Oxfam, Give the IMF a break!

by Mick Moore

I give international NGOs nine points out of ten for the ways  they campaign about tax and development. It is partly due to NGO’s efforts that some aid donors now accept that they should be aiming to make themselves redundant by helping to create more effective tax collection systems in developing countries.

More important, the campaigning NGOs – especially the Tax Justice Network and, in Britain, Action Aid and Christian Aid – have made it impossible for governments and inter-governmental organisations to ignore the extent to which the tax policies and practices of rich countries facilitate tax evasion and capital flight in poor countries.

Serious international policy discussions about these problems at least take place now. Some of the campaigning NGOs are involved at high levels, and are recognised to be sources of valuable technical expertise. For example, see the blog of Tax Research, LLP.

Most of the time, the NGOs are on the same side as the international organisations that have the authority to change ideas and policies at the global level, notably the IMF and the OECD. Indeed these organisations often cooperate.

Opposition to international tax reform is strong

And cooperation among NGOs and global institutions is vital. The opposition to international tax reform is very strong. Tax havens are not just small, remote island jurisdictions like the Turks and Caicos. They include many powerful OECD countries. Neither ‘the 1%’ (the world’s wealthiest people) nor most transnational companies really want to make information about their assets and transactions available to tax authorities.

Unless the reformers stick together, the current bubble of international interest in ‘tax and development’ could remain merely interest, without action.

Why do NGOs attack potential allies in tax reform?

It is a pity then that some of the campaigning NGOs continue sharply to criticise their potential allies, especially the IMF. Criticism is sometimes framed as broad opposition to a vaguely-defined ‘neo-liberalism’ that the IMF is said to embody.

More concretely, criticism takes the form of continual opposition to the IMF’s promotion of the value-added tax (VAT). But how many of us really understand VAT? It is certainly a complicated tax. But it is also rather a good one. And the reason most countries have adopted it is not because they have been cajoled by the IMF. VAT is useful because it is hard to evade, brings in a lot of money, encourages small enterprises to maintain more complete and informative accounts, and encourages economic efficiency.

So why do the NGOs, especially branches of Oxfam, campaign against VAT so militantly (pdf, 1 mb)? Their story is that VAT is a tax on consumption, and therefore is regressive: it falls most heavily on the poor. Oxfam would like all the emphasis to be on income, wealth and property taxes – the kinds of taxes that fall mainly on the rich.

I too would like to see the rich pay more. The IMF and plenty of tax specialists also agree for that matter. But this should not imply that we should abandon VAT, sales taxes or other taxes on consumption.

Why can taxes on consumption be a good option for developing countries?

Any good tax system includes a portfolio of taxes on income, property, transactions, international trade and consumption. There is no reason to oppose all consumption taxes.

One reason is that it is far from clear that VAT imposes a heavy burden on the poor. While Brazil’s VAT certainly does burden the poor, this is not the typical case. Like Britain, most countries that levy a VAT give reductions or exemptions for basic consumption items, especially food. The rather scant evidence we have suggests that, in developing countries, VAT is not generally a regressive tax that falls heavily on the poor.

The practical policy issue is not whether a particular tax is regressive or progressive, but whether it is more or less progressive than the feasible alternative sources of revenue (pdf, 300 kb). If a government abandons VAT and reverts to the only other relatively easy source of income – customs duties on imports and exports – the poor might in fact be worse off.

Let’s move from campaigns on VAT to campaigns on the real problems of international tax policy

VAT is not beyond criticism. But it is now a major part of the tax system of most developing countries, and could only be replaced at great cost and with great upheaval.

We could better spend our energy doing the things that NGOs and international organisations alike want to achieve. We could start by focusing on three things:

• improving the exchange of information among national tax authorities
• getting more information from transnational companies about the real locations of their activities and profits
• stemming the worst abuses committed in and by tax havens

Let us unite around the big issues, and stop sticking pins into our allies.