Low-income countries are being called on to generate their own financial resources for development. One of the ways they can do that is through taxes. It’s being discussed at the Third International Conference on Financing for Development in Addis Ababa (July 13-16).
Britain’s Institute of Development Studies has issued a policy brief on Building Tax Capacity in Developing Countries. It says that “governments will be urged to tax more effectively” and donors will be called upon to help build the capacity to do so.
Professor Mick Moore, CEO of the International Center for Tax and Development and one of the authors of the brief, said, “I think there’s now a very widespread understanding that a lot of low income countries could probably raise more of their own money themselves. And many of them understand this. You know, we’ve had an era of what I call ‘big aid’ for quite a long time now. And I think it’s clear to most people in the world that that era of ‘big aid’ is going to draw to an end.”
He said donors would continue providing aid for such things as humanitarian emergencies. Many low-income countries, he said, would be “happier if they were not dependent on donors and could just raise their own money.”
Labeling a country “low-income” may give the impression that it does not have much of a tax base. Moore disagreed.
“Well, it’s not really the case. Even low-income countries have a tax base. It’s not as big as the tax base in the U.S. or the U.K., but it’s quite substantial and it’s not always tapped into very well," he said. "So, there is certainly scope for doing better there.”
The IDS professorial fellow said building taxation capacity in a low-income country does not necessarily mean taxing poor people.
“There’s a great deal of tax evasion and the worst tax evasion happens in low-income countries is not actually poor people. But it’s because there are a lot of unrecorded transactions in the economy," he said. "Doctors, lawyers, consultants, dentists, artists, architects – professional people of all kind operate on a cash basis and they don’t pay taxes. Large numbers of people own a lot of property. Property taxes are extremely low in most low-income countries.”
Moore said low-income countries already have a tax foundation to build on.
“Even the lowest-income countries all have a system of taxation at present. And that system of taxation actually doesn’t look a million miles different from the taxation system in you’ll find in the U.S. So, it’s not as if they’ve got to start from nothing. It’s just that they have a machine there and they’re not using the machine to quite its capacity,” he said.
One reason is a lack of staff well versed in tax matters. That’s due to qualified people taking jobs in the private sector. Moore said other reasons include a lack of commitment by the government to do something about taxation – or the government being too eager to give tax breaks to foreign investors.
The Institute for Development Studies policy brief said successful tax collection is based on trust.
“We have a long history now of rich countries trying to support the development of organizations in low-income countries. When we’re giving the money we want to do it our way, according to our timetable. And we want our experts to visit there when it’s suitable for us. But in many cases and especially true I think in the tax field where you have quite few rather well educated people, they often know what their problem is. They don’t need us to tell them what the problem is, but they genuinely do need our help in solving it,” said Moore.
Building partnerships, he said, establishes better relationships and brings better results. As the policy brief puts it, “mentoring is better than training.”
Moore said it’s not clear how much an improved tax capacity would stem illicit flows of money. He described it as a “very, very contested issue.”
“We know that there is quite a lot of illicit flows of money from low-income countries. This goes through banks and much of it is suspicious money. It’s corruption money. And it ends up someplace in the rich world or in a tax haven world. That’s one thing. But that is not all potential taxable income for the government. Indeed, most of it isn’t potential taxable income for the government. So, even if you enormously cut down on the illicit flows, you wouldn’t necessarily make a big impact on the taxation issue,” he said.
Several African countries have sharply improved their reputations for tax collections. These include Kenya, Mozambique and Tanzania.
Moore said building tax capacity in low- and middle-income countries is a fashionable subject right now among donors. However, he added that donors often make big commitments, but fail to follow through several years later. One reason is that tax authorities in rich countries are reluctant to release qualified personnel to go work in developing countries because there’s so much work to do at home.