How tax solves climate change
Summary
The power to tax is taken for granted in a great deal of mainstream public finance. In considering limits to taxation, traditional research in the field focuses on limits imposed by incentive constraints, which are tied to asymmetric information or to politics and political institutions. The limits to taxation are rarely tied to the administrative capacity of the state. But incentive constraints alone cannot explain the vast differences in the levels of taxation that we see across the world and across time. Low-income countries typically collect taxes of between 0-20 per cent (usually around 10%) of their GDP, while developed countries can collect far more of their GDP from tax such as Denmark which collects 46% of their GDP from tax.
In essence, my view on these patterns is similar to that taken by Joseph Schumpeter (1918) almost a century ago, when he noted: “The fiscal history of a people is above all an essential part of its general history. An enormous influence on the fate of nations emanates from the economic bleeding which the needs of the state necessitate, and from the use to which the results are put.” In order to understand taxation, economic development, and the relationships between them, we need to think about the forces that drive the development process. Poor countries are poor for certain reasons and these reasons can also help to explain their weakness in raising tax revenue.
Like many baseline models in economics, it is useful not because it applies very directly to the real world, but because it helps organize our thinking about what departures from the model are likely to be useful. We then turn to our primary focus: why do developing countries tax so little? We begin with factors related to the economic structure of these economies. But we argue that there is also an important role for political factors, such as weak institutions, fragmented polities, and a lack of transparency due to weak news media. Moreover, sociological and cultural factors—such as a weak sense of national identity and a poor norm for compliance—may stifle the collection of tax revenue. In each case, we suggest the need for a dynamic approach that encompasses the two-way interactions between these political, social, and cultural factors and the economy. Of course, the study of taxation in low-income countries teaches us about the general forces driving higher and lower levels of taxation, but it does much more. The evolution of taxing power is central not only to the state’s capacity to raise revenue but also to its capacity to provide goods and services and to support a market economy. Moreover, political development goes hand in hand with economic development, as citizens in participatory political systems demand sound management of increasing public resources. Thus, the power to tax is about much more than raising tax revenues—it is at the core of state development.
1.7 Billion people in the world are not part of the financial systems and mainly untaxed, as a result, lack of taxation is causing a domino effect which causes the number one cause of all the SDG issues we face in the world today.
Farmers get paid little, being bullied by larger corporations to sell for next to nothing. With this, governments don’t have much revenue from taxes so you have issues with funding schools, hospitals and more. This is a very simple way to look at things, but below you can look at this in more detail.
Taxes pay for garbage collection, which prevents plastics from entering the ocean. Taxes provide funds for schools, making farmers more educated and less vulnerable and removes the biggest cause of poaching and deforestation.
Taxes pay for strong legal systems, so Gov. can prosecute companies for destroying the environment etc.
While it might not be very popular to speak about tax, it’s something we’re all ignoring and this is what we must solve as quickly as possible. No one should ever avoid taxes, no company and no citizen. Taxes are your commitment to your society. How the Gov. uses those taxes, are an entirely different discussion, which will be discussed below.
This article is here to explain the issue and how a simple marketplace can solve many of the most pressing issues of our time.
Full article
A well-functioning revenue system is a necessary condition for strong, sustained and inclusive economic development. Revenue funds the public expenditure on physical, social and administrative infrastructure that enables businesses to start or expand. The revenue system is also a central element in supporting a strong citizen-state relationship that underpins effective, accountable and stable governments. Both of these elements contribute to stronger economic and employment growth outcomes. There is general consensus around the importance of basic public goods to economic development. Without safety and security, few people will invest; why forgo real resources today when there is little likelihood that you will be able to secure the returns on that investment tomorrow? A functioning corporate and regulatory system reduces the costs for business and supports their expansion. Transport, communications and energy infrastructure are critical components for many large and small businesses. Access to health and education services means that workers are more productive and take less time out of the workforce to care for families. A social safety net encourages risk-taking, innovation and labour mobility
One of the reasons we have high tariffs in developing countries is because it’s a choke point where the Gov. can collect taxes from farmers as they have no Gov. presence in more remote and poorer agrarian regions.
