New Global Taxman to Wage War on Informal Economy

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

This coming week, political representatives of many of the world’s developing countries will gather in Addis Abbada, Ethiopia, for the International Conference on Financing for Development. Two issues seem set to dominate proceedings: tax evasion and the informal economy.

As I warned in the article “Beware, the Borderless Taxman Cometh,” these two intertwined issues are becoming increasingly important to today’s cash-strapped governments. Recent years have seen ever closer cooperation between national tax authorities, with the US and Europe leading the way.

As part of this effort the delegates assembled in Abbis Abada next week are expected to discuss ways of coordinating their efforts to combat tax evasion in Africa and beyond. Euractiv:

Tax evasion costs developing countries around €100 billion each year. This leads to considerable budget shortfalls in countries with already low tax revenues.

In the developing world, tax revenue represents on average between 10% and 20% of GDP, while the average in OECD countries is between 30% and 40%, according to a study on the mobilization of tax revenues in developing countries carried out by the European Parliament.

To boost their tax raising capabilities, developing countries are being pressured to give their backing (and a sizable chunk of their national sovereignty) to an international body such as the UN or the OECD. For France, the Paris-based OECD is the obvious choice. “We will make faster progress in an OECD forum with the participation of developing countries than we would at the UN,” said Annick Girardin, the French Minister of State for Development.

Most developing countries seem unconvinced, with many worried that the interests of the OECD members (i.e. rich countries) would dominate the agenda in such a forum. There are also concerns among many developing nations about the EU’s continued inaction on corporate tax evasion closer to home.

They’ve got a point: Jason Hickel of the London School of Economics notes that multinational companies siphon out over $900bn from developing countries each year through tax evasion and other illicit practices, with much of the money flowing through European tax havens such as Luxemburg, Lichtenstein and the City of London and its vast web of crown dependencies.

Meet the Global Taxman

But desperate times call for desperate measures – at least according to Wolfgang Schäuble. Last autumn Germany’s Finance Minister wrote an article ominously titled “Why We Need a Global Taxman.” In it he outlined how technological advances and global cooperation between more than 100 national governments were making it possible for tax authorities to keep ever closer tabs on the people’s money.

Under the Common Reporting Standard, tax authorities receive information from banks and other financial service providers and automatically share it with tax authorities in other countries. In the future, virtually all of the information connected to a bank account will be reported to the tax authorities of the account holder’s country, including the account holder’s name, balance, interest and dividend income, and capital gains.

Various measures are in place to ensure that banks can identify the beneficial owner and notify the relevant tax authorities accordingly. The CRS thus expands the scope of global, cross-border cooperation among national tax authorities. In this way, we can establish a regulatory framework for the age of globalization.

The ultimate goal is clear: through incremental steps, to create uniform global tax standards and rules to allow governments to track and tax every penny we earn, spend or save. This should be comforting news, for if there’s one thing we’ve learnt in the wake of the Global Financial Crisis, it is that banks and governments can always be trusted to look after the people’s money.

Indeed, according to Turkey’s finance minister Mehmet Şimşek, global tax authorities should be given even more power:

The G-20 has launched efforts to encourage all jurisdictions to sign the Multilateral Convention on Mutual Assistance in Tax Matters, developed jointly by the Council of Europe and the OECD. But more must be done to combat the informal economy. I can easily imagine bilateral agreements – and then a multilateral agreement – that establishes a unique global tax ID for all taxpayers.

A tax ID for each and every global citizen! That way we can be taxed wherever we are. Registration will no doubt be quick and painless, and once you’re in the system, escape will be next to impossible – a little like trying to leave the euro zone. And the ultimate target, as Şimşek is not shy to admit, is the informal economy.

Killing System D

In the developing world the informal economy (or what is increasingly being called “System D”) can account for as much as 45% of total economic activity, providing critical economic opportunities for millions of people living on the edge of subsistence. While the informal economy is often equated with the criminal economy, genuine criminal activity (burglaries, extortion, kidnappings, drug trafficking…) accounts for a relatively small part, as Robert Neuwerth writes in Foreign Policy magazine:

Kids selling lemonade from the sidewalk in front of their houses are part of System D. So are many of the vendors at stoop sales, flea markets, and swap meets. So are the workers who look for employment in the parking lots of Home Depot and Lowe’s throughout the United States. And it’s not only cash-in-hand labor… System D is multinational, moving all sorts of products — machinery, mobile phones, computers, and more — around the globe and creating international industries that help billions of people find jobs and services.

