relating to international tax enforcement, governance, new infrastructure (namely the creation of two new organizations), and new tax policy. It also calls for major new reforms that undoubtedly will trigger debate and controversy, especially among some of the OECD countries that may be compassionate and religious, but their spirituality has different (for example, more individualistic) notions. Governance The discussion of domestic resource mobilization implicates governance. The principal responsibility for securing growth and equity and achieving quick poverty reduction and human development must be with each country's policymakers. Their actions primarily determine the state of governance, the choice of macroeconomic and microeconomic policies, the health of public finances, the parameters of the financial system, and other fundamental elements of the economic environment. Growth cannot occur without investment of sufficient amount and quality. The domestic economy is always the dominant source of savings for investment, and the domestic policy environment is a decisive determinant of the desire to invest. Additionally, the equally critical issue of efficiency with which resources are invested is determined overwhelmingly by national decisions and the domestic policy environment. Hence, a discussion of how to provide the financial resources to achieve the 2015 targets must start with domestic policy issues in developing countries. The most basic issue involves governance, including the rule of law. Countries must govern themselves efficiently, fairly, and in a manner that commands the consent of the governed if they are to have an opportunity to develop. The report calls for the vigorous combating of corruption as an impediment to growth and an offense against the poor. Macroeconomic discipline is required to attract savers and investment. Inflation and the current account deficit must be consistent with sustained growth. Monetary policy must be consistent with the chosen exchange rate regime, which must give reasonable assurance that unsustainably large current account deficits will be avoided. A market economy provides both a means for enlarging personal freedom and the most effective known way of furthering economic growth. However, a market economy requires a secure institutional infrastructure to function effectively. That involves adherence to the rule of law, administered impartially by the courts; a coherent system of corporate, contract, and bankruptcy law; legally established property rights; and regulations appropriate to a country's stage of developments. 2 Tax Policies and Administration A key component of domestic resource mobilization is the ability to finance an adequate level of public expenditure through raising sufficient tax revenue, whose sufficiency must permit the financing of public expenditure without imposing the inflation tax or curtailing investment by the private sector. Many developing countries must undertake tax reform to raise tax revenue to the levels required. Many countries have found value added tax useful to supplement income tax. A tax structure does not work if it is administered incompetently or corruptly. A tax system should be simple whenever possible, and its administration must be transparent, accountable, and corruptionfree. 3 If a pension system will supplement national saving, it must be a funded rather than a payasyougo system. The transition to the funded system must not be financed by borrowing. A funded system is one in which contributions of today's workers are set aside for their own retirement, as contradistinguished from a payasyougo system in which the contributions are transferred to today's retirees. The result of a funded pension system will be a higher national savings rate, as the current generation of workers must save to build up the assets that will pay their future pensions, while still paying taxes to fund the pensions of the workers already retired when the scheme is introduced. A definedcontribution scheme, in which a participant accumulates rights to the assets that he or she contributes, is perhaps the most efficient way to raise savings, because people perceive their capitalized contributions as a part of their personal wealth. Such a scheme can be organized and managed by the state itself, or the task can be transferred to private pension funds regulated by the state, with mandatory contributions. In any case, a tax financed scheme with a progressive redistributional impact so as to ensure a minimum pension should complement a program of either type. The importance of a funded, defined contribution element and a tax financed element assuring a minimum pension is likely to vary from one country to another, depending in part on the solvency of the existing system and in part on the weight the society places on social cohesion. 4 Private Capital Flows The report speaks to the need for a country to supplement investment from domestic sources with foreign direct investment (FDI). In that regard, a host country must be prepared to make a commitment to the right investment climate, such as political stability, application of the rule of law, skilled work forces, efficient infrastructure, and proper tax laws. 5 According to the report, the wrong way to attract FDI is to "hand out tax concessions or erode domestic social or environmental standards in a race to the bottom." Hence, an ITO could help discipline competitive tax concessions, which mainly benefit foreign investors rather than the host countries. The disciplines must apply to industrial as well as developing countries, as many industrial countries are now also engaged in tax competition to attract FDI. 6 The report addresses the trend toward progressive liberalization of capital markets and capital movements. It underscores the importance that liberalization be phased in, and then only in appropriate circumstances. Liberalization must proceed only gradually, in pace with the capacity of the domestic financial system and when there is no serious macroeconomic disequilibrium, financial institutions are solvent, and an effective system of prudential supervision is in place. In connection with liberalization of capital markets and capital movements, the report discusses the establishment of a new international financial architecture, such as the new proposals for determining minimum capital requirements, now under discussion by the Basle Committee on Banking Supervision. 7 International Development Cooperation The report identifies four vital roles for international public finance (IPF).
