What is “fair”?
There are lots of different ways to see it. According to the Americans for Tax Fairness tax fairness means making corporations and wealthy individuals “pay their fair share.” For those at CATO, tax fairness is an Alternative Minimum Tax (or flat tax).
Ultimately, though, tax fairness is a normative concept.
It’s helpful, then, to consider what society as a whole considers fair. People’s opinions about this question matters, not only in a theoretical sense, but also because we want to maximize society’s happiness overall. To accomplish this, we need a tax system that aligns with society’s preferences.
While people do not have homogenous preferences on tax fairness, economists have found that people generally prefer greater societal equity established through the tax code.
Senator Tom Coburn, a Republican from Oklahoma, has articulated tax fairness this way: “An individual’s or corporation’s tax rate shouldn’t be dependent on their ability to hire a tax lobbyist. It’s especially wrong to ask families who are struggling to make ends meet to subsidize special breaks for corporations.”
After decades of sanctions and years of negotiations, the permanent members of the UN Security Council (and Germany) have reached a temporary deal on Iran’s nuclear program. Under the agreement, for the next six months, Iran will halt activities that would enable it to make a nuclear weapon and allow international inspectors to dramatically increase their oversight of the program. In exchange, the United Nations and the United States will ease international economic and financial sanctions (including by unfreezing billions in Iranian assets abroad).
Not everyone is happy with the deal. Israeli Prime Minister Benjamin Netanyahu called it an “historic mistake.” Some lawmakers in Washington have expressed skepticism over whether the deal will actually impair Iran’s ability to pursue a nuclear weapon. And others have argued the decision to ease sanctions is a mistake—that now is actually the time for stricter controls.
Yet both opponents and proponents generally do agree on one thing: the sanctions against Iran worked. Since 2006, the United States, European Union, and United Nations have enacted increasingly tougher economic and financial sanctions on Iran. Economic sanctions included export restrictions on oil, automobiles, and arms. On the financial side, these nations have frozen the assets of Iranian entities and public sector, banks which do business with Tehran, and Iran’s currency. Together these sanctions resulted in significant negative economic consequences for Iran’s economy, including drags on oil revenue and GDP and increases in inflation.
The budget conference committee, which is currently charged with negotiating a compromise on the U.S. federal budget, has met publicly for a second time last week. The committee must deliver a report to Congress by December 15 and, to avert another shutdown, Congress must extend government funding by January 15.
Leaders in the budget committee leaders have said they “won’t waste time debating the areas where they already know there’s no agreement, but will focus on where deals can be cut.” Some Senate Democrats believe those compromises could lie in tax expenditures—including by eliminating “egregious” loopholes that wealthy individuals and corporations use to lower their net tax burdens.
Many have focused compromise in this realm on corporate tax loopholes. For good reason: while the United States has a statutory tax rate of 35% (the second highest among developed nations) corporations in this country pay an effective tax rate of just 12.6%. Senator Tom Coburn, a Republican from Oklahoma, has responded to these statistics, saying: “An individual’s or corporation’s tax rate shouldn’t be dependent on their ability to hire a tax lobbyist. It’s especially wrong to ask families who are struggling to make ends meet to subsidize special breaks for corporations.”
Technological advancements in currency are already challenging our efforts toward transparency. As I’ve discussed before, digital currency, most notably Bitcoin, grant added flexibility and opacity to the international financial system for criminals, money launderers, and tax evaders. If trends continue on their current trajectory, these technological developments, namely digital currency, will represent a significant obstacle to stemming the continued tide of illicit financial flows from developing countries.
Yet there are other technological—and digital—pathways for criminals to launder money. These are still not well-understood, but are nonetheless vitally important. The earlier—and better—we can understand them, the better our chance of tackling them early.
Jean-Loup Richet, an Information Systems Service Manager at Orange and Research Associate at ESSEC Business School, recently published a report on this topic for the United Nations Office of Drugs and Crime. Richet’s report outlines a variety of digital tools money launderers now use to clean their dirty funds. They extend far beyond currencies like Liberty Reserve and Bitcoin, which we’ve discussed here, and venture into online-realms that few would expect to include the nefarious activities of money laundering criminals.
With the government running again, the joint Senate and House Budget Conference Committee has begun meeting to hammer out, if not a grand bargain, at least a small one. The Committee must deliver a report by December 15 and, to avert another shutdown, Congress must extend government funding by January 15.
