- Paula Escalada, EFE News Agency
- Susana Ruiz, Tax Justice Policy Lead, Oxfam International
- Jose Antonio Ocampo, Minister of Finance, Colombia
- Guilherme Mello, Secretary of Economic Policy, Brazil
- Prof. Jayati Ghosh, ICRICT Commissioner
- Vitor Gaspar, Director Fiscal Affairs Department, IMF
Susana Ruiz: We have had massive wealth concentration over the pandemic. How can the IMF support more progressive taxation – heard yesterday the head of the Western Hemisphere support that.
Paula Escalada, moderator: Minister Ocampo, you have promoted taxing windfall profits, digital economy – What is your resume after 5 months? Do you think this can be replicated in the region?
Jose Antonio Ocampo: Tax reform that was passed in Colombia has several elements. First, progressive personal income tax, reducing benefits for high income earners and creating wealth tax. Colombia has some experience with that, now permanent, for individuals. Inequality in wealth is much worse than the inequality of income, this is a very progressive element in the reform.
On corporations, a simple tax on micro businesses – simplified system for small businesses, to pay only one tax, system takes care of other local taxes. Reduces the tax rate for those small businesses, now the objective it to formalize many and bring them into the tax system.
Second element was the windfall tax for oil and coal sectors, major exports of Colombia. Surcharge on those sectors based on international prices. For oil 15 per cent and coal 10 per cent, it will decline if international prices start to decline. One interesting pattern: There was a lot of talk that this would reduce investment in oil, but actually it’s increasing, businesses still very profitable.
Third element is we implemented the 15 per cent minimum tax agreed in OECD tax deal, reduced benefits for corporations. This is a floor, no exception, real minimum tax. Two small other elements, health and environmental taxes – for sugary drinks and meals with too much sodium, and we have a carbon tax that was expanded to new activities. Special tax on non-reusable plastics. Small in terms of revenues – I hope we raise no money with those taxes because people change their patterns of consumption!
Escalada: What about replication in the region?
Ocampo: Trying to promote with Chile, hopefully Brazil, Latin-American agreement on taxation. Two basic purposes: One, in international negotiations as a group of countries. Africans were much better in OECD negotiations, LatAm was totally fragmented. Hope that India G20 will promote a new round of tax negotiations. Other to strengthen the system of the OECD tax deal to have a fair taxation of multinationals in the place they operate, including digital taxation. We determined that beyond a certain level of sales, multinationals have to become income tax payers. One of the American companies doing business in Colombia, claimed they didn’t have a subsidiary there, told them to create one and pay taxes there.
Global UN convention for taxation, General Assembly approved it, now they started the process. I participated in the panel, it is interesting and hope this Latin American process will allow LatAm to have a common voice in this.
Escalada: Secretary Mello, you have announced lifting the debt ceiling in Brazil. Are you planning to address the regressive tax system in Brazil and how?
Guilherme Mello: I used to say that if you look at Brazil’s tax system and compare to other countries even in LatAm you find one of the worst systems you can think of. Very complex, regressive, taxes exports not in a good way (manufacturing more than basic commodity exports), tax investments. And a lot of loopholes. The last big reform of the Brazilian tax system was in the 1960s with the military regime. After that, the world has changed, new constitution, but basis still the same. We don’t have a VAT. We have a lot of special regimes. Some part of our tax systems started being corrupted by little changes in legislation like you pass a law about women’s rights, and inside you put a small change of the tax system, taking out like 100bn reals of revenue.
First, we approved a constitutional amendment to give room to the social problems, Brazil are back with social problems, hunger. Next step to close some of those loopholes, we lost in one year more than 1.5 per cent of GDP in revenues. Not only a revenue effect, also we get the markets better – some enterprises pay their fair share and others don’t, so competition gets distorted. When you close those loopholes you create a better business environment. Third step is the tax reform. Looking to reform consumer tax system, half of the revenues are from consumer taxes, this is very high. Also very confusing and unequal. Trying to create a VAT with cash back for poor people – of course, consumer taxes are not the best way to distribute income, but if you add something that works it will get better and will be a progressive reform.
