Tax for development

Reforming tax systems can boost development by giving countries more autonomy. This can lead to broader reforms too.

People in developed economies struggling to close burgeoning deficits incurred in the crisis by raising taxes or cutting spending could be forgiven for thinking that developing countries are concerned with the same priorities. But even in good times, dealing with fiscal challenges is an ordeal.

Forget about tax rates or tranches, poor countries often quite simply lack the resources and capacity to build effective tax-collection systems. Despite some recent improvements in revenue-raising efforts, half of sub-Saharan African countries still mobilise less than 15% of their GDP in tax revenues, as against an average of around 35% in OECD countries and 23% in Latin America. This makes it difficult for the state to function properly, let alone to deliver on wider roles, such as social services or a better business environment.

Developing countries know that, for their economies to grow and to attract business and jobs, and ultimately eliminate poverty, they must build capacity, strengthen infrastructure, combat corruption and develop transparent financial systems. They also need to work on a global level if they are to retain their already scarce resources by combatting illicit financial flows and reduce the impact of tax havens. Tax revenue is central to achieving all these objectives. It is about providing a stable and predictable fiscal environment to promote growth and, in the longer term, reducing dependence on development aid. Taxation is also about “good governance”, because tax systems work as vehicles for enhancing state-society relations and improving public accountability. In other words, how taxes are raised matters as much as how much. What is more, the evidence shows that reforms which begin in tax administration may inspire the reform process in other parts of the public sector, which would be good news for those developing countries wishing to jumpstart their reform efforts.

Making tax systems work is easier said than done. Attitudes have to be changed. Ordinary people may be unwilling to pay tax, frequently reflecting an accurate perception that officials themselves may be corrupt, and that governments consistently misuse public funds. Elites are equally hard to tax and may be able to use havens or evade taxation. It is also difficult to collect tax from low-income, agrarian economies with large informal sectors or to avoid coercion to raise those taxes by local officials.

The external environment also poses new challenges. There has been an international shift away from taxes on trade, and this has added to the problems of domestic revenueraising (African countries typically rely for more than 40% of their revenue on trade taxes). Striking the right balance between an attractive tax regime for investment and growth, and securing the necessary revenues for public spending is a key policy dilemma.

Globalisation may also exacerbate fiscal problems, as internationally mobile capital becomes more difficult to tax. Large firms and investors have increased their bargaining power over governments, forcing a “race to the bottom” among developing countries competing to provide the most attractive tax incentives. At the same time, governments are under pressure from trading partners and local citizens to ensure their tax systems are transparent and fair.

These challenges have created major new capacity needs in developing countries that the donor community has yet to fully recognise. Up to now, support for revenue and customs sectors has attracted a minimal share of aid, of around 0.1% of official development assistance annually. Donors could increase that amount and see aid as a way to kick-start the move towards sustainable tax systems. Such assistance should be seen as an investment in the future of these countries.

Despite these challenges – and also because of them – now is a good time for tax reform. A shift away from indirect trade taxes in favour of VAT has made tax more visible and consequently provided a base for direct interaction (and formalisation) between state and small businesses. We now know more about how to make tax systems simpler and more transparent, about encouraging more compliance and about effective tax revenue solutions, such as broadening the base for taxation of financial sector profits rather than imposing financial transaction taxes, and so on.

There is now a growing international consensus around these policy themes, backed up by an increasingly powerful and well-organised global community of tax professionals. The call for action is increasingly coming from developing countries themselves. In Africa, the creation of the African Tax Administration Forum, driven, managed and, over time, operationally funded by Africans, provides a key platform for peer learning, capacity development and dialogue on domestic and international tax issues.

The other good news is that there is evidence to show that aid directed at capacity development in the revenue and customs sectors in the developing world is money well spent – an important consideration given the mixed record of technical assistance and donor fatigue in many other areas.

With the economic crisis, the G8 and the G20 have made considerable advances with the assistance of the OECD, IMF and others towards addressing illicit flows, tax evasion, avoidance and tax havens. With more than 300 exchange agreements being signed in 2009, more progress has been made on this front in the last year than in the last decade. Nearly one hundred countries are now committed to transparency and exchange of information standards and are in the process of implementing them. This number will grow quickly as developing countries become directly involved in the debate. The key issue now is how developing countries can best be supported to take advantage of the more transparent international environment to strengthen their tax systems. If they can achieve that, they will strengthen their development potential significantly.

Visit www.oecd.org/tax 


References

Bräutigam, Deborah, Odd-Helge Fjeldstad and Mick Morre, eds. (2008), Taxation and State-Building in Developing Countries, Capacity and Consent, Cambridge University Press, Cambridge.

OECD (2009), “Taxation, State Building and Aid”, Factsheet, Updated December 2009, Paris. Available at www.oecd.org/dac/governance 

OECD (2008), Governance, Taxation and Accountability: Issues and Practices, DAC Guidelines and Reference Series, Paris.

