US embassy cable - 04BRASILIA1756

UNCLAS SECTION 01 OF 03 BRASILIA 001756 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA - DAS LEE AND SSEGAL 
NSC FOR DEMPSEY AND DICARLO 
ROME FOR FODAG 
STATE FOR E - TOM SMITHAM 
STATE FOR EB/IFD/OMA - O'REILLY 
STATE FOR WHA/EPSC - URS 
 
E.O. 12958: N/A 
TAGS: EFIN, EAID, SOCI, PREL, BR, UN, Economic Policy & General Analysis 
SUBJECT:  LULA'S INTERNATIONAL HUNGER INITIATIVE BANKS ON 
TAXATION OF INTERNATIONAL FLOWS 
 
REF: USUN 1593 
 
This cable is Sensitive But Unclassified, please protect 
accordingly. 
 
1. (U) Summary:  Brazil, in coordination with France, Chile 
and Spain, is preparing for circulation this month a set of 
proposals for new mechanisms to finance international 
development, health and anti-hunger efforts, primarily 
through the UN agencies.  These proposals would be presented 
for discussion by heads of state at a meeting President Lula 
is calling on September 20, on the margins of the UN General 
Assembly.  The financing mechanisms under discussion focus 
largely, but not exclusively, on taxation by national 
authorities of international financial flows and arms sales. 
Proceeds would be forwarded to the UN development agencies. 
Other financing mechanisms floated include a carbon emission 
tax, the promotion of socially-responsible investment funds 
and reducing taxation of remittances. 
 
2. (SBU) The Brazilian effort flows in large part from 
Lula's personal experience of hunger and poverty as a child, 
according to Maria Nazareth, the GoB point-person on the 
initiative.  Acknowledging that there are serious obstacles 
to implementing this sort of taxation, Nazareth claimed the 
GoB approach, and that of their partners, is pragmatic, more 
focused on increasing resources available for development 
efforts than on specific financing mechanisms.  The 
financing effort, according to Nazareth constitutes the 
third broad thrust of GoB international development efforts, 
along with efforts to reduce agricultural subsidies through 
the G-20 and Lula's effort to amend how the IMF accounts for 
certain investment expenditures.  End Summary. 
 
3. (SBU) Emboff met July 13 with Maria Nazareth, of Foreign 
Minister Amorim's staff, who is spearheading President 
Lula's international anti-hunger initiative.  Nazareth 
explained that Lula's initiative, like his trademark 
domestic "Zero Hunger" program, grew out of his personal 
experience of hunger and poverty as a child in Brazil.  Lula 
recognizes, she said, that getting at the root causes of 
hunger implies a broad development agenda.  Shortly after 
his inauguration in January 2003, Lula attempted to launch 
at the Davos conference that year the idea of an 
international foundation to fight hunger and finance 
development.  But, after an extensive conversation with 
French President Chirac at the G-8 Evian conference in the 
summer of 2003, Lula realized that the problem was less an 
issue of an appropriate foundation but rather the lack of 
resources, particularly long-term financing, for the use of 
the various United Nations development, health and related 
agencies.  From this encounter, according to Nazareth, was 
born a joint Brazilian-French effort, which the governments 
of Chile and Spain later joined, to identify or create 
financing sources. 
 
4.  (SBU) Lula and Chirac, Nazareth said, discussed during 
their Evian conversation a modified Tobin tax on 
international financial flows as one possible financing 
source.  The idea, Nazareth stressed, is not to replace 
Official Development Assistance (ODA), but rather to create 
mechanisms that help make up for the developed world's 
failure to meet the 0.7% of GDP ODA target.  Chirac 
reportedly created a study group, known as the "Landau 
group" to begin studying various forms of international 
taxation, she said.  In addition to a Tobin-style tax on 
international financial flows, a proposal for a tax on major 
weapon systems was also being advanced.  Some have discussed 
an international carbon emission tax, although Nazareth said 
the latter proposal had stirred up considerable doubts, 
since it would make development itself more expensive. 
 
