international tax dialogue

Thanks to human ingenuity, living standards have attained a level far above where they were in pre-industrial times. Increasingly, however, this expansion meets environmental constraints. Climate change is a real threat. And the burden of excessive waste and local air and water pollution is tangible not least in the densely populated emerging economies in Asia. With a global population that is still rising, higher living standards and quality of life for all can only be achieved within the environmental constraints of the planet if growth becomes greener. But how do we achieve that - what are the policy instruments?

In the wake of the recent financial and economic crisis, all countries face the challenge of restoring public finances without jeopardising economic growth. How can tax structures best be designed to support GDP per capita growth? Growth-oriented tax systems seek not only to minimise the distortions by the tax system, but also to create as few obstacles as possible to investment, innovation, entrepreneurship and other drivers of economic growth. Recent OECD empirical analysis suggests a “tax and economic growth” ranking order according to which corporate income taxes are the most harmful type of tax for economic growth, followed by personal income taxes and then consumption and environmental taxes, with recurrent taxes on immovable property being the least harmful.

There are few areas of economic policy-making in which the returns to good decisions are so high—and the punishment of bad decisions so cruel—as in the management of natural resource wealth. Rich endowments of oil, gas and minerals have set some countries on courses of sustained and robust prosperity; but they have left others riddled with corruption and persistent poverty, with little of lasting value to show for squandered wealth. And amongst the most important of these decisions are those relating to the tax treatment of oil, gas and minerals. A book recently published by the IMF - "The Taxation of Petroleum and Minerals: Principles, Problems and Practice" - consolidates and takes forward current knowledge in the field of natural resource taxation.

Taxation is not just a technical topic. It is the centre of good governance and state-building, central to the development challenge of creating effective states. The perceived fairness of the tax system is crucial to building an effective state based on citizens’ consent. Willingness to pay taxes is a good indicator of the legitimacy of the state. The degree of ‘quasi-voluntary’ tax compliance expresses citizens’ trust and confidence in the government and institutions of the country to respond to the needs of the population. Building that compliance is a central incentive for the state to engage with society. The ‘state-building’ approach to taxation requires the construction of tax systems (both policy and its administration) which strengthen the legitimacy of the state in the eyes of its citizens…

Tax policies didn’t cause the current financial crisis. But might they have made it worse, or affected its form? Are there any lessons to be drawn for directions of tax reform, once the immediate dust has settled? Some first thoughts on these questions are set out in a recent IMF note . This aims to stimulate discussion rather than offer definitive answers. It argues that the crisis draws attention to some long-standing tax distortions that have been widely recognized (and criticized), but often addressed, if at all, only in ad hoc and piecemeal ways.

Thanks to human ingenuity, living standards have attained a level far above where they were in pre-industrial times. Increasingly, however, this expansion meets environmental constraints. Climate change is a real threat. And the burden of excessive waste and local air and water pollution is tangible not least in the densely populated emerging economies in Asia. With a global population that is still rising, higher living standards and quality of life for all can only be achieved within the environmental constraints of the planet if growth becomes greener. But how do we achieve that - what are the policy instruments?