There are debates about the extent of public good provision—what constitute basic public goods. There is also a debate over how some of these public goods should be financed; what is the balance between user pays and funding from general revenue? But this is a matter of degree; the provision of a set of core public services,
There is also increasing interest in the relationship between revenue and the nature of state formation and state fragility. Stable and functioning states are needed to provide these essential public goods. However, the collection of revenue does more than fund these states. Rather, there is an increasing focus on the role of revenue collection as central in building the state-citizen relationship. It is this relationship that is key in establishing an accountable, responsive and ultimately legitimate state.1 The coincidence of state fragility or failure with very weak revenue performance has piqued interest in the state formation literature. In particular, the relative ineffectiveness of governments in fragile states, together with their reliance predominantly on natural resources or foreign aid for revenue has raised the question of whether there would be a ‘governance dividend’2 from a stronger focus on domestic taxation
A McKinsey benchmarking study of tax administrations in 2008–09 found that tax administrations in 13 countries could collect an additional $86 billion by improving the efficiency of their tax administrations (Dohrmann & Pinshaw 2009). However, such reports represent the exception rather than the rule.
If taxpayers know their obligations, the second question for a revenue system is whether those obligations can be effectively assessed. The second aspect of the revenue system involves registering and assessing taxpayers, based on their legal obligations.
In assessing administrative costs, three aspects need to be considered: the number of transactions; the complexity of each transaction; and whether there was a natural or easy point for the transaction to take place. That is, did the nature of the activity bring the taxpayer into contact with the state administration in a natural way, or did engagement with the taxpayer rely either on voluntary action by the taxpayer or a proactive action by the revenue authority?
How does the level of administrative capability impact on the appropriate choice of tax instruments?
How is the appropriate choice of taxes and tax reforms impacted by the change in the economic structure of a country as it develops?
In particular, does the increasing complexity of what is produced and the increase in the formal sector as an economy develops impact on the appropriate choice of taxes?
While I could discuss the various benefits of different tax forms such as VAT, GST etc, I’ll focus on tariffs. Tariffs, excises and service taxes are less economically efficient as they only apply to a subset of goods or services. The relative degree of inefficiency relates directly to the extent of coverage. Tariffs are the least economically efficient as they focus on goods and exclude services, and tax consumption of imported goods rather than consumption of goods generally.
Given its comprehensive coverage, the VAT is more difficult to administer—because it applies to more taxpayers. Even in its simplest form, it is more complex to administer, because intermediate producers need to get credit for the tax they pay. These complexities are multiplied when there are multiple rates or some products are ‘zero-rated’, while others are exempt. Conversely, import tariffs are the easiest to administer because the border represents a natural collection point. This is particularly the case for island economies, but also the case in many developing countries with limited transport infrastructure. An RST, turnover tax and a services tax sit between these two extremes. A services tax has been an attractive option in fragile or post-conflict countries because of its ease of administration. It has regularly been applied to a handful of visible services such as hotels, restaurants, telephony services and car rentals. The visibility of the services and their placed base nature makes administration simpler. The fact that these services are predominantly consumed by international staff in the development industry makes it an easy tax to implement politically. An RST has fewer taxpayers than a VAT, making it easier to administer. A turnover tax will have the same number of taxpayers as a VAT, but each taxpayer interaction will be simpler. So such a tax is harder to administer than GST but easier than a VAT.
What Are the Issues? The 1990s saw a dramatic adoption of VATs among developing economies: from around 20 to over 80. A further 20 developing economies introduced a VAT during the following decade. The IMF has been active in the promotion of a VAT and Keen and Lockwood (2010) note that the probability of a VAT is significantly related to participation in a fund-supported program. Most of the countries that do not have a VAT have two unrelated things in common. They have a weak administrative capacity in their revenue administration and they produce a relatively small set of goods and services. In considering reforms to consumption taxation in developing countries, there is merit in understanding what impact different economic structures have on the relative efficiency of different ways to tax consumption. As countries become more developed, the structure of their economy becomes more diverse. They build greater capabilities and produce a wider range of goods and services, and the goods and services they produce are more complex.7 In particular, they produce an increasing number of intermediate goods and services—that is goods or services that are input into the production of another good or service.
There are also dynamic issues that need to be considered. Does the introduction of a VAT catalyse improvements in the tax administration? Can the VAT threshold be used for taxpayer segmentation, supporting more effective direct taxation collection from small and medium businesses? Does the VAT provide an incentive for small and medium enterprises to enter the formal economy in order to claim refunds on intermediate products, with greater formalising of the economy delivering benefits beyond increased revenue? Or does the VAT provide an additional burden that increases the incentive for firms to remain in the informal sector?