In the second half of the year, we will come with a proposition to also reform tax on income, that’s the key to change from regressive to progressive. In Brazil, income tax are only progressive until 30-40 minimum wages, after that the more you earn, the less you pay, because we don’t tax dividends, just salaries. Rich people usually get most of their income in the form of dividends. Only Brazil and Estonia do this in the world, very unusual.
Escalada: Professor Ghosh, developing countries that lack fiscal space harder hit by crises. What is the role of international systems in limiting the capacity of countries to respond to crises?
Jayati Ghosh: I am delighted to be here, Minister Ocampo already showing what a country can do, we are all looking to LatAm, seeing region coming together on taxation is very inspiring.
Developing world needs fiscal resources like never before. Have never faced the combination of urgency, need, and absence of resources. We are taxing profits and rich incomes less than even 10 years ago. Global institutions that frame possibilities for raising revenues and dealing with these crises are no longer fit for purpose. What is described as a very urgent debt crisis, nothing gets done, this is the 3-4 year where we say this is urgent. What’s remarkable is that the developing world is not getting its fair share of taxes because of the way the tax architecture is drawn up. It was made a century ago, when we didn’t have multinational corporations and rich people being able to move their capital around. 3 areas in which tax reform is essential:
- taxing multinationals, why we can’t tax them properly
- taxing wealth adequately, lack of domestic political will and countries don’t have the information.
Let’s start with the first, profit shifting to tax havens, pay almost no taxes. OECD set up process for base erosion and profit shifting – this is actually quite easy, stop treating them as separate entities but as one corporation, then apportion the tax revenue to different countries based on a formula. Need a global minimum tax rate, even if you pretend to make profits elsewhere, pay a minimum in the country of operation.
OECD came up with a result that official accepts both proposals, but both pillars are lacking in critical ways. Pillar one which is about this unitary taxation is too limited, the share of profits is so small, only the residual profits above 10 per cent. And then only a quarter of those. Reduces the amount of tax that will be shared is really low, like 20bn. Similar minimum tax rate, should be 25 per cent which is the global average, OECD compromise is 15 per cent which is close to tax havens. So this could actually become a race to the bottom. In return for this very little advantage for developing countries, told they should give up their autonomy like digital services tax, and take part in investor state dispute settlements.
A lot of revision and change is needed to make this fit for purpose. The fact that it was an OECD process led by rich countries has something to do with that outcome.
On wealth taxes, we just don’t have enough information on who is storing wealth where. If every country had an asset registry with beneficial ownership, even for trusts, and share that information. Country by country reporting of all incomes and wealth. Ocampo has shown you can do this. These are huge steps forward that we could take. It requires political will, but I’m inspired what has been possible already in a short time. The resources are due, it’s essentially a transfer from poor to rich countries.
Escalada: IMF focused on addressing inflation, hitting developing countries hard, austerity. You make clear point on targeted spending as stabilizers. What about windfall profits and other progressive tax measures?
Vitor Gaspar: We show in the Fiscal Monitor that when inflation is happening based on monetary policy alone, it comes at disproportionate cost for lowest segment of households. By fiscal tightening one is able to moderate interest rate increases that are necessary to bring inflation back to target, and mitigate distribution of cost from monetary policy. But we can do better, with targeted transfers to lowest segments of population most hit by cost of living crisis, especially when it has a food component. By targeting those, we can protect their consumption while contributing to overall smoothing of consumption for all households. From that viewpoint of monetary and fiscal tightening looks better than what you get from monetary policy alone, especially when accompanied by transfers. This is stabilization but not automatic, targeted in specific set of circumstances. A fact that is crucially important to recognize that in countries that redistribute, they do so much more through spending than revenue. The proportions are about 2/3 spending, 1/3 revenue. I am saying nothing against progressive taxation, but saying that if you enable the state to redistribute on spending side, this is important as my example of transfers demonstrates. The success of a program like Bolsa Familia is an example of the power of this.
