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Improving African tax revenues
– by Dereje Alemayehu
Informal retail business in Addis Ababa: To make taxes acceptable, governments must provide good infrastructure and services.
World-market integration is asymmetric, and the benefits are not shared equally. What policy space a government has depends on many things including the level of its country’s development, size of the economy, endowment with natural resources, geostrategic position, environmental conditions et cetera.
To achieve development goals, governments must tackle domestic as well as international challenges. In low income countries, even tax collection, which is normally a crucial area of national policymaking, is interlinked with international matters. “Domestic resource mobilisation” (DRM) is the technical term used in international debate when it comes to increasing tax revenues. The international consensus is that African countries must do more in this field in order to achieve the sustainable development goals (SDGs). However, their efforts in this field cannot succeed without committed and consistent international support.
In regard to DRM, international cooperation must achieve several things. A stable and fair international finance architecture is a global public good, which the international community must deliver and safeguard. Two relevant challenges are:
- to agree a multilateral mechanism to resolve sovereign debt problems and
- to curb illicit financial flows (IFFs) and tax dodging by multinational corporations.
The international community acknowledged as much in the Addis Ababa Action Agenda (AAAA), which was unanimously adopted by the UN conference on financing for development in the Ethiopian capital in 2015.
The AAAA assessed the challenges and elaborated the responsibilities of national governments as well as their international partners. It showed that the responsibility of high-income countries goes far beyond official development assistance (ODA). Of course, ODA can help to develop capacities in developing countries’ revenue services, but that is not the most important duty of advanced nations.
A recent multilateral report indicates that too little progress has been made in regard to DRM. The Inter-Agency Task Force on Financing for Development (IATF), which was set up to monitor the implementation of the AAAA, published it in March. It deserves to be taken seriously. Over 50 major international institutions are taking part in the IAFT, including various UN bodies, the International Monetary Fund (IMF), the World Bank and the World Trade Organization (WTO).
From the African perspective, enhancing DRM involves national homework as well as multilateral duties. Both are essential for SDG attainment.
African governments are in charge of achieving three things:
- they must expand and deepen the tax base,
- they must stem wasteful public spending and resource leakages, and
- they must improve the integrity and effectiveness of their revenue services.
So far, African governments have basically improved their ratios of tax to GDP by increasing indirect taxes such as sales taxes or the value added tax (VAT). The share of VAT in the overall tax take is estimated to be around 60 % of the total tax revenue, and that is alarmingly high. The problem is that consumers ultimately pay the VAT, and poor people who must spend a large share of their incomes for consumption are burdened in particular (see my essay in Focus section of D+C/E+Z e-Paper 2018/01).
By contrast, it would make sense to introduce taxes on property and wealth. They hardly exist in Africa, but they would bolster public budgets and, at the same time, reduce social inequality.
Moreover, African governments must widen the tax base by bringing in additional sectors. The most important issue is to tax the informal sector. This is certainly a difficult and complicated undertaking, but for the sake of healthy public finances, it must not be postponed.
So far, masses of people in the informal sector and smallholder agriculture are part of the “fiscal contract” according to which they would pay direct taxes to their government and get meaningful physical and social infrastructures in return. For tax reforms to succeed, governments must do more than squeeze money from the informal sector. In return, they must build roads, provide electric power, ensure health care et cetera. Good infrastructure is the basis on which an economy can thrive and social development occurs.
The UN Economic Commission for Africa (UNECA, 2019) recently stated: “Taxing hard-to-reach sectors, improving governance in revenue collection and bolstering accountability would greatly reduce inefficiencies and mobilise up to $ 99 billion a year over the next five years.”
The Commission warned, moreover, that tax breaks for foreign investors reduce government revenues by an average of 20 % in Africa, but they only increase investments by one percent. If DRM is to improve, such and other kinds of giveaways must to stop.
Duties of high-income countries
DRM is moving forward too slowly, according to the above-mentioned IATF report. Moreover, the report warns that a serious financial crisis is becoming ever more likely if current trends in the global economy continue unchecked. The greatest concern is the growth of sovereign debt and the rising costs of servicing it.
In this grim scenario, the policy space of African governments is actually shrinking. Growing debt-related expenditure makes it harder for them to enhance DRM. The point is that the share of public budgets that they must commit to this purpose is growing at the expense of resources available for essential services and developmental initiatives. Unless people see that paying taxes ultimately brings benefits, they will not accept higher taxation.
It is important to remember the two decades characterised by the crippling debt crises of the 1980s and 1990s are generally remembered as “the lost decades” in which development stalled in many places or even went into reverse. For good reason, the AAAA demanded that problems of this nature must be addressed.
Governments of high income countries have so far refused to start negotiations on a multilateral mechanism that would allow the international community to resolve future debt problems systematically. Such a mechanism is needed. It would increase African government’s scope for DRM.
Another important issue is that national governments cannot successfully tackle IFFs on their own. Once more, the established economic powers are dragging their feet.
On behalf of the African Union and UNECA, a high-level panel of African leaders published a report on IFFs in early 2015. The topic has since stayed high on the agenda of international discourse. The SDGs include a target devoted to reducing IFFs, and the AAAA called on the international community to act. So far, the debate has not led to convincing results.
Indeed, IFFs are “significant” and a “persistent drag on developing countries”, according to the Washington-based think tank Global Financial Integrity (2019). Nonetheless, adequate measures are not being taken. The lack of consensus on an “IFF definition” serves as a pretext. The core dispute is absurd. Some parties argue that tax avoidance should not count as an IFF. In practice, however, tax avoidance is not simply one of several IFFs. It is actually the main driver of other IFFs which typically depend on the institutions, enablers and mechanisms set up by the tax-avoidance industry.
A developing country cannot curb IFFs on its own. Relevant measures would have to apply to cross-border transactions, so more than one government is involved. Tax dodging by multinationals and wealthy individuals is obviously a global problem. It is often – and correctly said – that African problems require African solutions. In the same sense, global problems require global solutions.
The Group of 77, which is actually a coalition of 134 African, Asian and Latin American countries in UN settings, has been demanding intergovernmental negotiations to tackle IFFs. Civil-society organisations around the world endorse that demand. By finally engaging in negotiations on a sovereign-debt mechanism and measures to control IFFs, donor governments could prove that they are serious about promoting DRM in developing countries.
Global Financial Integrity, 2019: Press release.
Inter-Agency Task Force on Financing for Development (IATF), 2019: Financing for sustainable development report 2019.
UN Economic Commission for Africa (UNECA), 2019: Fiscal policy space for financing sustainable development in Africa.
Dereje Alemayehu is the executive coordinator of the Global Alliance for Tax Justice.