Burden Sharing in Support of the United Nations
II. Principles and Methodology of Assessment
Different conceptual principles that help to guide one in devising a fair scheme of assessment for financial support of the UN are:
(i) assessment according to ability to pay
(ii) the system should be progressive
(iii) the system should have horizontal equity
(iv) the system should have transparency:
the assessment base should be statistically available, understandable,
and acceptable to all members
By ability to pay we mean that larger and more prosperous countries should bear a large part of the burden - richer the country, the more it should pay. This can be interpreted as meaning that the share of the total cost should increase correspondingly with some measure of each country's income (or wealth). Progressivity is much more specific and demanding term than ability to pay. It means that as we move up the income scale, across countries, the ratio of incremental assessments to incremental income should rise. In terms of per capita income levels, the marginal assessment should be an increasing function. Horizontal equity refers to fairness in the sense that countries with the same per capita income should have the same per capita assessment. Finally, transparency means that the rule of assessment is simple, understandable to the world at large, formulated in terms of available data and objective.
(i) Ability to pay: In some sense larger, richer countries are more able to pay and should be asked to bear a larger portion of the burden. This principle can be realized in various senses and by many objective procedures of assessment calculations. There could be maximum and minimum rules of payment. The maximum could be set as a fixed per capita amount, or at a certain share of the total world income. The minimum could be as low as zero for countries at the bottom percentile of per capita income.
By some measures of income, especially for international comparisons, the United States is the richest country in the world on a per capita income basis. It depends, however, on the conversion rate system used for putting income measures on a comparable monetary basis, but if the United States is not the richest it is very close to being so. In terms of share of total world income, however, the United States accounts for the largest share of income without any question. Using GNP and converting at market exchange rates, the US share is approximately 27%. In a tabulation from the PENN Tables, Robert Summers and Alan Heston estimate the US share of World GDP at 1985 international (PPP) prices as:
There is some difference between using PPP conversion rates (as opposed to market exchange rates); GDP as opposed to GNP; and current prices as opposed to constant prices; nevertheless we can conclude that:
a. the share of the USA, the largest share, is gradually declining, and there are good reasons for this;
b. a ceiling contribution to the UN budget could reasonably
be set at about 25% of the amount to be collected, depending on
the measure that is finally selected.
Ability to pay could be indicated by the share of world production; so one of the simplest allocation systems would be to set assessment shares equal to shares of world production attributed to each country, with the maximum at 25%. The maximum at 25% is realistic because the country with most arrears is near that level in terms of output shares, and some influential political personalities have indicated or implied that 25% is a reasonable US share. In the present political debate, however, there are some suggestions that a smaller share may be more "acceptable."
What should the minimum level be? The poorest countries listed in the Human Development Report, 1996 are Ethiopia, Tanzania, Mozambique at $100, $90, and $90, respectively, in terms of GNP per capita for 1993. Their shares of world GNP in 1993 were 0.037%, 0.011%, and 0.006%, respectively. Their assessment would accordingly be in the tens of thousands of $US.
There are two ways of dealing with the minimum level. On the one hand, it is useful to have all members contribute something. Even for a poor country, an assessment in the tens or hundreds of thousands is not impossible. In connection with the much larger sums involved in the support of a UN standing army, representatives of very poor African countries voiced such sentiments at a UN seminar on the paper that was cited in fn. 2, above. In that paper, even though only 43 more prosperous countries were estimated to support the entire cost, nationals of poor African countries thought that all countries should be drawn into the effort.
The second way of dealing with the affordability issue is to assume that the poorest countries should pay only token amounts, and that the richer countries can make up the necessary balance. It is not a very large sum of money and it can readily be reapportioned to the richer countries. Also, it is not a large enough sum to matter in the total world economy. All sub-Saharan Africa accounts for little more than 1% of GNP summed over the world; so there would be, at an extreme, only about $15 million to be taken up by the more prosperous countries to cover the exempted amounts from very poor countries.
(ii) Progressivity of the assessment system: In a sense, the system of apportionment of expense on the strict basis of world income shares is based on ability to pay, but it is not a progressive system.
Consider the simple relationship
Ti = assessment levied on country i
Yi = income (i.e. GNP) for country i
S Ti = total sum to be raised for the annual UN budget
S Yi = world income (i.e. GNP)
All magnitudes are to be measured in US dollars. The sum to be
raised from each country, according to (1), is given by the product
of i's share of world income multiplied into the necessary amount
for the budget. This equation can be written in terms of the average
assessment rate on i as
and every country's assessment is then determined from
This is a proportional assessment function, known as a "flat tax." Since every country, no matter how rich or poor, pays the same assessment rate it is not deemed to be progressive. Countries have different assessments, but their average assessment rates are the same. If special favored treatment is given to lower income countries, we must have a deviation from the flat tax. Either a floor or ceiling, or both together, could introduce some progressivity (or lack of progressivity) into the system.