System D is by now the second largest economy in the world – and it’s growing at a startling rate. In 2009, the OECD concluded that half the world’s workers (almost 1.8 billion people) were employed in the informal economy. By 2020, the OECD predicts it will employ two-thirds of the world’s workers.

In other words, the fastest growing part of the world economy is that which lies beyond the reach of central government measurement or control. Unsurprisingly, governments are not happy about this and now have their sights firmly set on the informal economy. Through a combination of carrots (lower taxes and social security payments, access to bank credit) and sticks (repressive policies such as the threat of criminal sanctions or even the use of state violence) governments around the world, from Mexico to Egypt and Nigeria to Argentina, are trying to chip away at the shadow economy.

Naturally, much less attention is being paid to the taxes not being paid by the global super rich. Take Mexico, for example, where the nation’s four richest individuals now own a staggering 9% of the country’s total wealth, up from 2% just 12 years ago. Yet instead of trying to get these four men to cough up their share for the general good, the Peña Neito government has its sights set on the millions of workers scratching out a subsistence existence in the informal economy. By Don Quijones, Raging Bull-Shit.

At the same time, Western governments are escalating their war on cash, the lifeblood of the informal economy. Growing ranks of economists, businessmen, bankers, and policy makers are calling for the creation of a completely cashless society. Eventually, they might pull it off. Read… The “War on Cash” in 10 Spine-Chilling Quotes

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  17 comments for “New Global Taxman to Wage War on Informal Economy

  1. Felix says:

    These are really good points. On the other hand we need to do this. Governments should be responsible to the least able and well off citizens and in order to transfer assets for child health, food support, and education and infrastructure the government needs assets. The street an Indian fruit seller is working on has to be built and maintained.

  2. Dave Mac says:

    “Keep those sheep bagged and tagged”

  3. Petunia says:

    The US govt can’t even keep track of all the fraudulent tax returns sent in from Florida alone. The refunds sent to fraudsters in Florida constitute an industry here, the money sent out is in the hundreds of millions. Identify theft is everywhere. If you filled out insurance forms anywhere in Florida, your information has been sold or stolen. The private information of every federal employee past and present has been stolen by the Chinese, and it will be used.

    My point is that the supra nationalist can plan and plot their way to global control, and with all their planning, unleash chaos that will blow the circuits of a super computer. Their cashless society will never work because any company or group can issue script to substitute cash. All they need is the confidence of users. It doesn’t even have to be script. They can just use currency issued by some other foreign country.

  4. David R. (Canada) says:

    No mention in this article of the likely reaction of Evangelical Christians to a World-Wide enforced tax. This new system will need a World-Wide identification system, probably the infamous implant that Christians are so against.
    How will the Elite convince Christians to accept this? Force? Probably.

  5. Paulo says:

    When laws are unjust/wrong, they are disregarded and flaunted.

    Look for a continuing breakdown in trust between authority/institutions and common people if this continues.

    Where I live it is a decaying trust between the people that live here in my rural valley and those that impose regulations from afar. It is becoming Steve Earle’s, ‘Copperhead Road’. It is becoming an ‘us and them’. One day it will be ‘us or them’.

    • Mama Bear says:

      The tax burden is unfair. We all know how corporations pay no tax at all. Yet, I was taxed 36% annual income for the federal govt and another 9% on every purchase, plus property taxes, and then, state gross receipts tax…about 63% of my income. Exxon ain’t paying that….McDonalds ain’t paying that. So now I live on less and work less. We are all over taxed.

      @ Paolo, my small city was “visioned” by outside consultants to grow 35%, never mind we got no chance to disagree and there is no work here for those people, except at the new strip malls. It’s all part of the grab. Bring on the crash, I say. They make us wrong every time….we can’t work enough to support the control, graft and entitlements of the top.

      The Greeks need to get honest and then dig in, feel the fear and hold their line. The world will help them……the ECB will not.

  6. MC says:

    A few years ago I quipped the world should ring that much maligned economist, Art Laffer, and apologize to him for at least part of the bad rap he got over the years.

    While Laffer is no friend of sound money and free enterprise as we ordinary people conceive them, he understood one thing perfectly well: high taxes are their own natural enemies. After you reach the apex of the curve named after him, revenues start decreasing because either people feel the benefits to be had evading/avoiding taxes outweigh the risks or because economic activity as a whole buckles under the weight of taxation. That’s as simple as that.