5.  (SBU) The Brazilian group that Nazareth heads is 
focusing in particular on a tax on international financial 
transactions and a separate one on arms sales.  Nazareth 
stressed that everyone involved in the discussions is 
cognizant that universal participation would be necessary 
for such taxes to work.  All it would take is one country 
outside the system for evasion to occur.  She acknowledged 
that this need for universality required pragmatism.  They 
had canvassed existing studies, she said, to find approaches 
that might be modified and made widely palatable.  The Tobin- 
style tax, for example, would be set at 0.01% of financial 
flows and not structured, as a true Tobin tax would be, to 
try to reduce financial market volatility.  The studies in 
question have suggested that a 0.01% tax on financial 
transactions would yield from $17 - $20 billion per year.  A 
tax on large weapons systems sales, notionally at a 5% rate, 
might yield a further $10 billion, although work on this 
proposal was less advanced than that on financial flows. 
Nazareth argued that the latter tax, to the extent it 
reduces weapons sales, might have positive externalities by 
reducing the threat that terrorists might gain access to 
advanced weaponry. 
 
6.  (SBU) Elucidating on the legal basis for these taxation 
schemes, Nazareth said that the ideas floated to date do not 
call for international taxation administered by the UN. 
Rather, national authorities would collect these taxes and 
forward them for use by UN development and health agencies. 
Discussion of how this could be accomplished was ongoing, 
but the most logical approach seemed to be for an 
international convention that countries would sign and 
ratify. 
 
7.  (SBU) Along with obligatory taxation, several 
"innovative" financing mechanisms are also under discussion, 
according to Nazareth.  These include the promotion of 
socially-responsible investment funds and making widespread 
the use of "incentive" credit cards, that donate a 
percentage of the transaction to a cause, in this case the 
UN development agencies.  These might be accompanied, she 
said, by two voluntary efforts to build political consensus 
to reduce taxation of immigrant labor remittances (after 
receipt in the worker's home country) and to reduce tax 
evasion by reducing the role of tax havens.  More 
controversially, a carbon tax had also been considered.  At 
a rate of $0.48/liter of gas, such a tax would raise $130 
billion world wide, Nazareth said.  She acknowledged that, 
by making energy more expensive, such a tax might make 
development itself more costly. 
 
8.  (SBU) Looking ahead at next steps in the process, 
Nazareth said that representatives of the governments of 
Brazil, Chile, France and Spain would meet again July 28 in 
Paris.  They would then circulate for initial comment a set 
of papers that they hope would form the basis for discussion 
at the heads of state level in a meeting Lula has called for 
September 20, on the margins of the General Assembly. 
Nazareth emphasized that, from the GoB's point of view, the 
effort is designed to stimulate broad discussion and 
ultimately increase resources available for UN sponsored 
development efforts.  Nazareth said that the financing 
effort is the third broad thrust of GoB international 
development efforts, along with efforts to reduce 
agricultural subsidies through the G-20 and Lula's effort to 
amend how the IMF accounts for certain investment 
expenditures. 
 
9.  (SBU) Comment:  The GoB's interest in this subject 
appears to be serious, not just rhetorical, hence Nazareth's 
repeated acknowledgement of the need to take a pragmatic 
approach.  The example of Lula's call for the IMF to change 
how it accounts for investment expenditures may be both 
instructive and predictive.  After initial public fanfare, 
in which Lula scored some PR points on the IMF issue, the 
technicians at the Finance Ministry sat down to try to map 
out an approach that would not spook the markets.  Their 
effort started from the clear recognition that accounting 
shifts won't solve Brazil's debt problem or fool the 
markets.  A senior finance ministry official assured Emboff 
recently that what Brazil is now aiming at is achieving 
political consensus, within the IMF and without, for greater 
investment in the expenditure mix while maintaining the same 
level of fiscal restraint.  This represents a substantial 
change from initial characterizations of the effort.  The 
key point, however, is that the GoB's intent has been in 
stimulating change, even if they do not get all their 
initial public rhetoric indicated they are seeking. 
 
DUDDY