The best technical solution to the most effective way to tax consumption in the 50 or so countries without a VAT is not immediately obvious. It will depend on the country context, particularly around the economic structure and the level of administrative capacity. The key for development partners is to help countries identify and develop the appropriate solution, and then implement it. Conversely, for the vast majority of developing countries that have introduced a VAT, there is a range of specific reforms in design and implementation that is obvious from a technical perspective. In this case, the challenge is to stay engaged with the revenue authorities to support them in the long game of introducing these reforms.
The vast majority of PIT revenue comes from wage withholding of employees—a much smaller amount comes from the personal income earned by other individuals, including high wealth individuals. Revenues from a PIT are quite low and stagnant in developing countries, around 1–2 per cent of gross domestic product (GDP) compared with 9–11 per cent in developed countries.8Around 95 per cent of the PIT collected in developing countries comes from wage withholding by the public sector and large corporates. Reflecting the structure of many developing country economies, less than 5 per cent of the population pay PIT
Generally, a CIT is levied on the profit earned by companies, that is the revenue they generate less the deduction of allowable expenses. On average, CITs make a larger contribution to overall revenue in developing countries—around 1.5–3 per cent of GDP. They make a much smaller relative contribution to overall revenue in developed countries, also contributing on average around 3 per cent of GDP. Given the skewed distribution of firms, large corporates make the major contribution to this revenue. In the mid-1900s 35% of frontline services were paid for by corporate taxation, while today it only pays for 13%, because of tax avoidance and offshore holdings. This gives a real look into the benefits and consequences of having a working CIT which is easily prosecutable for tax avoidance, which can only happen once the Gov. has a large percentage of its GDP coming from taxation to create a strong government and legal system.
What Are the Issues? Effectively segmenting the taxpayer base is the key to allocating scarce administrative capacity and capability to their best use. This includes both domestic resources as well as international assistance. As discussed, much of the focus as has been on the high yielding large corporates, including multinational enterprises. More recently, there has been increasing attention on the aggressive tax planning practices employed by some multinational enterprises. However, the focus needs to go beyond the large corporates for two reasons: supporting a broad level of compliance with the revenue system and ensuring that there are necessary barriers to corporate expansion or firms moving from the informal to the formal sector. In any successful revenue system, there needs to be a culture of compliance among taxpayers. Certainly, this culture can be sharpened by well-directed and publicised enforcement actions. It can also be sharpened by designing the system and educating taxpayers in a way that reduces their compliance costs. However, a further element in building such a culture is the perception of fairness. Specifically, compliance by large businesses can be undermined if small or medium businesses are not seen to pay a reasonable amount. So too small and medium businesses complying with their tax obligations may reduce this compliance if they see other taxpayers not complying—particularly their competitors. In the same way, if multinational enterprises are seen to not be paying their way, it impacts on compliance by domestic large corporates and other businesses. A particular challenge in many developing countries is the relatively high level of economic activity in the informal sector. This raises a range of challenges beyond undermining compliance with the revenue system by participants in the formal economy. The weaker access to financial instruments and larger markets has limited the scope for economic expansion and has led to relatively lower levels of economic growth in countries with relatively larger informal sectors.
While I could now go into the issues around pressure on various governments to provide tax breaks for investment, as competition between nations to attract investment in their countries is highly competitive, it’s a short term solution and often a political win, rather than a longer-term strategy for the health of a nation.
A unit-based royalty—applying a fixed dollar rate to physical production—is the most straightforward tax to administer. Essentially, it involves measuring the tonnage and applying the rate. Corruption or maladministration is still possible, but an honest tax administration does not need the deep technical capability to effectively implement this tax. A value-based royalty involves applying a fixed rate to the value of the minerals in the ore sold by the miner. This can be either be applied to the sales value of the minerals (as included on the invoice) or on the gross value of the metal/minerals contained in the ore. However, these royalties do not lead to the optimal exploitation of natural resources. They are levied irrespective of the costs of production, so economically efficient but more expensive operations or risky investments are discouraged.
