Monday, July 09, 2007

The Four "Rs"

When we think of tax, we normally think of two words starting with the letter “R” – that is, tax provides governments with Revenue (to pay for schools and police forces, for example), and tax can be a way to Redistribute wealth and income. There is a third “R” - tax can be used for Re-pricing (for example, taxing tobacco and carbon-based fuels can be a way to change behaviour.)

So far, so good. But there is a fourth “R” which is so often forgotten, and yet this fourth “R” may be as important as the first. It is Representation. American colonists rejecting British colonial rule in the eighteenth century knew all about it, famously demanding “no taxation without representation.” When citizens are taxed, they demand accountability in return for their hard-earned money, and this keeps governments on their toes.

In rich countries, people tend to take this fourth function of taxation for granted, and the debates about tax tend to focus instead on tax as a moneybox problem. Donors and tax specialists have mistakenly tried to transplant this skewed set of priorities onto poor countries – with disastrous results. Even those who have woken up to the scandal of offshore and the ability of what the Financial Times calls a tax-avoiding “global plutocratic class” to shift their financial affairs offshore to avoid taxes often forget this aspect of the harm that tax havens cause: how tax avoidance and evasion erodes the accountability of governments. TJN’s latest quarterly newsletter – the Accountability issue – examines these issues in more depth.

It is essential that this fourth “R” becomes a central part of the debate about poverty and international development. Good tax systems will not only help bring better governance to poor countries, but they should also help these countries reduce reliance on external funding and start financing public services from their own revenues. This should be the end game of foreign aid. Our editorial entitled "Wake Up, Donors," asks why they seem to be avoiding this issue.

In this edition, we also discuss TJN’s fledgling campaign to change international accounting standards for multinational corporations so that they report on a country-by-country basis, and we explain TJN’s even newer efforts to set up a code of conduct for taxation. Watch this space.


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