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Why New International Taxes for Development Are InefficientExecutive SummaryDeveloped since the early2000s, innovative financing fordevelopment, or IFD, is a collectionof disparate spending projects, organizationsand financing mechanismsin the field of developmentassistance. It is first and foremosta set of current or proposed newtaxes. The current IFD taxes arethe airline ticket tax and part ofthe proceeds from pollution allowancesin Germany. Several newIFD taxes have been, and are being,proposed, including financial transaction taxes(FTTs), a carbon tax, a tobacco tax, and new specialdrawing rights (SDRs)—a hidden tax.IFD taxes do not meet the criteria of “good”taxes suggested by the standard or orthodox theoryof public finance: efficiency, low administrativecosts, flexibility, political accountability, andfairness. The airline ticket tax hits relatively elasticdemand, which implies a large excess burden(economic cost). FTTs are probably inefficient,despite the fact that many economists favourthem (for reasons unrelated to IFD objectives).Higher tobacco taxes would likely be inefficient,and raise less revenue than anticipated. New SDRscould generate inflation. Only carbon taxes, to theextent that they correct pollution externalities,could possibly be justified from a standard publicfinanceviewpoint. Many IFD taxes may carryhigh administrative costs, especially a tobacco tax,and probably an FTT and a carbon tax as well. AllIFD taxes have inflexible rates, except perhaps forthe hidden tax represented by SDRs. IFD taxesalso fare badly against the criterion of politicalaccountability: They are hidden, and the linkbetween the taxes and what they finance is brokenor obscure.Market failures exist, but so do governmentfailures. Analyzing IFD taxes using this approach—called “Public Choice”—reveals further problems.The danger is that these taxes willserve more for tax exploitationthan for providing the public servicesthat taxpayers want. New taxescreate new rent-seeking opportunities.Rent-seeking also occurswithin governments, on the partof bureaucrats who, like everybodyelse, naturally pursue their own interests.It comes as no surprise thatbureaucrats in development agencieshave attractive working conditionsand perks. Most IFD taxes(the proposed tobacco tax being the only possibleexception) levy small amounts of money from alarge number of people who will, therefore, notbe motivated to protest, while the immediate recipientsare a small number of bureaucrats in nationalor international bureaucracies. The incentivesof politicians are misaligned too. The fact thatIFD taxes are hidden and non-transparent is afeature of such taxes, not a bug. International aidagencies are also particularly opaque, and theirauditing procedures often questionable. IFD taxesappear to be more a demonstration of governmentfailure than an efficient way to raise moneyto correct market failures.IFD taxes do not, and would not, increasedevelopment resources as much as it appears theymight at first glance. Money is fungible and asubsidy can just replace other money that wouldhave otherwise been spent on the same things.On top of this, there is much empirical evidencethat development aid has not served to furtherreal and sustainable growth. The importance ofgood institutions, including economic freedomand free international trade, was obscured, if notcountered, by development aid.IFD taxes are in many ways the epitome ofinefficient development aid.Montreal Economic Institute 5