A/HRC/26/28 State’s population or undermine that State’s ability to use maximum available resources to realize economic, social and cultural rights. 34. In the past, it has been difficult to reach international agreement on tax cooperation owing to the powerful entrenched interests at play and the reluctance of States to cede any sovereignty on tax affairs. In the current status quo, however, certain States – in particular low-income States and States with high debt levels or loans from international financial institutions – have very limited sovereignty over their tax affairs. Indeed, their actions in this sphere are frequently constrained by wealthy countries, international financial institutions and business interests. Tax sovereignty is also undermined by competition for foreign investment between developing countries, creating a “race to the bottom” in terms of both corporate tax rates and incentives. 35. A contemporary interpretation of existing obligations of international cooperation and assistance should recast or redefine the outdated emphasis on tax sovereignty to a more modern conception of international tax cooperation in a globalized and interdependent world economy (see paras. … below).41 III. Tax: a critical tool for realizing human rights and tackling inequality 36. Taxation is critical to finance development and can be a powerful tool for stimulating poverty reduction. Higher and more stable revenues result in increased sustainable investment in public services, infrastructure and other development needs, and improve competitiveness of economies over the long term. Taxes are not the only source of government revenue, but they are arguably the most important, because they combine three critical functions, addressed below: (a) the generation of revenue for the realization of rights; (b) achieving equality and tackling discrimination; and (c) strengthening governance and accountability. 37. Certainly, poverty reduction is more effective and sustainable when combined with investments in areas such as education, health and food security. These areas are also critical for ensuring the realization of rights in the present and future and for overcoming the intergenerational transmission of poverty. 38. Taxation policies also have the potential to reduce income and wealth inequalities, depending on their level and progressiveness.42 This is a crucial goal, because inequalities have been shown to slow the pace of poverty reduction, create intergenerational poverty traps through uneven access to health and education, and increase the vulnerability of societies to economic crises. 43 Some research has shown that improvement in income 41 42 43 10 See for example the advisory opinion of 21 June 1971 on Legal Consequences for States of the Continued Presence of South Africa in Namibia (South West Africa) notwithstanding Security Council resolution 276 (1970), ICJ Reports 1971, p. 16, para. 31. Every year from 1985 to 2005, direct income taxes and transfers reduced the average Gini coefficient of income inequality in 25 countries of the Organization for Economic Cooperation and Development by about one third. See Francesca Bastagli, David Coady and Sanjeev Gupta, Income Inequality and Fiscal Policy, IMF Staff Discussion Note, 28 June 2012, p.11. See also ECLAC, Time for equality: closing gaps, opening trails, 2010, p. 225. See Department of Economic and Social Affairs, Inequality Matters: Report on the World Social Situation 2013, pp. 66-68, and Fiscal Policy and Income Inequality, IMF Policy Paper, 23 January 2014.