The principal global public goods include peacekeeping; the prevention of contagious diseases; research into tropical medicines, vaccines, and agricultural crops; the prevention of chlorofluorocarbon emissions; the limitation of carbon emissions; and the preservation of biodiversity. A main goal of the Financing for Development conference would be to secure adequate mechanisms to achieve the goals. In particular, every country that seriously pursues the International Development Goals should be assured that lack of external finance will not block their realization. 8 The report estimates that achieving the 2015 development targets may require an extra US $50 billion a year. 9 New and Innovative Sources of Funding To raise revenue, the report provides two alternatives: a currency transactions tax or a carbon tax. The currency tax (also called a forex tax or "Tobin tax" after the economist and Nobel laureate James Tobin, who originally suggested the idea). The tax would be "small" something between 10 and 50 basis points (0.1 to 0.5) that will be imposed on all transactions in the foreign exchange market. An advantage is that the tax would fall most heavily on persons taking shortterm positions, thereby deterring shortterm speculation and helping stabilize exchange rates. The extra cost of the tax would not be significant for traders and longterm investors. Another alleged advantage is that due to the enormous turnover on foreign exchange markets, even a modest tax rate could raise large amounts. For instance, a tax of 10 basis points on the current trading volume of US $1.6 trillion a day would yield approximately US $400 billion annually. Opponents of the tax have underscored two practical difficulties and disputed both of the claimed benefits. One practical difficulty comes from the need to expand the tax base beyond the spot foreign exchange market to all derivative instruments, such as futures and options, that might be used to undertake equivalent transactions. The problem would be how to achieve equivalent taxation of spot and derivative instruments, which would be necessary to avoid inefficient shifting from one to the other. If a tax is imposed only on the value of the derivative contract, it would be too low to achieve equivalence, although one on the value of the underlying assets would be so high that it might disrupt or even ruin the markets. Another practical difficulty comes from the ease with which financial transactions can shift location, especially with current information technology and telecommunications. Hence, a tax must be implemented not just in the major financial centers, but worldwide. Achieving unanimity among all the world's countries and jurisdictions would be difficult. Financial engineers might succeed in creating new derivative instruments able to escape the tax net if countries reached an agreement. Another potential difficulty is that even if all the above mentioned problems in a forex tax could be overcome, the market could still be reorganized as a broker market. Foreign exchange traders would stop acting as dealers, drawing on their own inventories of currencies to consummate transactions, to acting as brokers, bringing together buyers and sellers who then transact directly. The results would be a marginal inconvenience to persons wanting to buy and sell foreign exchange and an unknown but possibly drastic fall in the volume of transactions. Critics of the proposed forex tax have also questioned its revenueraising potential. The main issue is how precipitous the fall in trading volume would be on introduction of the tax, especially if the market reorganized itself in response as a broker market. Admittedly, only a very drastic decline in volume would diminish the revenueraising potential of such a tax. Some critics contend that such a decline cannot be eliminated. All in all, the merits of a forex tax are highly controversial. The reporters believe that additional rigorous study is required before any definitive conclusion is reached on the feasibility and convenience of a forex tax. However, the panel also believes it is worthwhile inquiring whether a forex tax is really the only option or whether other potential tax bases exist that might be tapped to raise revenue to pay for global public goods. 10 Meanwhile, the Belgian government has put the tax on foreign exchange transactions on the discussion agenda for its current six month presidency of the EU. It will be raised at the informal meeting of EU finance ministers (ECOFIN) meeting 2223 September in Liege. The meeting precedes the annual meetings of the IMF and World Bank in Washington, kindling hopes among the forex tax supporters that the EU may try to include the measure in discussions on reforming the "architecture" of the international financial system. The Banking Federation of the EU has argued that the tax would damage trade, penalize investment, and be impossible to apply because it would require support from all countries. 11 In addition to the forex tax, the report discusses other suggestions. One is that an international tax be imposed on the use of the "global commons," meaning the high seas, Antarctica, and outer space. In that connection, the international community through the ITO might impose a tax on seabed mining, if and when it starts, on ocean fishing or on the launch of space satellites. A disadvantage of those proposals is that none seems likely to generate substantial sums in the near future. Other possibilities would be to tax various international transactions, such as international trade, air travel, or arms exports. The panel did not believe any of those ideas would be likely candidates for achieving international agreement. 