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
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.