Owens, Jeffrey and Richard Parry (2009), “Why tax matters for development”, in OECD Observer, No 273 June 2009, available at www.oecdobserver.org/tax 

For information on the OECD Global Relations Tax Programme, see www.oecd.org/tax/globalrelations 

For information on the OECD’s work on countering tax avoidance, see http://www.oecd.org/dataoecd/25/61/44431069.pdf 


©OECD Observer No 276-277 December 2009-January 2010



Bookmark this


Economic data

E-Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive print editions delivered to you directly


Online edition
Previous editions

Don't miss

  • Low interest rates here to stay for half a century, says OECD director Adrian Blundell-Wignall.
  • OECD speak on support it will offer to Greek
  • 3.4 bn people or 56% of the world's population live only just above the global poverty line, on US$2-10 a day. The global middle class is both smaller and poorer than thought. Read more about the results of this Pew Research Centre's new study on the Financial Times.
  • Resale of charity shop rejects has destroyed Kenya's local textile industry but a proposed ban on the importation of used garments risks putting thousands out of work. Read more about this economic dilemma on The Guardian.
  • Bill Gates visited the OECD on 26 June. He met with the Secretary-General Angel Gurría to discuss areas of collaboration with his foundation and participated at a briefing session on official development assistance modernisation with OECD experts.
  • "Countries that are home to high proportions of immigrants tend to have better integration outcomes”, according to the OECD Indicators of Immigrant Integration 2015, released on 2 July 2015. Read more on The Guardian.
  • The People’s Republic of China decided to enhance longstanding collaboration with the OECD and to join the OECD Development Centre, in a historic visit by Chinese Premier Li Keqiang on 1 July to the OECD in Paris.
  • In order to face global warming, Asia needs at least $40 billion per year, derived from both the public and private sector. Read how to bridge the climate financing gap on the Asian Bank of Development's website.
  • One dollar in aid for trade generates eight dollars in extra trade for all developing countries and 20 dollars for low-income countries. Read OECD Secretary General's post on the newly released Aid for Trade at a glance 2015.
  • Catherine Mann, OECD Chief Economist, explains on Bloomberg why "too much bank lending can slow economic growth".
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .
  • Come va la vita in Italia? How's life in Italy? The OECD Better Life Index is an interactive online platform in seven languages that goes beyond GDP by offering important insights into measuring well-being and quality of life. Try it for yourself!
  • What does it mean to live on less than US$2 a day? Xavier Godinot, Delegate for International Affairs of ATD 4th World and René Locqueneux, a member of this NGO, gave an insightful presentation on the topic based on their field experience, at the 2015 OECD Forum.
  • How to jump-start slack investment to drive global growth and jobs dominated discussions at the annual OECD Ministerial Council Meeting, chaired by the Netherlands, which ended 4 June.
  • The IMF calls for a decisive energy subsidy reform in order to use the freed resources to meet critical public spending needs and to reduce pollution ahead of the Paris climate change summit.
  • More than 35 million young people, aged 16-29, across OECD countries are neither employed nor in education or training according to the newly released OECD Skills Outlook.
  • Have a look at these posters representing a world without fundamental rights at work – including child labour, forced labour and inequality. Read more about this ILO image competition here.
  • Rising inequality threatens social cohesion and growth. Income inequality has reached historical highs in most OECD countries and is still rising.
  • Time to vote! As the dust settles after the UK general election, let’s remember that voting at the ballot box is not an innate right enjoyed by everyone. Indeed, although the number of democracies across the world has spiked from 48 in 1989 up to 95 today, billions of people are still living in non-democratic, authoritarian regimes.
  • How can we achieve a zero-carbon future? A new World Bank report provides a few insights.
  • Today alcohol causes more deaths worldwide than HIV/AIDS, violence and tuberculosis combined. In order to reduce damages to health, the OECD recommends that regular drinkers reduce their consumption by one unit a week, that is, a small glass of wine for example. In addition, increasing prices, regulating advertising, effectively treating drinking problems together with stricter police enforcement would greatly contribute to reducing damages done to individuals and society.
  • video alcohol
  • Africa vs profit shifting African countries heavily rely on the income generated by multinationals’ taxation, which can represent as much as 88% of a country’s tax base. Little wonder Africa is involved in the OECD’s initiative to address tax base erosion caused by profit shifting, known as BEPS. The need to strengthen inter-governmental co-operation to curb cross-border tax losses was reaffirmed at the Africa Tax Administration Forum (ATAF) in Sandton on 21 April 2015.
  • Africa v. profit shifting
  • Rana Plaza
  • Wal-Mart, Other Retailers Sued over Bangladesh Factory Collapse Two years after the April 24, 2013, Bangladeshi factory collapse in the capital of Dhaka, the victims' families filed a lawsuit in U.S. federal court in Washington against Wal-Mart Stores Inc and other U.S.-based companies that sourced out their products from the Rana factory. Read more on Telesur's website.
  • #OECD360: Your country in figures.
  • How to ensure transparency in public procurement? Read Cobus de Swardt's article on OECD Insights.
  • After three decades of extraordinary economic development, China is shifting to a slower and more sustainable growth path, according to the OECD's latest Economic Survey of China.
  • In pursuit of the American Dream
  • Tim Harcourt Video
  • G20 and Australia: Bestselling economist Tim Harcourt speaks to the BBC about how Australia has gone from "Down Under to Down Wonder".

Most Popular Articles

Poll

What issue are you most concerned about in 2015?

Euro crisis
Unemployment
Global warming
International conflict
Other

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2015