Can tax policy stop human trafficking?

Author:Fahey, Diane L.

    The total number of victims who are held in captivity to perform forced labor at any one time is estimated to be as high as twenty-seven million. (1) That would be equivalent to every man, woman, and child in the states of New Hampshire, Vermont, Massachusetts, and New York (2) being held in captivity and forced for twelve to fourteen hours each day to labor in sweatshops, or toil as agricultural workers, or service sexually many customers every day with no hope that it will ever end except by death. They would live in crowded, dirty hovels, receive little food and no medical care, and live under the constant threat of beatings, rape, and other violence. Every year, new victims will be added to their numbers. This is human trafficking.

    The twenty-seven million victims include those who are trafficked within their own country and those who are trafficked across international borders. (3) Each year, as many as one to four million new victims are trafficked across international borders. (4)

    Both domestic and international efforts to prevent cross-border trafficking have been ineffective, and the number of victims increases each year. Victims who are trafficked across international borders come from countries that are primarily war-torn, developing, or poor. They are trafficked through transit countries which have weak immigration laws or in which immigration or law enforcement personnel can be easily bribed, or whose topography makes it easy to get across the border without being detected. The victims end up in destination countries that are rich and economically developed. (5)

    Human trafficking is the third largest international criminal enterprise, behind drugs and arms smuggling, and it is starting to surpass drugs. (6) It generates approximately $9 billion a year. (7) Why is human trafficking so appealing to criminals? It is a relatively low-risk, inexpensive way to make a lot of money very quickly. (8)

    The international community recognizes that human trafficking is a human rights violation and the United Nations repeatedly has denounced the practice. Yet, it not only continues, but it flourishes, in part because the United Nations pronouncements themselves do not contain sanctions. (9) Both the United States and the European Union have enacted domestic legislation; however, for the most part, that legislation does not cross borders and reach into countries where the trafficking originates. (10)

    The rise in human trafficking can be attributed to many factors, such as overpopulation, social chaos in poor or war-torn countries, poverty, and government corruption. Of all the factors that lead to human trafficking, government corruption is the most significant. (11) Corrupt government officials enable trafficking in a number of ways, including providing false visas for victims, refusing to stop or prosecute known traffickers, or even engaging in trafficking themselves. The importance of improving the living conditions for those who are vulnerable, educating potential victims, and prosecuting offenders cannot be gainsaid. However, if government corruption is the most significant factor, then we need to direct our efforts towards eradicating government corruption while at the same time respecting state sovereignty. This article recommends taxation as an economic incentive that would recruit as allies in this war the wealthy residents of countries where government officials or the governments themselves are complicit in trafficking.

    Foreign persons used to be subject to U.S. tax on nonbusiness-related interest ("portfolio interest") they earn from U.S. government bonds, bonds issued by domestic businesses, and interest earned on domestic bank deposits. After 1984, the United States exempted portfolio interest from U.S. tax. (12) Other governments, in order to remain competitive with the United States, followed suit. (13) This article proposes that the governments of the world's major economies, where the wealthy invest the bulk of their money, re-impose the withholding tax on the interest income from investments. The governments of these major economies can then agree to reduce the withholding tax rates on residents of complicit countries if trafficking is reduced. In addition, the governments of these major economies can promise to refund to the complicit governments a certain amount of the interest income withheld after the complicit governments achieve certain benchmarks. Unlike foreign aid, the refund would depend on the complicit governments' prior demonstration that they have satisfied certain criteria, rather than relying on their commitments to comply in the future. This economic solution applies pressure on those who are in positions of power to achieve change, and at the same time does not hurt those who are the most vulnerable to trafficking--the poor.

    Although the primary purpose of taxation is to raise revenue to fund government, taxation is also used for social policy purposes--to encourage or discourage behavior, (14) This proposal expands the role of taxation with regard to social planning to the international sphere. Critics may ask why human trafficking should be singled out for this special tax treatment. After all, there are many social policies that governments might wish to address through taxation. The distinction here is that, unlike many social policies, there is no dispute that human trafficking is a violation of human rights. Even countries that traffic at least pay lip service to the principle that human trafficking is wrong.

    Further, the pernicious effect of human trafficking crosses borders, creating crime and government corruption as it wends its way through the countries involved. With regard to wrongful or undesirable behavior that crosses borders, the international community is beginning to turn to taxation, in addition to regulation, as a tool to control such behavior. For example, the European Union is considering levying a carbon tax on countries which refuse to sign the Kyoto treaty in order to force compliance. (15)

    Part II reviews the causes that make victims vulnerable to human trafficking and the factors that have encouraged its dramatic increase. The most significant factor that predicts whether trafficking will occur is government corruption. Further, trafficking has flourished in part because it has been difficult for the international community to develop sanctions and incentives that cross international borders. Part II, therefore, also reviews the international community's responses to human trafficking, particularly the responses of the United Nations, the United States, and the European Union. Part III demonstrates that this lack of incentives and sanctions has encouraged governments to commit to treaties and agreements that support human rights but enabled governments to avoid complying with their obligations without suffering adverse consequences. Part IV then examines the fiscal strains that await the developed countries and that the developing countries face now from insufficient tax revenues. Further, Part IV examines how the repeal of withholding on investment income has contributed to the fiscal strain and to tax evasion.

    Finally, Part V proposes that the developed countries with the major world economies re-impose the withholding tax on investment income. Not only would the re-imposition of the tax reduce some tax evasion and generate much needed tax revenues, but the tax could be used to provide an economic sanction or incentive towards countries that are complicit in human trafficking. In order to avoid the sanction or obtain the incentive, the complicit government must satisfy certain criteria or benchmarks. The wealthy residents of complicit countries then would be eligible for a reduced withholding rate after their governments satisfied certain benchmarks and reduced human trafficking. The complicit governments also would have the incentive to reduce human trafficking as a means of acquiring revenue from the developed countries through a refund of a portion of the withheld tax.


    1. Human Trafficking Defined

      The United Nations Protocol to Prevent, Suppress and Punish Trafficking in Persons, Especially Women and Children defines human trafficking as follows in Article 3:

      (a) ... the recruitment, transportation, transfer, harbouring or receipt of persons, by means of the threat or use of force or other forms of coercion, of abduction, of fraud, of deception, of the abuse of power or of a position of vulnerability or of the giving or receiving of payments or benefits to achieve the consent of a person having control over another person, for the purpose of exploitation. Exploitation shall include, at a minimum, the exploitation of the prostitution of others, or other forms of sexual exploitation, forced labour or services, slavery or practices similar to slavery, servitude or the removal of organs.... (16)

      The United States Department of state estimates that between approximately 600,000 and 800,000 new victims are trafficked across international borders each year, although that is a concededly low estimate. (17) Other estimates are as high as four million new victims each year. (18) Eighty percent of the victims are female and fifty percent are children. (19) Most of the victims who are trafficked for sexual exploitation originate from Russia and the other former Soviet Republics, Asia, and Central and South America. (20) However, not all victims are forced into sexual slavery and not all victims are women; it is also overlooked that men and boys are trafficked as well. (21) In addition to sexual slavery, victims also are forced to work in sweatshops, or as agricultural workers, domestic servants, or beggars. Traffickers do not consider victims to be "human capital" in which an investment has been made and, therefore should be preserved. Rather, victims are considered to be...

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