    To this it must be added what the State gives citizens and firms in return for what it demands. If law enforcement is lax, roads and sewers aren’t maintained, hospitals are dirty and overcrowded, garbage collection is hit or miss etc people and firms will be even more incentivated to avoid/evade taxes because they feel their tax money is just being wasted on something they don’t benefit from. These conditions (I call them “Waste Perception”: I am no economist so I don’t know the exact term) bring the apex of the curve much closer to zero.

    In most countries this “Waste Perception” is extremely high: this is due to the fact many democracies have turned from “Service Providers” into “Wage Providers”. Tocqueville wasn’t very far off the mark when he noted Republics last only as long as people aren’t bribed using their own money.

    The idea of a “Wage Provider” goes far beyond simply hiring civil servant by the busload and allowing people to retire at 55 with taxpayers picking up the tabs. It’s a complicated game: for example healthcare is quickly morphing from providing a basic and essential service into allowing pharmaceutic and insurance companies to make more money than they would otherwise and relieving them of a lot of accountability while at the same time providing people with non-vital drugs and services they don’t really need.

    And here’s another catch: “Services” are usually discretionary budget items, meaning they can be cut at will and without the political battles usually associated with non-discretionary items such as retirement benefits. When tax revenues start to stagnate or even decline, guess what gets cut? Yes: road and sewage maintenance, garbage collection etc.
    In short it is dog chasing its own tail.

    All Western governments are past (and in some cases well past) the apex of the Laffer Curve. Revenues are bound to stagnate.
    They got a big help from monetary policies which are presently repressing sovereign bond yields as ferociously as Mao Zedong repressed “well-to-do farmers”. But still this is not enough: the vicious circle of rent seeking if not downright bribery is in full swing. With private economies dead in the water, State budgets have become not a mean to provide law enforcement, roads etc to citizens and firms but the main engine of the economy. In many European countries, public spending now accounts for over 50% of the GDP, which is often inflated by accomodating estimates for illegal activities such as drug trafficking and money laundering.

    How long before the dog will chew its own tail?

  7. RP. says:

    They may think that having a global tax ID is a great idea . I think the agents will end up as barbeque in many places. when the big companies pay their taxes maybe i will pay mine … or not

  8. Julian the Apostate says:

    “It’s not my fault! I need more power!”
    -Wesley Mouch in Atlas shrugged

  9. Gil Obrero says:

    I have been in corporate finance, predominantly for SME’s for most of my working life, starting my own company with 2 colleagues back in the early 80’s.
    Structuring SME’s at that time to set up the best tax and financial order was complicated but certainly could be done.
    I also learned quickly just how the corrupt bureaucratic system in the UK operates and how it was geared to the needs of the big crony corrupt corporations and was set against the SME

    Bureaucracy has destroyed those opportunities for SME’s now, and most SME’s are the stuck pig, getting raped and pillaged by bloated parasitic bureaucracy every day.
    In 2000 I went to China and it opened my eyes.
    This was a time when the multinationals were in the frantic globalization and off shoring mode and they saved billions. Within 2 years I has two company’s set up in China and now headquartered in Manila we specialize in off-shoring by way of setting up clients, in the UK and US mainly, their own private and personal outsourcing operation, set up 100% under a foreign jurisdiction, not to avoid tax, but to EVADE bureaucracy.

    Understanding that bureaucracy EVASION is perfectly legal, and is n fact very simple in theory although more difficult in practice, it is the single most cost effective thing an SME can do. The practical side of course is a little more complicated

    For example if you wish to evade the bureaucracy of the diktat of Europe, you simply move outside its jurisdiction.
    I did that over 10 years ago, and as a consequence EU rules are no more a concern of mine than are NK or Cuban regulations. Tax benefits flow instantly. And careful knowledge and a close cooperation with a good corporate law firm overseas takes care of that jurisdictions particular needs.
    Tax rates are far lower and avoidance is simpler, cleaner and as it brings jobs and revenue, (more workers equal more tax) there is little incentive to do EU or US style clampdowns.
    What many SME’s don’t understand is the process to set up off shoring of part of their operation, and although Manila is absolutely booming right now as global multi nationals are outsourcing with a mad frenzy to cut costs back home so they can do more stock buybacks and dividends to goose their collapsing businesses, what they have done in the process is create literally millions of highly educated motivated and competent workers that have now well over ten years experience of marketing back office and all BPO operations and lately KPO, (Knowledge Outsourced Operations).

