Tax avoidance – Tax evasion, tax avoidance and development finance

Working Paper Number 129
Tax evasion, tax avoidance and development finance
Alex Cobham*1
Domestic revenue mobilisation is key to sustainable development
finance – only self-sufficiency will allow the development of
fully-functioning states with flourishing systems of political
representation and economies reflecting societies’ expressed
preferences in regard to, for example, inequality. Tax evasion
and tax avoidance are important insofar as they affect both the
volume and nature of government finances. This paper estimates
the total cost to developing countries of these leakages as
US$385 billion annually, dwarfing any potential increase in aid.
An additional result suggests that doubling aid to low income
countries may have little positive revenue effect but damage the
strength of political representation, if full trade liberalisation is
simultaneously required.
September 2005

1. INTRODUCTION
This paper considers the effects of tax avoidance and evasion on the financing of
development. Although funding for new aid commitments is important, it is argued that
(i) sustainable development requires developing states to approach fiscal independence,
and (ii) that the annual revenue cost of tax leakages is well in excess of aid flows.
The paper proceeds as follows: first it surveys the structure of tax systems in rich and
poor regions of the world and developments during the last three decades (section 2);
then it sets out a simple model of all leakages, and uses existing work and new data to
generate the first comprehensive estimate of the cost to developing countries in
revenues foregone (section 3). Finally, section 4 concludes with a call for a new agenda.
It is useful first to assess the context – both political and ethical – in which tax evasion
and avoidance feature, and in which sources of development finance are considered.
Meet the ‘new’ sources, same as the old
In the light of recent commitments to increase official development assistance (ODA) to
poorer countries, there has been renewed focus on identifying the most promising
potential sources of new revenues which OECD country governments can allocate to
development assistance. In this context, amid discussion of environmental taxes
(including the airline tax backed by French President Jacques Chirac), global lotteries
and the proposed International Financing Facility (IFF), the topic of tax avoidance
seems somewhat out of place. Arguably however it is both the most promising longterm
source of new funds for development, and also a politically attractive mediumterm
option.
The context of seeking ‘new’ funds for development finance is the commitment (finally
achieved) to a timetable to increase aid budgets to 0.7% of GNI by 2015, and to 0.51%
by 2010. In the context of high-income OECD countries with revenues typically in the
range of 20-30% of GDP, there is clearly no binding fiscal constraint preventing greater
allocation. The problem that does exist however is political and two-fold: first, the
simple question of obtaining sufficient political will to carry out the commitment, even
in the face of pressing domestic fiscal demands; and second, the related issue of
maintaining that will (and that level of funding) in a future of domestic economic and
political uncertainty.2 Various studies have demonstrated the instability and even procyclicality
of aid flows, and the extent to which these undermine the benefits of aid.

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Tax evasion tax avoidance and development

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