On taxation, we advocate for a systemic approach, look at tax system as a whole, not on tax by tax basis. In our evaluation the empirical performance of net wealth taxation or windfall profit approaches is not very encouraging. We think capital income taxation probably can be designed to dominate wealth taxation, and rent probably dominates windfall taxation. But there are exception, property taxation can be relatively easily implemented, and contributes to increase the progressivity of the system. Adam Smith came up with 4 principles of taxation: fairness, certainty, convenience, efficiency. Certainty – extremely important that the system is transparent and you can explain to everybody how much you paid and why. Taxation should not be arbitrary, have to be careful not to introduce one-offs that undermine certainty and are arbitrary. Most of the proposals on wealth taxation can be replaced in a more easy and coherent way through capital taxation, this is a pragmatic argument based on cost of administration and compliance.
Escalada: First ministerial LatAm tax summit, historical opportunity for the region to build a more permanent platform. What do you expect?
Ocampo: Think the mix of huge social and environmental demands, and we have inherited high levels of public debt because of the pandemic. The only way to finance social programs is additional taxation. Two basic objectives is to create a more common view on how to push for more international cooperation – this UN Resolution has been pushed by the Africa Group, they have been much more effective than us. Second is to see if the OECD framework can be applied better in LatAm.
I cannot resist making a comment on Mr. Gaspar. The original justification for a wealth tax in Colombia back in 1936 is that capital income is always under-estimated. Capital gains are particularly tough. So the wealth tax is a way to compensate for that. By the way, Mr. Piketty is now using the same argument. Capital gains today have become a source of reducing the tax income of the rich in a significant way. Maybe the IMF can develop ideas on how to capture that, but so far we have been unsuccessful. I hope the IMF will join the push for wealth taxes.
Escalada: Sec. Mello, it’s become more common to hear about Global South concerns about inclusiveness of international negotiations about tax reform. What are your views on the summit? Also Brazil chairing G20 next year, what could be the role?
Mello: Brazil have a long tradition forming alliances with other Global South economies. Really believe that what we are seeing in Colombia is really important. We need to find a way to finance in a good way the expenditures we need to develop our countries. You have to finance education, innovation, infrastructure, housing – you need a solid fiscal basis. Nowadays also ecological and energy transition. The only way you can face all this is with a solid base of taxation. It needs to be fair, can’t be again taxing the same ones we always tax. In Brazil, it’s been this way through history – we tax the workers and the poor. It’s easier. We exempt the very rich and big corporations because there are pressures, “if you don’t give me this I’ll go away”. We need a commitment and this initiative is very important, a message that the Global South will need to find a way to finance their spending and taxing with equality with social and ecological justice. We have a climate crisis and need to set incentives in the right way for this transition.
Escalada: IMF has also been closely following international processes and recently made publication on OECD, saying pillar one and two will bring hardly any resources. Should we be content.
Gaspar: It is true that if we go back a hundred years, the architecture we have now that is trying to avoid double taxation, is actually the result of work by a group of economists from 1923. They were four experts from Belgium, US, Italy, and UK. If you have a system from 100 years ago, it requires a profound rethinking. Nothing survives a century of change.
Second point I think is crucial is to recognize that the agreement in the OECD framework is progress, global minimum that is self-enforcing is a good stop of the race to the bottom, really very positive. You can dispute the level, but having a minimum which is binding is a good step.
Pillar one is less immediately relevant, but conceptually crucial. From viewpoint of organization hosting us, a step in the direction that divides rights of taxation on base of country where country sells products. If that is implemented, it’s an open door for future progress. Cooperation is very welcome, we need to work together.
I’ve looked at the situation in LatAm, Gini Coefficient is between 40 to above 50. Colombia is at the bad extreme of this distribution, so I would be obsessed with distribution. The most unequal country in the world is in South Africa, which is 10 points above Colombia. At the bottom we have Scandinavian countries, Denmark, Sweden, Norway. Apart from Norway, these countries do not have a wealth tax. The efficiency of the income tax in Denmark is legendary. Many countries followed Colombia in 1936, most did not have a good experience with the practical implications and abandoned it. I completely understand the urgency, but we should adopt solutions that actually work and deliver. Need a profound reform in the tax system, exactly what Brazil is trying to do and this is absolutely right.