It’s difficult to overstate the political importance of a compromise, but the economics are important here, as well. The federal deficit has been declining since it hit a high of 10.1% of GDP in 2009 (though most American’s don’t know it). The deficit today is about 7% of GDP and the Congressional Budget Office (CBO) expects it to fall to about 2.4% of GDP by 2015.
Yet the CBO does not expect this downward trend to continue. As a result of an aging population, rising health care costs, and growing interest payments, the CBO expects (if policy remains at the status quo) the deficit will begin rising again the coming decade. In the long-term this is a rather significant problem to the extent that it contributes to a continued growth in public debt, which will likely exceed 71% of GDP by 2018.
While economists don’t agree on timing, most will say that the U.S. federal government needs to bring its expenditures in line with its revenues. On the expenditures side, many analysts and politicians have focused on the importance of reducing entitlement spending. For good reason—the cost of Social Security Insurance, Medicare and Medicaid are expected to grow at levels that many term unsustainable.
Nuance can be a challenge for Financial Transparency Coalition issues. To the average citizen or politician, the relationship between banking laws in developed countries and poverty in developing countries is not self-evident. On its face, it’s not obvious that public registries in the United Kingdom have anything to do with corruption in the Democratic Republic of the Congo. Yet there are compelling connections between these issues and strong causal relationships between them. Our challenge is to explain why.
At the risk of sounding too self-congratulatory, I must say the group of organizations who work on these issues does a phenomenal job of explaining these connections in ways that both citizens and politicians can understand. This week this fact is evidenced by two very different, but connected, developments. The first is a brilliant public outreach campaign by the ONE campaign called Stash the Cash. The second is a promising development toward public registries of beneficial owners in the United Kingdom, which, if you read this blog, you’ve already heard about.
First, in the spirit of connecting the dots, let me say a bit about beneficial ownership, public registries, and their connection to economic development and corruption. Criminals and corrupt business and politicians use anonymous shell companies (or “phantom firms”) to avoid taxes, launder the proceeds of crime, and steal public money. Via these phantom firms, dirty money flows from the developing world to banks and trusts in developed countries. Which means developed countries have the power to curtail it. Yet the inadequacy of anti-money laundering standards and laws on beneficial ownership in many developed countries and secrecy jurisdictions allows these flows of cash to continue.
In less than two weeks New Yorkers will head to the polls to replace Mayor Michael Bloomberg, who has hit his term limit. In the race, Bill de Blasio, the Democratic candidate, is the clear frontrunner over Republican Joe Lhota by 64 percent to 23 percent.
To voters, the campaign has centered on the economy and jobs, public education, and affordable housing—issues which all relate to major concerns over New York’s rising income inequality. In New York City income inequality is a huge concern. In fact, according to the Census Bureau, the income gap in the City is higher than in any other metropolitan region in the United States. On this issue, many New Yorkers have expressed a preference for de Blasio, and noted that during 12 years of Republican-turned-Independent Mayor Bloomberg, the city “paid too much attention to the rich and not enough to the poor.”
Mayor Bloomberg, who is a billionaire himself, has not responded to this issue with much sympathy. “Wouldn’t it be great if we could get all the Russian billionaires to move here?” he said recently in his weekly radio interview, “You picture this income inequality measure, but if we could get every billionaire around the world to move here, it would be a godsend.”
Tom Cardamone, Managing Director of Global Financial Integrity, recently published a piece in Reuters on the connections between human rights and tax evasion. He references a recent report Tax Abuses, Poverty, and Human Rights, published by the International Bar Association’s Human Rights Institute (IBAHRI) Task Force on Illicit Financial Flows, Poverty, and Human Rights. The report finds that the evasion of taxes “has considerable negative impacts on the enjoyment of human rights.”
The IBAHRI report goes beyond this connection, however. Developed nations, they write, have an “obligation to assess and address the domestic and international impacts of corporate, fiscal and tax policies on human rights.” These ideas are worth fleshing out.
Much of the IBAHRI report reflects the philosophies of Thomas Pogge, a member of IBAHRI and a chair of Tax Force on Illicit Financial Flows, Poverty, and Human Rights. Pogge’s philosophies are grounded in the philosophical principal on the two types of moral imperatives: negative duty and positive duty. Negative duty is the moral obligation not to cause harm (that is, non-interference), whereas positive duty is the moral responsibility to prevent harm (that is, assistance). For example, you have a negative duty not to push another person in front of a speeding train. You might also have a positive duty to pull an injured man out from in front of a speeding train.