    We simply tap into this huge pool of labor, and as we can make outsourcing for our SME clients approximately 3 times more cost effective than major corporations outsourcing to other major corporations, (the requirements of major outsourcing companies to also pay bloated executive perks and salaries, stock buy backs dividends, stock price goosing etc.), we can walk all over them as far of cost effectiveness and in the process poach their best and brightest staff because we can offer them a 50 % increase in salary without in the slightest compromising the viability, but enhancing it.
    So the SME’s get the best staff trained by the multi nationals and at approximately 60% – 70% lower cost than home grown.
    You see one problem the EU or the US has, despite what they want in co-opting developing world governments into their sleazy corrupt schemes, is the simple fact that they may not have thought about too deeply.
    The cost of a bureaucracy that will implement this without corruption, in other words the government corruption shilling trumps private corruption costs.
    The developing world governments are certainly not going to be inclined to double or triple their bureaucratic salaries just to satisfy the EU, that is laughable, but that is what it would take to convince those developing world bureaucrats to always err to side of government rather than private corruption.
    And right now its very inexpensive to ensure bureaucratic decisions go your way in Manila. And as a very very experienced partner in an international local law firm informed me, that would take another war to change.

    As ever, vast extremely profitable opportunities open up whenever clueless inexperienced economists and so called intellectuals and bureaucrats get involved in the real world and start imposing nonsensical conditions on its people.
    This is why as they grow their parasitical tentacles ever longer they destroy in perfect inverse correlation their own economies.

    The bottom line, If you know what you are doing it sets you free. Free of regulations, free of meddling bureaucrats, free of onerous and pathetic paperwork, free of impositions like fees and penalties, and free to decide how you run your business and not some corrupt little man troughing in the government slush fund for bureaucrats, from some fancy office in Whitehall or Washington or Brussels. I haven’t so much as completed a tax return let alone pay tax for a quarter century now.
    It is only knowledge and how to use it.

    I am more than happy to cover more ground for anyone who might have an interest.

    • Petunia says:

      Even the big companies are seeing the collapse. Recently when big blue sold their chip business, I saw it as a confirmation that they can no longer function under the current system. All the craziness by the surveillance state is out of control and hurting business. From my perspective, after three decades of watching high tech closely, big blue just walked away from the craziness. It is easier for them to just buy the chips from a company they “don’t control” than deal with the insane demands of govt officials that don’t know anything about their business. Unfortunately for us our govt doesn’t know much about most things.

  10. Cocoabean says:

    “Tax evasion costs developing countries around €100 billion each year”

    Well, this SOUNDS so…evil. But if you substitute the word “governments” for “countries” and remember that that €100 billion is now back where it belongs in the pockets of its owners and earners, it looks actually quite optimistic and positive.

    • "Equality" supervisor says:

      I live in a village in Indonesia where people supplement their income from farmwork by scavenging in the local tip plastic for resale and for vegetable refuse from the markets to feed a cow or goat kept tethered behind the house.

      I can’t tell you what nice, honorable, simple, harmless people these are.

      But these same people are also somehow part of some nasty System D that is “illicitly” keeping Herr Schauble from the income that should be spent building his ego an even bigger golden throne.

      My contempt for these Schauble-parasites is simply inexpressible.

  11. Jerry Bear says:

    In history, a good sign of a doomed society is that it effectively exempts the wealthy from taxation and crushes the middle classes under the resulting burden. The poor are too destitute by this time to pay anything and are lucky if they can keep from starving. It was like this before the French revolution and it was like this just before the fall of the Roman Empire. It should be interesting to see what transpires.

  12. Joe says:

    Most of the sheep follow the idea that when a government passes a law, it has gone through a ethical and thoughtful process.

  13. d says:

    Corporations have abused globalization to exploit the cheapest and dirtiest labour sources, sell at immense profits in the developed markets and pay a minimal fee to an “Ireland” allowing them to keep all of their ill-gotten profit.

    Whilst contributing nothing to the running costs, of any of the nations containing the markets, they abuse and exploit.

    They are no better than drug dealing cartel’s, in some cases direct crime is just part of their corporate profit generation structure.

    For nations to get their fair share from corporates legitimate “Revenue Gathering” will also have to be globalized.

    The structures to do this, will always off course, be aimed at the little guy first, he will be used to fund the development of these structures, as he can not afford to fight them.

    Once international cooperation is established, the “structures” may one day be turned on the Corporate global exploiters.

    Then the little guy can go back to flying under the radar (there is always a way especially when cost benefit is considered by the enforcer) which is not hard once the big guy is on it.

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