Consider also, the per capita form of (1)
It says that the rate of assessment per capita, or the rate for the "representative" assessment payer in each country, is the same. This is the essence of national tax proposals.
Apart from having ceilings and floors imposed on (1) to achieve
a modification, what else can be done to achieve progressivity?
If, in analogy with an individual country's income tax system,
equation (1) is modified to be either
(1¢) Ti = a0
+ a1Yi ,
where a1 is computed from
truncated shares, i.e. shares of income, across countries, above
some minimum income value (such as $5 billion) and where Ti
= 0 if Yi £ min.
where bi is computed from
truncated shares, i.e. shares of income, across countries, above
some minimum value (such as $300 per person), and where ,
(See Figures 1 and 2, below.)
In (1¢) and (1²) the marginal rate of assessment is constant, a1 or b1, as the case may be, but the average rate of assessment increases as income (Yi or Yi/Ni) increases (by virtue of the thresholds). In (1¢) and (1²) it is evident that the contribution rates can readily be fixed so as to generate the desired level of supporting revenue, but for (1¢²) it is necessary to calibrate g0, g1, g2, g3 so as to bring in the appropriate amount of revenue. Furthermore, in (1¢²) it is not necessary to have the term g3(Yi/Ni)3 in order to have a progressively rising marginal rate of assessment; progressivity could also be achieved with a quadratic function or with many other nonlinear functions. A quadratic relationship is, in a sense, the simplest. Logarithmic and other nonlinear transformations can also be used.
(iii) Horizontal equity: This concept played an important role in the motivation for reforming the US income tax system in 1986. The idea behind the concept is that people at the same income level should have the same tax burden. This could mean the same total amount of taxes paid or it could mean the same average tax rate.
If the assessment schedule conforms to the expression in equation (2),
then we have progressivity and identical assessments for countries with the same value of Yi/Ni.
A very simple assessment system that is progressive and has horizontal equity is the log linear function
It is progressive because the marginal assessment rate is a positive function of Yi/Ni.
It has horizontal equity in the sense that Ti/Ni
depends only on Yi/Ni, given the parameter
values, A and a. It is also the case
that Ti/Yi, the average assessment rate,
is always the same if Yi/Ni, per capita
income, is the same. That is,
Therefore the average assessment rate depends only on the value of per capita income, given A and a. This is merely an illustration of a function that can be devised to be progressive and to satisfy horizontal equity. It has fewer parameters than polynomial functions of degrees higher than two.
(iv)An acceptable transparent assessment base: Taxes are levied on some base (price, sales value, quantity, income, wealth). In the present case, it is a matter of finding agreement, among nations, for a given income base. Most countries have social accounting systems, with varying degrees of sophistication or accuracy. From national income and product accounts (NIPA) it is possible to compute such aggregates as national income, national product, or domestic product. They are all related to one another through accounting relationships, i.e. identities. Some are more accurately measured than are others, but the recommended aggregate is GNP (i.e. recommended by the Ad Hoc Working Group). It is gross because it includes capital consumption allowances as a component of GNP. The related measure, NNP, simply subtracts capital consumption allowances from GNP, but such allowances are not accurately measured or are unavailable for many countries. This argues in favor of gross concepts.
Opinions differ whether income, production, or expenditure are more easily and more accurately measured, but the recommended aggregate remains as GNP and is determined mainly from expenditure data. More countries report GNP than GDP on a regular and timely basis; therefore it is not a bad choice to use GNP rather than either GDP or an income flow concept.
Scope and coverage are determined, fundamentally, by the previous considerations, but there is still a valuation choice. For comparability across countries, it might seem to be more natural to value each country's aggregate in international prices, and the method of choice for some kinds of comparative studies is to value international prices by the method of purchasing power parity (PPP). This method has been implemented for many countries, but is extended to a base of the widest possible coverage by means of inferred relationships between countries that do have PPP conversion factors and those who do not. Even though, there are analytical grounds for preferring PPP conversion factors, the General Assembly has been advised to use market exchange rates. A very practical argument in favor of using market exchange rates is that all UN dues contributions are in $US; so the market rates in US dollars appear to be more meaningful and acceptable to most countries.
Finally, country valuations of a statistical aggregate, such as GNP, GDP, or NI can be in current prices or in some fixed (constant) price system. Current price valuations may reflect fluctuations, with considerable volatility; so market exchange rates may be put into moving average form in order to smooth the conversion procedure.
There are some distributional differences affecting inequality or share measures, between constant and current prices, and between use of PPP or market exchange rates; nevertheless the distributional properties are stable enough to lead statisticians to choose the most available data sets across the individual countries. Ease and availability are the two most significant (overpowering) criteria for the calculations across countries.
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