The Democratic Republic of the Congo is widely considered one of the world’s nations with the highest levels of natural resource wealth. In particular, the nation is richly endowed with many types of mining industries—including copper, cobalt, gold, diamonds, and tin—and timber. In fact, DRC accounts for 51% of the world’s extraction of cobalt and is the world’s fourth largest producer of diamonds.
Despite this wealth, and in part because of it, the country also has experienced conflict, economic instability, and systematic corruption since its independence in 1960. These dynamics have contributed to its status as the world’s poorest nation in terms of per capita GDP. In particular, DRC suffers from an uncertain legal framework and a paucity of transparency in government. As I explained in a recent series of blog posts, nations that have vast natural resource wealth, but do not take the necessary steps to keep the extractive industries accountable, transparent, and honest, are likely to suffer from corruption and, ultimately, the resource curse. DRC’s policies and dynamics fall squarely in these criteria.
Given these existing dynamics, it is difficult to see that expanding oil production—as the government now hopes to do—will stimulate economic growth. In 2012, oil revenues contributed $325 million to DRC’s GDP, but according to Nathaniel Dyer, a campaigner for Global Witness, these revenues are expected to “rise sharply,” particularly given the DRC’s recent deal with Angola to exploit offshore fields.
This blog post is the third post in a series on the connection between extractive industries and corruption in developing countries. You can read part one here and part two here.
In a blog post two weeks ago, I discussed the relationship between extractive industries and corruption, noting that while they are related, the presence of extractive industries alone does not inherently lead to their political exploitation. Rather, it is the effect that these industries have on other economic and political conditions that can drive corruption. Last week, I introduced a few alternative hypotheses that explain the connection between extractive industries and corruption. I used a framework to explicitly point out the causal links between extractive industries and governance. This week, I’ll discuss some of the proposed solutions to the resource curse, again in the context of this model.
In each of these posts I’ve started with a framework adapted from a model presented by Tsegaye Lemma, a policy analyst with the United Nation Development Program’s Bureau for Development Policy. Lemma defines corruption as a function of monopoly, discretion, accountability, integrity, and transparency. Specifically:
Corruption = (Monopoly + Discretion) – (Accountability + Integrity + Transparency)
Last week I noted that extractive industries can increase the government’s discretion, create monopolies, reduce integrity and accountability. Missing from this discussion, however, was the issue of transparency. As it would turn out, many of the solutions to this problem lie in that variable.
This blog post is the second post in a series on the connection between extractive industries and corruption in developing countries. You can read part one here.
In a blog post last week I discussed the relationship of extractive industries and corruption, noting that while they are related, the presence of extractive industries alone does not inherently lead to their political exploitation. Rather, it is the effect that these industries have on other economic and political conditions that can drive corruption.
Conceptually, we can think about this in terms of a model presented by Tsegaye Lemma, a policy analyst with the United Nation Development Program’s Bureau for Development Policy. Lemma defines corruption as a function of monopoly, discretion, accountability, integrity, and transparency. Specifically:
Corruption = (Monopoly + Discretion) – (Accountability + Integrity + Transparency)
Extractive industries can affect each of these components of governance and economic conditions. Below, I consider alternative hypotheses to explain the connection between extractive industries and corruption and, using this framework, will point out how these industries affect each of these categories of governance and economics.
This blog post is the first post in a two-part series on the connection between extractive industries and corruption in developing countries.
Natural resources, particularly fuels and ores, are often associated paradoxically with stagnant economic growth. More intuitively, natural resource wealth is also often associated with poorer governance, most notably corruption. Understanding why this is the case, however, is not necessarily intuitive. To that end, I’ll explore the correlational relationship between natural resource wealth and corruption in this post and show a model for examining these issues. Next week, I’ll use these theories to talk about some specific hypotheses explaining the relationship between large exports in extractive industries and corruption in developing countries.
The relationship between corruption and natural resource wealth, like so many things in this world, is not empirical. Notably, it’s difficult to tease out a cause and effect relationship between natural resource endowments, corruption, and governance, particularly without observing the effect of other factors—as geography, poverty, and conflict—which also tend to be correlated with natural resources and governance.