Najib Should Not Play Poker with Freakonomics critical to the efficiency of economic activity, to fairness, and to the legitimacy of the state.

You hear a lot these days–not least from me–about the fiscal problems of advanced economies. But let’s not forget the fiscal problems that low-income countries face, though they are of a different kind.

For all too many low-income countries, government tax revenues are far from enough to meet the needs of their people. Some have made good progress, and this helped them weather the crisis better than many advanced economies–but there is an underlying, quiet crisis of inadequately resourced governments.
Tax Matters for Developing Countries the Global Economy’s Corporate Crime Wave Najib income tax cuts with GST
Nor is it just the level of revenue that matters; tax design and implementation are also critical to the efficiency of economic activity, to fairness, and to the legitimacy of the state.
Sharing experiences
Supporting low-income countries’ efforts to strengthen their ability to raise revenue is an important part of the IMF’s role in helping them maintain stable and growing economies. How best to do this was the topic of two recent IMF conferences: one, in Nairobi, focused on sub-Saharan Africa; the other, with a global focus, in Washington, DC, earlier this week.
In both cases, I was impressed by just how candid and frank participants–government officials as well as civil society, donors, business and academics–were about what has and hasn’t worked for them. At both events, participants made very clear their view that the IMF’s technical support has, and is, helping their countries become better governed states that are responsive to the needs of the people. But they also made very clear that ultimately the solutions to these problems must be home-grown.
We want to hear your ideas too, on both our recent paper on this topic and the G-20′srequest for major international and regional organizations (including the IMF) to advise them on what they could do to help. Please visit our comments page to weigh in.
More than “show me the money”
There was, of course, a lot of technical stuff at both events. I now know much more about the details on which revenue mobilization ultimately depends, such as taxpayer segmentation, compliance management, production sharing agreements, transfer pricing, and small business taxation, among other critical issues.
But it is the broader issues that left the most powerful impressions. Four in particular stand out:
(i) Strong Commitment
Many low-income countries have shown strong commitment to strengthen their revenue systems, through both administrative reforms and improved tax policies.
There is a lot still to do. In sheer revenue terms, an additional 4 percentage points of GDP or so was suggested needed in some low-income countries if they are meet the Millennium Development Goals. But there have also been notable successes: Tanzania, for instance, achieved a 5 percentage point increase in its revenue to GDP ratio in the decade after 2000. Such good results exemplify the need for a commitment to the reform process over the medium- to long-term; sustainable changes require continued effort, and, particularly, continued political support.
(ii) Equity, fairness and good governance
Strengthening revenue systems is about much more than increasing revenue.
  • Effects on growth and efficiency clearly matter–the poor are not likely to be best served by tax systems that treat investment harshly, for instance.
  • But equity and fairness matter a great deal too, maybe even more. They matter in themselves: after all, a main reason that low-income countries need more revenue is to finance poverty-reducing measures. And equity and fairness also matter for the legitimacy and effectiveness of the tax system: taxes that are seen as unfair will be poorly complied with. And poor compliance leads itself to actual and perceived unfairness, as only some pay their fair share.
  • Then there are links between taxation and building modern, accountable and responsive governments overall. One reason we have long seen combating corruption in tax administrations as so critical, for instance, has been its potential value in spearheading wider improvements in public governance. Ensuring that elites are seen to pay a decent amount of tax is important in this context, too.
(iii) Avoiding exemptions and preferences
Exemptions and preferential treatments in tax systems are a pervasive source of revenue loss in many developing countries–as they are too, of course, in many advanced economies.
Discussions at the two recent conferences made clear again that many low-income countries fully understand the misallocation of resources and inequities these create.
They feel, though, largely powerless to do much about them because of both strong domestic interests and a perceived need to compete with neighboring countries for foreign investment. Increased transparency has an important role here, particularly in the form of analyzing the revenue losses associated with tax expenditures. So, perhaps, does stronger regional tax cooperation, so countries can avoid “beggar thy neighbor” tax policies.
(iv) Political will
But addressing inappropriate tax policies, and improving revenue administration and enforcement, is ultimately an act of political will. The trouble is–and this is my final impression–that we still know very little about this ‘political will.’
We know it is needed in order to drive through tough policy changes. And that it matters to build and support firm, even-handed enforcement. But there are many hard questions, to which we don’t yet have the answers, about where political will comes from and how to create it.

Malaysians could see a cut in corporate and personal income taxes should the goods and services tax (GST) be introduced, .

