World Bank to consider if taxes are good for business

WASHINGTON — The World Bank’s influential “Doing Business” report, an index that ranks countries according to their friendliness toward the private sector, is undergoing reforms that supporters hope will make the publication less ideological, and more consistent with the bank’s development mission. The changes were outlined in a press release by the U.S. House Committee on Financial Services last week. The committee’s chairwoman, Rep. Maxine Waters, a Democrat from California, had pushed for reforms as a condition of her support for a capital increase at the International Finance Corporation, the bank’s private sector arm. “The Doing Business tax indicator is really in tension with the actual work of the bank in trying to help countries increase revenue and the whole push for domestic resource mobilization.” --— Justin Sandefur, senior fellow, Center for Global Development As part of that agreement, the bank’s management has agreed to two changes to the approach the Doing Business Team takes when it evaluates countries’ private sector regulatory environments. The first relates to the bank’s treatment of issues related to labor rights and worker protections in its Doing Business evaluations, and the change has been in the works for a long time. The “employing workers” indicators measure “flexibility in the regulation of employment.” They evaluate countries according to regulations related to hiring, working hours, and redundancy rules and costs. Critics of these indicators charge that they take an anti-labor view, in favor of laws that grant businesses disproportionate power over workers. According to Rep. Waters’ statement, these indicators were “used to advance a one-sided deregulatory view of labor market policy and encourage governments to weaken worker protections with the purported aim of attracting foreign investment.” The World Bank stopped including the employing workers’ indicators in its calculations for the Doing Business index rankings in 2010, but continued to collect the information and use it for its analysis. According to the House Financial Services Committee's release, doing so “allowed an anti-worker bias to re-emerge in the narratives presented by the report.” The bank had been considering including these indicators in its rankings again, but decided not to based on feedback from the U.S. Treasury and “other stakeholders,” according to a letter from World Bank President David Malpass to Treasury Secretary Steven Mnuchin on Dec. 16, 2019. The bank is now taking the additional step of no longer collecting labor data or including it in the Doing Business data set at all. “This decision will effectively put the issue of labor market policy outside the purview of the ‘Doing Business’ report,” the House committee wrote. A second potential change relates to a Doing Business indicator that measures countries’ tax burdens. The “total tax and contribution rate” looks at the overall amount of tax a company has to pay in a given country, and then combines that with measures of how easy or difficult it is to pay those taxes. The more taxes a company is required to pay, the lower its score on this particular indicator. Critics have taken issue with both the methodology used to calculate the tax rate threshold that leads to a country receiving a lower score, as well as the indicator’s broader implication that corporate taxes only produce costs, with no parallel accounting for the potential benefits of the revenue they generate. That message seems particularly at odds with an institution that has strongly advocated for countries — particularly low- and middle-income countries — to increase their domestic revenue in order to boost development-related spending, said Justin Sandefur, senior fellow at the Center for Global Development. “The bank has lots of people working on taxation. They’re going and helping countries set up and implement their tax systems, and then the bank is making lots of noise about an index, which tells everybody to stop,” Sandefur said. “The Doing Business tax indicator is really in tension with the actual work of the bank in trying to help countries increase revenue and the whole push for domestic resource mobilization,” he added. As part of the recently-brokered agreement for IFC’s capital increase, the bank will commission an independent, external review of the total tax and contribution rate sub-indicator by Dec. 31, 2020, “with a view to aligning this indicator with the development objectives of the World Bank, including its commitment on domestic resource mobilization,” according to a March 20 letter from Malpass to Mnuchin. The announcement of these changes comes after the resignation of the bank’s former director of development economics — and one of the originators of the Doing Business report — Simeon Djankov, on Jan. 31. There has been no indication that the two are related.