12 If a global tax is deemed desirable, another potential tax proposal would be to create an incentive to increase the supply of an important global public good. The public good in question is the control of global warming, and the proposed tax is a tax on carbon emissions. Scientific evidence has shown that the continued emission of carbon into the atmosphere will eventually result in a significant rise in average global temperatures. While no professional consensus has been reached on the likely magnitude of the costs of global warming, one cannot make an informed assessment of the optimal expenditure on restraining carbon emissions. It has been clear for many years, however, that the threat merits a policy response. A carbon tax could assume the form of a tax on the consumption of fossil fuels, at rates for each type of fuel that reflect its contribution to global carbon emissions. An agreement among countries that each would impose such a tax at or above some minimum rate would activate various economic incentives. The higher prices for carbon based fuels would guide energy production to lessdamaging sources, encourage consumers to economize on the use of carbon fuels, and raise the returns to scientific research in energysaving technology. If the carbon tax proposal was adopted, industrial countries would agree to transfer that portion of their tax receipts corresponding to the agreed base rate to the international organizations responsible for financing the provision of global public goods. Developing countries would be permitted to recycle all their tax receipts into their own economies. One use for the resources generated would be to pay developing countries for actions that sequester carbon from the atmosphere, such as the preservation of forests or reforestation. Sequestration will be a lowcost way of combating global warming for the next couple of decades. The countries collecting the balance of the tax revenue would retain it, permitting them to reduce fiscal deficits, cut distortionary taxes. 13 International Tax Organization The report observes that tax policy is the principal area of economic policy in which international spillover effects are strong, but no international organization exists to address them. It notes the roles and shortcomings of the Organization for Economic Cooperation and Development, whose membership is restricted, the United Nations and UNCTAD, which convene occasional expert groups on specific topics, and the International Monetary Fund, which provides technical assistance in tax assistance. An ITO would be part of a proposed Economic Security Council (ESC) within the United Nations. An ESC would have the same standing on international economic matters that the Security Council has with regard to peace and security. It would monitor the state of the world economy, supervise interaction among the major policy areas, provide a strategic framework for policy made in the several international organizations and secure consistency across the policy goals, and promote intergovernmental dialogue on the evolution of the global economic system. 14 The ESC would meet twice a year, once at the level of heads of government and once at the level of finance ministers, with a supporting infrastructure of deputies and a small secretariat. There would be no need for any major new bureaucratic apparatus. 15 The report underscores that in a globalized community, overlapping jurisdiction to tax exists. The ability to design and collect tax on international transactions depends on complex and, in some respects, arbitrary conventions. Countries are increasingly competing not by tariff policy or devaluing their currencies, but by providing low tax rates and other tax incentives. When a person earns income from capital in a country other than that where the taxpayer resides, it provides a major motivation for capital flight and aids tax evasion. The creation of an International Tax Organization (ITO) would help with the abovementioned tax issues. It would compile statistics, identify trends and problems, present reports, offer technical assistance, and serve as a forum for the exchange of ideas and the development of norms for tax policy and tax administration. The ITO could engage in surveillance of tax developments in the same manner that the IMF maintains surveillance of macroeconomic policies. It might engage in negotiations with tax havens to persuade them to stop their harmful tax competition. The ITO could take a lead role in restraining the tax competition designed to attract multinationals, because the competition often results in the foreign investor obtaining most of the benefits of foreign direct investment. An ITO might develop procedures for arbitration when frictions develop between countries on tax issues. An ITO could sponsor a mechanism for multilateral sharing of tax information, such as the one in place within the OECD, to curb the scope for evasion of taxes on investment income earned abroad. An ITO could also seek to develop an international agreement on a formula for the unitary taxation of multinationals. An ITO could be charged with the development, negotiation, and operation of international arrangements for the taxation of emigrants (high net worth individuals). They currently pay taxes only to their host country, an arrangement that exposes source countries to the risk of economic loss when many of their most able citizens emigrate. Even countries that try to introduce an emigration tax require an international enforcement mechanism to facilitate compliance and enforcement. Two positive consequences would flow if an ITO could curb tax evasion and tax competition. The first would be an increase in the proportion of a given volume of taxes paid by dishonest taxpayers and mobile factors of production, such as capital. The second would be an increase in tax revenue for a given tax rate. Governments could take advantage of the increased revenue by either increasing public expenditure, improving the fiscal balance, or cutting tax rates. 