Session Report
Fiscal Arrangements and Public Spending
(Taxation and Treasury)
Who raises revenue for whom?
Who spends whose money, for what, on whose authority?
Article 103 of the Constitution states, ‘A public commission shall be established by a law to audit and appropriate federal revenues… [to] ensure the ideal use and division of the federal financial resources.’ Responsibilities pertaining to fiscal arrangements and public spending such as organisation of commerce, taxation, general budget and general economic situation, stock exchange, issuance of currency, management of the Central Bank, supervision of banks and circulation of money are the responsibility of the federal government. The Constitution thus sets the general framework of the economy (though does not specify whether it should be a free market system). Regulation of the private sector is considered part of the policy agenda of government, and currently revolves around market economy principles, regulated by parliament. Participants agreed on the need for standardised legislation covering all regions in a federal framework, and that collaboration and coordination among different tiers is essential for a working federal system. They were also generally of the opinion that the Central Bank should be independent from all political powers. The first paragraph of Article 100 states ‘The Central Bank of Iraq, Board of Supreme Audit, Communication and Media Commission, and the Endowment Commissions are financially and administratively independent institutions. A law shall regulate the work of each of these institutions,’ though the second paragraph specifies that the Central Bank of Iraq is responsible before parliament.
Taxation
Participants discussed the need for Iraq to define a clear policy on taxation. Insights from the visiting experts provided examples of mechanisms used in some other federal countries In South Africa the Auditor General is appointed by Parliament with a 2/3 majority and can be dismissed in accordance with a special procedure. In India, the central government taxes revenues on income, customs and other sources, and distributes among the states. A mechanism has also been established at the level of local governments granting them taxing rights: this gives a sense of autonomy and creates a ‘pyramid of power’ that is encouraging. The government is much more transparent due to the Right to Information Act, a measure the participants discussed as a possibility for Iraq to incorporate into its system.
The Canadian fiscal system was briefly discussed. The Constitution grants both federal and provincial governments authority to raise taxes. These powers are coordinated to avoid what was defined as a ‘tax jungle’ (which was noted as a problem in the United States). Provinces spend about 61% of government expenditure and raise about 40% of revenue. The federal government uses federal taxpayers’ money to provide funds to provinces to undertake certain activities.
There is a direct relationship between wages and salaries with taxation. Participants considered that federal systems should ensure fairness and balance in order to avoid excessive tax-migration between regions. Regarding the collection of taxes, participants considered each region should have a role as the task is too complex for the central government, though it may have a supervisory role. Each region should have the ability to collect taxes, even if standards may be set centrally. In South Africa, the central government has considerable control, although the second chamber of its parliament, designed to ensure strong provincial representation, creates an essential balance, such as should also be incorporated into the Iraqi system. Furthermore, in South Africa, the central government determines all civil service salaries to avoid excessive competition among provinces. However, when there is a scarcity of personnel in a particular region (such as a lack of teachers or doctors) the inability to attract them there can be a disadvantage.
Redistribution
The visiting experts briefly discussed redistribution of revenues from taxation. In Canada, a priority of the federal system is to find fairness and equity in the distribution of state resources. The Constitution includes a program of equalisation that commits the federal government to use its revenue to give each province the same ‘per person’ revenue, regardless of wealth. In South Africa, redistribution was a matter of great urgency after the transition from Apartheid. The central government has almost complete control over raising taxes though provinces have the right to an equitable share of revenue, as determined by the national parliament. A financial and fiscal commission composed of representatives from all provinces was established; the central government has the power to remove representatives, a fact which has caused problems subsequently. The Iraqi Constitution does not call for such an institution. Bearing in mind the experience of South Africa, there are three important issues to consider: the pace and mechanisms of redistribution; record keeping; and reporting (essential elements are the application of a formula to know how funds are being spent and the presentation of similarly formatted budgets by all provinces). In Spain, the central government has predominant control over the collection of taxes and other main sources of revenue.
Though Iraq is known to be rich in natural resources, predominantly hydrocarbons such as oil and gas, participants encouraged the consideration also of non-natural resources as sources of revenue. A major concern among Iraqis is how resources will be managed and the revenues distributed. Participants discussed the many difficulties that can arise between central and regional governments in distributing resources. It is therefore vital that everything should be transparent and clear to ensure that the distribution is fair and equitable. A financial and fiscal committee is foreseen which could represent all provinces; in addition, a special institute foreseen to guarantee that specific balance is achieved in redistribution. Natural resource management and distribution of wealth are very complex issues and should be devolved to the regions to avoid overlapping and penalising the poorest regions. In order to ensure equitable distribution of resources such as oil and gas, it is necessary to consider in the first place regional demographics and secondly each region’s need, also based on harm suffered under the previous regime.
International lending and business
Another important element for Iraq to consider when defining its fiscal arrangements, public spending and redistribution of wealth is the international business and lending context. This is on account of the fact that international lending institutions generally don’t approve loans unless there is a clearly defined fiscal policy It is also important to consider how potential foreign investors will perceive the taxation system as it applies to them (they will want to know, for instance, how much they will be expected to pay and to whom)
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Main issues
- Is there a need to state in the constitution that the economy will be based on the principle of “free market” and “private property”?
- Can a strong second chamber give sufficient guarantees that the federal government does not regulate too much against the will of the regions?
- How much fiscal competition should be allowed between the regions and the provinces within the country?
- Should the government set limits and standards to the taxation power of the regions?
- Should the federal government and regions coordinate to avoid a “fiscal jungle”, or allow competition?
- What level of equalisation (redistribution of wealth) should exist between rich and poor regions and provinces?
- Can the region attach conditions to the taxes they raise for the federal government?
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