The prime minister was coy however on when the GST, which has already been postponed several times, would be implemented.
“I will tell you later,” Najib (picture) told reporters at the Budget 2012 Consultation when asked if the GST would be implemented next year.
He said GST would be implemented when the public has full understanding of it and his government will assess the public’s readiness.
“I will announce when the time comes,” he said.
Touching on the 2012 Budget which will be tabled on October 7, Najib said it will contain programmes that will benefit the people and a few major programmes will be launched even before the Budget, in June and July.
“Putting the people first will be the theme not only for the Budget but also of the government,” he said.
The Najib administration had postponed the implementation of the GST indefinitely in October last year, a move analysts said showed the government’s lack of political will and indicating that a general election could take place this year.
The postponement of the GST came as the government was embarking on a slew of big-ticket projects in its Economic Transformation Programme, such as the RM43 billion new KL MRT, which are expected to boost the economy and possibly increase the feel-good factor ahead of polls.
The GST Bill was tabled for reading in Parliament in December 2009 but its second reading, originally planned for March 2010, was postponed due to fierce political resistance.
It was originally expected to have been implemented by the middle of 2011.
The tax was expected to help the government reduce the federal budget deficit, which came in at 7.6 per cent of GDP in 2009, and grow revenue by widening its tax base as currently only about 10 per cent of workers pay income tax.
Government revenue is heavily dependent on taxes and dividends paid by Petronas, which make up over 40 per cent of its income. The national oil company’s dividend payout ratio has ballooned from 39 per cent of profits in 2006 to 74 per cent in the 2010 financial year, raising concerns that its ability to reinvest could be affected.
Some members of the public have approved the GST proposal as it is expected to spread the tax burden more evenly across the population. There is some expectation, however, that income tax rates should come down if GST is introduced.
Others have criticised the proposal, saying that the government should first address revenue leakages and wastage before introducing new taxes to boost its income.
The world is drowning in corporate fraud, and the problems are probably greatest in rich countries — those with supposedly “good governance.” Poor-country governments probably accept more bribes and commit more offenses, but it is rich countries that host the global companies that carry out the largest offenses. Money talks, and it is corrupting politics and markets all over the world.
Hardly a day passes without a new story of malfeasance. Every Wall Street firm has paid significant fines during the past decade for phony accounting, insider trading, securities fraud, Ponzi schemes, or outright embezzlement by CEOs. A massive insider-trading ring is currently on trial in New York, and has implicated some leading financial-industry figures. And it follows a series of fines paid by America’s biggest investment banks to settle charges of various securities violations.
There is, however, scant accountability. Two years after the biggest financial crisis in history, which was fueled by unscrupulous behavior by the biggest banks on Wall Street, not a single financial leader has faced jail. When companies are fined for malfeasance, their shareholders, not their CEOs and managers, pay the price. The fines are always a tiny fraction of the ill-gotten gains, implying to Wall Street that corrupt practices have a solid rate of return. Even today, the banking lobby runs roughshod over regulators and politicians.
Corruption pays in American politics as well. The current governor of Florida, Rick Scott,was CEO of a major health-care company known as Columbia/HCA. The company was charged with defrauding the United States government by overbilling for reimbursement, and eventually pled guilty to 14 felonies, paying a fine of $1.7 billion.
The FBI’s investigation forced Scott out of his job. But, a decade after the company’s guilty pleas, Scott is back, this time as a “free-market” Republican politician.
When Barack Obama wanted somebody to help with the bailout of the US automobile industry, he turned to a Wall Street “fixer,” Steven Rattner, even though Obama knew that Rattner was under investigation for giving kickbacks to government officials. After Rattner finished his work at the White House, he settled the case with a fine of a few million dollars.
But why stop at governors or presidential advisers? Former Vice President Dick Cheney came to the White House after serving as CEO of Halliburton. During his tenure at Halliburton, the firm engaged in illegal bribery of Nigerian officials to enable the company to win access to that country’s oil fields — access worth billions of dollars. When Nigeria’s government charged Halliburton with bribery, the company settled the case out of court, paying a fine of $35 million. Of course, there were no consequences whatsoever for Cheney. The news barely made a ripple in the US media.
Impunity is widespread — indeed, most corporate crimes go un-noticed. The few that are noticed typically end with a slap on the wrist, with the company — meaning its shareholders — picking up a modest fine. The real culprits at the top of these companies rarely need to worry. Even when firms pay mega-fines, their CEOs remain. The shareholders are so dispersed and powerless that they exercise little control over the management.
The explosion of corruption — in the US, Europe, China, India, Africa, Brazil, and beyond — raises a host of challenging questions about its causes, and about how to control it now that it has reached epidemic proportions.
Corporate corruption is out of control for two main reasons. First, big companies are now multinational, while governments remain national. Big companies are so financially powerful that governments are afraid to take them on.
Second, companies are the major funders of political campaigns in places like the US, while politicians themselves are often part owners, or at least the silent beneficiaries of corporate profits. Roughly one-half of US Congressmen are millionaires, and many have close ties to companies even before they arrive in Congress.
As a result, politicians often look the other way when corporate behavior crosses the line. Even if governments try to enforce the law, companies have armies of lawyers to run circles around them. The result is a culture of impunity, based on the well-proven expectation that corporate crime pays.
Given the close connections of wealth and power with the law, reining in corporate crime will be an enormous struggle. Fortunately, the rapid and pervasive flow of information nowadays could act as a kind of deterrent or disinfectant. Corruption thrives in the dark, yet more information than ever comes to light via email and blogs, as well as Facebook, Twitter, and other social networks.
We will also need a new kind of politician leading a new kind of political campaign, one based on free online media rather than paid media. When politicians can emancipate themselves from corporate donations, they will regain the ability to control corporate abuses.
Moreover, we will need to light the dark corners of international finance, especially tax havens like the Cayman Islands and secretive Swiss banks. Tax evasion, kickbacks, illegal payments, bribes, and other illegal transactions flow through these accounts. The wealth, power, and illegality enabled by this hidden system are now so vast as to threaten the global economy’s legitimacy, especially at a time of unprecedented income inequality and large budget deficits, owing to governments’ inability politically — and sometimes even operationally — to impose taxes on the wealthy.
So the next time you hear about a corruption scandal in Africa or other poor region, ask where it started and who is doing the corrupting. Neither the US nor any other “advanced” country should be pointing the finger at poor countries, for it is often the most powerful global companies that have created the problem.
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