16 A suggested approach for creating an ITO would be for the U.N. to convene a Global Economic Governance Summit on a oneoff basis, 17 with the possibility of it deciding to perpetuate itself as an Economic Security Council (ESC) within the United Nations, with the possibility of it deciding to perpetuate itself as an ESC if the first meeting provided worthwhile. The summit's agenda would be focused on the operation of the multilateral system and on evaluating the need for new global institutions and rules of the sorts that have been discussed in this section. Analysis The proposal of an ITO meets with the suggestions of the targeted countries of the OECD harmful tax competition for enhanced democracy and the use of an organization that has universal membership to design and implement tax policies. 18 Once the discussion moves from the procedural to the substantive, some of the targeted jurisdictions or opponents of the harmful tax practices initiative may not be enamored with the discussions of the need to increase exchange of information and international tax enforcement cooperation. 19 In fact, the targeted countries may not like the recommendations about disciplining tax preferences to attract foreign direct investment. No matter how much they disapprove, their ability to engage in and influence the debate and the policy decisions would at least be a significant improvement over their inability now to participate in the tax policy debate at the level of the OECD. The OECD invites jurisdictions to participate in its tax policy forum, but only after they make the commitment and endorse the fait accompli. The fear of some OECD countries and/or bureaucrats with having to float and persuade the world community rather than their elite OECD club is demonstrated by the discussion of the issues by a former Clinton administration official. He warned that the "global tax forum" sought by the targeted countries, such as the U.N. General Assembly, "the votes of underregulators would easily carry the day." 20 It is difficult to know why opponents of the harmful tax competition initiative would be able to carry the day when the OECD HTC proponents are so confident of the legality and morality of their initiative that they arrogate to themselves the right to impose countermeasures. Some OECD countries may not like the proposal to authorize a proposed international organization power to raise revenue. They may also object to the types of proposed taxes. Indeed, the Bush administration is not wont to approve either broad new authority for international organizations, such as the United Nations, let alone authorize new tax authority, especially on fossil fuel or carbon, the Holy Grail without which there would be no Texas or Bush administration. After all, an ITO carbon tax is tantamount to challenging religion, and such challenges are an anathema to the Midlandman's faithbased initiatives. Just as important, some OECD countries may object to the proposed scope of authority for the proposed ITO and the fact that they may have less leverage over the proposed ITO than they have within the OECD. The nonOECD jurisdictions may not like the entry of the ITO and/or the ESC into areas such as harmful tax practices, the new international financial architecture, and other means to limit their authority to act. The proposed establishment of an ESC and ITO indicates the effort to design and elaborate new economic and specifically tax policy regimes. Those are some relatively early initiatives. Regardless of whether the ESC and ITO catch on, the reality is that globalization and economic liberalization are bringing emergent demands and debates that will engage governments, international organizations, multinational corporations, and various players in the world economy. Regardless of the outcome, it seems that globalization, the new millennium, religion, and tax policy are converging or colliding. Bruce Zagaris, ia a partner with Berliner Corcoran & Rowe, Washington
FOOTNOTES 1 U.N., Report of the HighLevel Panel on Financing for Development, http://www.un.org/reports/financing. 2 Id. at 6. 3 Id. at 67. 4 Id. at 7. 5 Id. at 12. 6 Id. at 13. 7 Id. at 15. 8 Id. at 16. 9 Id. at 17. 10 Id. at 2021. 11 Peter Norman, Antipoverty Groups Hail EU Move on Forex Tax, Financial Times, 9 July 2001, at 2, col. 1. 12 U.N., Report of the HighLevel Panel on Financing for Development, supra, at 21. 13 Id. at 2122. 14 For similar calls for the need for an international organization to help with international tax policy and treaty interpretation and application, see Kees van Raad, Solving International Divergence in Tax Treaty Interpretation and Application, 2000 World Tax Conference Report 30:17 (Canadian Tax Foundation 2000). 15 U.N., Report of the HighLevel Panel on Financing for Development, supra at 2829. 16 Id. at 2728. 17 For the idea of a Global Economic Governance Summit, see Peter D. Sutherland, John W. Sewell and David Weiner, Challenges Facing the WTO and Policies to Address Global Governance, in The Role of the WTO in Global Governance (Gary Sampson, ed.) (Tokyo: United Nations Univ. Press, 2000) (http://www.odc.org/commentary/wtorpt.html). 18 See, e.g., Tony Best, New U.S. Stance on Harmful Tax Competition, The Business Authority (The Nation of Barbados), 14 May 2001, at 7., col. 1 (Interview with Barbados Ambassador to the U.S. Michael King), explaining that Barbados and the Caribbean are looking seriously at the possibility of establishing "a truly inclusive forum on international tax matters." He mentions that an inclusive forum is consistent with the principles articulated by Kofi Annan, Secretary General of the U.N.; see also in regard to calls for increased democracy, Bruce Zagaris, "Issues LowTax Regimes Should Raise When Negotiating with the OECD," Tax Notes Int'l, 29 Jan. 2001, p. 523, or 2001 WTD 1920 , or Doc 20012742 (10 original pages). 19 See, for example, Daniel J. Mitchell, The OECD Pulls A BaitandSwitch On the U.S. Treasury, Wall Street Journal (Europe), 11 July 2001. 20 William F. Weschler, Follow the Money, Foreign Affairs 40, 57 (JulyAug. 2001). The discussion repeats the oftenrepeated refrain of the OECD officials trying to drum up support by denigrating the opponents of their initiative: "money launderers and tax evaders around the world would then breathe a deep sign of relief."
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