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24 October 2013October 24, 2013

Why New International Taxes for Development Are Inefficient

Research Paper analysing the new financing mechanisms in the field of development assistance

Why New International Taxes for Development Are Inefficient

International aid only has a limited impact on the fight against poverty, as opposed to trade and entrepreneurial capitalism. Meanwhile, international bureaucrats are still busy crafting new taxes for development assistance. In 2000, the United Nations Development Programme started talking about Innovative Financing for Development (IFD), a complex set of spending projects and organizations in the field of development assistance that are to be funded mostly by new taxes. The authors of this Research Paper are unequivocal: IFD taxes combine nearly all the possible flaws a tax can have, both politically and economically.

Links of interest

Media release ::
New taxes to help… international bureaucrats

Research Paper prepared by Youri Chassin, Economist at the MEI, with the collaboration of Pierre Lemieux, Senior Fellow at the MEI.

Executive Summary

Developed since the early 2000s, innovative financing for development, or IFD, is a collection of disparate spending projects, organizations and financing mechanisms in the field of development assistance. It is first and foremost a set of current or proposed new taxes. The current IFD taxes are the airline ticket tax and part of the proceeds from pollution allowances in Germany. Several new IFD taxes have been, and are being, proposed, including financial transaction taxes (FTTs), a carbon tax, a tobacco tax, and new special drawing rights (SDRs)—a hidden tax.

IFD taxes do not meet the criteria of “good” taxes suggested by the standard or orthodox theory of public finance: efficiency, low administrative costs, flexibility, political accountability, and fairness. The airline ticket tax hits relatively elastic demand, which implies a large excess burden (economic cost). FTTs are probably inefficient, despite the fact that many economists favour them (for reasons unrelated to IFD objectives). Higher tobacco taxes would likely be inefficient, and raise less revenue than anticipated. New SDRs could generate inflation. Only carbon taxes, to the extent that they correct pollution externalities, could possibly be justified from a standard publicfinance viewpoint. Many IFD taxes may carry high administrative costs, especially a tobacco tax, and probably an FTT and a carbon tax as well. All IFD taxes have inflexible rates, except perhaps for the hidden tax represented by SDRs. IFD taxes also fare badly against the criterion of political accountability: They are hidden, and the link between the taxes and what they finance is broken or obscure.

Market failures exist, but so do government failures. Analyzing IFD taxes using this approach— called “Public Choice”—reveals further problems. The danger is that these taxes will serve more for tax exploitation than for providing the public services that taxpayers want. New taxes create new rent-seeking opportunities. Rent-seeking also occurs within governments, on the part of bureaucrats who, like everybody else, naturally pursue their own interests. It comes as no surprise that bureaucrats in development agencies have attractive working conditions and perks. Most IFD taxes (the proposed tobacco tax being the only possible exception) levy small amounts of money from a large number of people who will, therefore, not be motivated to protest, while the immediate recipients are a small number of bureaucrats in national or international bureaucracies. The incentives of politicians are misaligned too. The fact that IFD taxes are hidden and non-transparent is a feature of such taxes, not a bug. International aid agencies are also particularly opaque, and their auditing procedures often questionable. IFD taxes appear to be more a demonstration of government failure than an efficient way to raise money to correct market failures.

IFD taxes do not, and would not, increase development resources as much as it appears they might at first glance. Money is fungible and a subsidy can just replace other money that would have otherwise been spent on the same things. On top of this, there is much empirical evidence that development aid has not served to further real and sustainable growth. The importance of good institutions, including economic freedom and free international trade, was obscured, if not countered, by development aid.

IFD taxes are in many ways the epitome of inefficient development aid.

Read the Research Paper at iedm.org


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