Escalada: UN Tax Resolution, what do you make of it?
Ghosh: Part of the reasons the OECD outcomes have been so disappointing is because of the nature of the process, it was not inclusive. So even when you think about allocating the extra revenues, it is deeply unequal for the developing countries. So process is important, it determines the outcome. So we are delighted that there is a process in the UN and regionally, they can only further that process. They can cooperate, coordinate, and have a more effective voice in the global negotiations. Like the Africa Group has shown, if you are united you can get a more open, transparent process.
Mr. Gaspar likes to provoke – he emphasised the importance of universal health access. What happened that you’re suddenly all about targeting. Surely it should also be universal access to decent work, housing, education. Also surprised at the idea that it’s easy to calculate property tax and not wealth tax. Actually we have the information on wealth, we just need to share it. Maybe countries have had this difficult experience because they tried to tax all kinds of wealth. Just use a threshold, like everyone above 1 million – if you have country by country reporting, you can tax that. Why should we write that off? Countries like Sri Lanka, where elites have benefitted and continue to benefit while the country is in turmoil, and IMF comes in to say tax the poor more. There seems to be a schizophrenia in the IMF: Your research department is producing excellent work, this is not reaching to programs. To me this reiterates the critical need for countries to raise their own resources, the IMF should really support this, it will make your life easier because you have less countries coming to you.
Questions & answers:
- It would have been great for Africa to be represented on the panel.
- Why Sweden did away with wealth taxes, want to understand how you convinced the public? And when policies work how can this be shared better?
- How do you see these discussions link up to the international debates on debt etc.?
- Countries like Ghana trapped between the IMF and China, e.g. IMF demanding public wage bill cuts – meanwhile World Bank demands improvements to education, health etc. So paradoxical. Taxation is one of the issues fuelling political violence.
Gaspar: Agree that evaluating effects of policy intervention is crucial, have a good example how that can be done: Peru. Used micro data from their reform of corporate income taxation, saw that strengthening administration worked in levelling the playing field for small enterprises. In some cases the cost of compliance can actually be the dominant aspect impacting tax payers. This is the idea of convenience of Adam Smith.
(To woman from Ghana): I believe that your portrayal of the Fund is a very unfair caricature. The Fund is a crisis lender, when we associate with a country through a program, the country came to the Fund because it was in a crisis already. Still, when we design program the distribution of adjustment is taken into account and key spending priorities are protected, with special emphasis on social spending. This has been evaluated and documented. One has to be careful about this kind of perception, what is part of the pre-existing crisis and what is part of the program. We do our best to minimize the cost of adjustment.
Nabil Abdo, Oxfam: On Tuesday, the WEO said that the effects of fiscal consolidation on debt ratios are negligible because it depresses growth, then you have less tax revenue, vicious cycle. IMF is admitting that, but no change in terms of practice. How do you square that? Distributional impact assessments of policies, we talk to mission chiefs etc. ask them why don’t you do those assessments. They say we can’t do that, don’t have the capacity. So you are saying programs are doing these, so where is this? Why isn’t this published?
Gaspar: Impact assessments of individual policy interventions, like changing tax compliance systems. Yesterday I signed protocol with Guinea Bissau on a platform where people can access tax information from mobile phone, decreased cost of tax compliance. We have published results of this kind of thing. Program design done based on categories of government spending, e.g. health, education, social transfers. We don’t have the capacity to make a full distributional impact analysis of policies in real time. We try to protect social spending quite seriously.
Fiscal tightening is not equivalent to austerity. Last year in 2022 monetary and fiscal policy tightened in 75 per cent of the countries worldwide. Not like you had a worldwide bout of austerity. The reason why we need tightening because we have persistent inflation that risks creating strong degree of instability with very large overall costs.
In this environment, the considerations that were reported on Monday on the WEO, emphasize repeatedly that when fiscal consolidation takes place taking into account the macro environment and properly designed, it does help. Also said that when there is need for restructuring, it is very effective tool for reduction of debt level, but works better if accompanied by fiscal consolidation.