In developing countries with much weaker tax administrations, there are very strong arguments for supporting royalties based approaches. This can generate strong and relatively stable revenue flows even with relatively low levels of administrative capacity. Scarce administrative resources can be directed to basic anti-corruption and anti-evasion endeavours, rather than calculating tax liabilities and ensuring compliance with a complex law. In simple terms, a less efficient tax administered well serves the public interest better than an efficient tax administered poorly.
Developing countries with weak revenue administrations face major challenges from BEPS—in many cases, they will simply be unaware of the revenue they are losing. That said, with limited tax bases at their disposal, developing countries can ill afford to have their corporate tax base eroded.
To date, some developing countries have not embraced the AEOI (Automatic Exchange of Information) agenda. They have identified a number of concerns including over the legislative and administrative changes required to meet the global standard and the cost of investing in hardware to collect, store and encrypt the data. There are also concerns about the extent to which developing countries have the capacity to follow up on possible requests by other jurisdictions for additional information on their citizens. More generally, there are concerns about whether meeting the global standard for AEOI will draw resources away from other priority areas of tax administration.
AEOI is a key aspect of reducing tax evasion. By facilitating the systematic transmission across jurisdictions of taxpayer information concerning various categories of income, AEOI can provide timely information on non-compliance where tax has been evaded, even when tax administrations had no previous indications of non-compliance.
To date, some developing countries have not embraced the AEOI agenda. They have identified a number of concerns including over the legislative and administrative changes required to meet the global standard and the cost of investing in hardware to collect, store and encrypt the data. There are also concerns about the extent to which developing countries have the capacity to follow up on possible requests by other jurisdictions for additional information on their citizens. More generally, there are concerns about whether meeting the global standard for AEOI will draw resources away from other priority areas of tax administration
The tax system is the most direct and visible instrument that the state has to reallocate wealth within a society. Regulatory instruments or licensing decisions may reallocate significantly greater wealth, but the tax system is the most obvious. Accordingly, changes in the tax system are invariably difficult, vexed and highly contested. This is true for both tax policy changes, which are relatively simple to implement, and tax administration changes, which take longer to implement. Tax changes involve winners and losers. The only revenue-neutral tax reform with no losers is the status quo. The winners and losers are very clear with changes to direct tax bases. There may be some confusion with changes to indirect tax bases that alter relative prices. In general, this confusion leads to an overstating of losses, and an understating of gains.
Tax changes are often introduced to improve the efficiency of the tax system. That is, under the new tax system the costs (administrative, compliance and economic) of raising revenue will be lower. This may be the case in the medium to longer term. However, in the short term, there will be upfront administrative and compliance costs associated with shifting to a new regime. The dynamic gains associated with the reallocation of factors of production or goods and services to higher-valued uses also occur over time—and is viewed sceptically by non-economists.
These elements mean that changing the tax system is always an exercise in both economics (what is technically feasible and efficient) and politics or governance (what is politically feasible). This is certainly the case in developed countries. The introduction of a goods and services tax (GST) into Australia is a case in point
In supporting taxation reforms in developing countries, international organisations and donor countries need to remain mindful of the importance of understanding the local political context. As the OECD (2009) notes: ‘Political commitment to reform is crucial and more important than the formal status of revenue authorities. Experience underlines the importance of local leadership, locally developed solutions and donor sensitivity to local political and social context’. Similarly, Cottarelli (2011) concludes: ‘Sustained political commitment from the highest level is essential for deep reform, which needs then to be entrenched to prevent backsliding’.
Our company is called Kabu & Co. a global coffee bean marketplace for farmers.
Our goal is to re-invent the coffee supply chain and connect buyers directly to farmers.
Coffee production globally is declining as farmers are unable to break even due to a lack of access to markets. While this last year, coffee has been hitting very low prices and coffee production is up, this is temporary. With more and more coffee farmers going out of business and more and more companies exploiting the farmers and paying them next to nothing, there is no stability in coffee production.
In the next couple of years, we're predicted to bring 1 million farms out of poverty or 4-5 million people. While creating a tax base and facilitating tax collection. Tax collection means, the Gov. will have money for schools, hospitals, water treatment facilities or in other words, frontline services.
***This article is both written by myself and various parts have been copied from other authors, as this post is really not about re-writing a paragraph that has been written well already, but about clearly showing the issues and solutions surrounding tax, taxation and the distribution of tax revenue. While also showing the impact tax can have on solving the SDG issues***
#impact #coffee #sdg #climatechange