Sunday, April 25, 2004

Global Tax

Dear friends and colleagues, (my fellow Executive Directors at the World Bank)

Timidly, within brackets, and diluted by an “among others,” the most recent Development Communiqué spells out the possibility that, in order to mobilize additional resources for aid, we should at least examine the option of a global tax. We must have touched a raw nerve somewhere, and I at least have been approached by a surprising number of persons who, moving up close, give me the what-do-you-think-of-it whisper. Colleagues, we will certainly have endless discussions about this matter in the Board, or at least our inheritors will, but, for the time being, let me share with you my not so hushed up but precocious answer. 

In general terms, like any normal citizen, I hate taxes, but, in this case, that might be precisely why I find it interesting to look into a formal global tax so as to see whether in that way we could get rid of some of those informal global taxes that we are already paying or, if deferred, we will pay some fine day soon. As we live in a minuscule interrelated world, with a lot of butterfly wings flapping, no one will convince me that there aren’t many problems out there that already have someone somewhere paying taxes for them, albeit not always in cash. 

I come from a country where we have grown too accustomed to paying some sort of hidden taxes in many forms and ways: holes in the street gobbling up the car ties, insecurity that requires our paying private guards, a precarious health system where some even pay with their lives, poor public education whereby even if your own kids get a good private education it is worth less as they will be unable to count on the synergy of other educated citizens, and you could go on forever. On a global level, for instance in matters of the destruction of the environment, it is clear that we already are paying taxes, at an ever increasing rate. 

Therefore I would analyze a new and formal global tax, not in terms of its being a new tax, but in terms of whether it is a more efficient and transparent tax to substitute for some of the current and future awful-consequence taxes. Intuitively, I would answer “yes” on both counts, and here are briefly my reasons: 

In terms of effectiveness, at least it sounds quite good to be able to count on some type of centralized funds that could be allocated strictly according to global priorities instead of being captured by local interests. Just as an example, it is absolutely clear to me that, from an environmental perspective, we would be much better off allocating scarce financial resources to help Brazil cover for the fast-growing opportunity costs of not developing the Amazon, than building windmills in somebody’s backyard. As you can see, this is impossible, while taxes are parochial. 

In terms of transparency and coming from an oil country, what more could I say? Huge taxes are currently levied on oil in the developed world, and most of the contributors (consumers) believe that these taxes have environmental purposes that extend much beyond curtailing consumption. Well, no, the truth is that not a single net cent of each dollar goes to the environment, perhaps even less, when taking into account the economic inefficiency of investments in wind and solar energy and the environmentally negative implications of coal subsidies. 

But, as always, the devil is in the details. How on earth should an earth tax be run? I haven’t gotten that far yet but, as a starter, perhaps a petit committee of experts, world leaders, and scientists (not any self-appointed eminences) could allocate the resources to development institutes, through yearly public hearings, based on proposals and performance, and could also help to fire some healthy competition and accountability into development. 

And tax on what? On our airplane tickets? No, if we are going to have a chance to work things out globally, we should meet frequently, not only through videoconferences. If forced to give an off-the-cuff answer, I would mention a type of Tobin tax[1] on capital movements as a probable candidate, as that would also perhaps help us to slow financial movements down, from a nanosecond to hundreds of a second, and help the world to move out of its shortsightedness where full weight is given to the next quarter’s results and nobody thinks about the next generation. 

Summarizing, those opposing a global tax are blind to the fact that such costs exist anyhow. Perhaps they are living out their teenage illusions of never growing old and never needing to depend on others. 

Friends … pssst … what do you really think of a global tax? 


[1] Tobin tax refers to a very low tax proposed by James Tobin, Nobel Prize in Economics, 1981, of between 0.05 and 0.1 per cent, to be applied on all trade of currency across borders, in an effort to put a penalty on short-term speculation in currencies. 

Thursday, April 22, 2004

Odious Credit

I recently wrote about odious foreign public debt, that debt about which there is a current debate in the world as to whether it can be legally repudiated if it is taken on by illegitimate governments or for illegitimate ends.

The other side of the coin is odious credit. Please don’t think I’m against banks—quite the opposite. But I respect the role of the financial middlemen too highly to keep quiet when they are not doing their job right. In 1981, the representative of a foreign bank in Venezuela showed me a letter in which his boss instructed him to “give credit to the INAVI, Venezuela’s National Housing Institute. It’s the worst public institution, which means that it pays us the highest rate and, as you know, in the end it’s just as public as the best of them and Venezuela will have to pay up just the same.” Odious credit, isn’t it?

The first thing a good banker should ask a client applying for a loan is what is it for and if the answer is not satisfactory he should reject the application, regardless of the guarantees offered. Simple plain-vanilla fraud of the Parmalat kind will always exist, but the asinine way all their creditors fell into the trap makes one suspect that this is only the first case of systemic risk in the banking system: tempted by the regulators in Basel, banks subordinate their own criteria to those dictated by auditors and credit raters. This development, bad in itself, is even more serious in the case of public credit, where the what it’s for is being replaced by how much can be carried, perversely derived by calculating the level of sustainable public debt.

When I call for the total elimination of foreign public debt (which is feasible and would not require huge sacrifices in an oil rich land like Venezuela) my colleagues often argue that a certain level of debt is good and necessary for the country. This does not convince me, since it makes debt sound like electricity that must be kept at a certain voltage. Because public debt must always be paid back, regardless of whether anybody ever knew what or whom it was for, I’m fighting for the day when the private sector in Venezuela can return to the markets, freely, without having to carry that huge monkey—foreign public debt—on its back.

In my opinion, the Benemérito (the dictator Juan Vicente Gómez (1864–1935) who ruled the country between 1908 and 1935) deserved great credit for ridding Venezuela of her foreign debts He certainly knew that to shake off that vice more than patches or pieces of chewing gum are needed.