Director of Policy Research in the Public Policy & Advocacy Department
Few public policies are less popular with Americans than taxation.
In 2014 52% of Americans said their taxes were too high, while 3% said they were too low. The Internal Revenue Service is rated as one of the least-loved federal agencies. In 2013 only 27% of Americans said it did a good or excellent job while 42% said it was doing a poor job, making it the lowest rated agency among all surveyed.
But from a global perspective, taxation and prosperity often go together. As analysts have asserted, wealthy, healthy, and well-educated populations are typically supported by high levels of government expenditures. That money has to come from somewhere, often it’s from taxes.
Evidence indicates that – in general – the wealthier your country, the more taxes it raises as a percentage of its economic output (GDP). If you live in a prosperous country – unless you are living on top of massive oil reserves – then you probably have an above-average tax-to-GDP ratio. For example:
- Contrast that with Uganda which had a tax-to-GDP ratio of 13% in 2011 and a poverty rate of about 20% (in 2012)
But we have to be careful not to make facile linkages between taxation and healthy and prosperous societies. While taxes and development often go together, the relationship is complex.
Taxation is beneficial in developmental terms only if it’s done to an extent that doesn’t hamper economic growth and doesn’t hurt the poor. Government intervention can increase poverty rather than raise incomes. As analyst Charles Kenny has noted, “The incidence of poverty after transfers, taxes and subsidies is higher than market income poverty in Armenia, Bolivia, Brazil, El Salvador, Ethiopia, and Guatemala.”
But before delving further into the nuances of taxation on poverty, it’s useful to ask: Who cares? In addition to being disliked, tax is also typically regarded as a dull public policy issue.
The momentum on “taxes for development” has been growing for some time as the development finance focus has shifted to include domestic resources, which now contribute nearly 70 percent of development finance in Africa. No wonder that domestic resource mobilization (DRM) – developing countries increasing their own revenue – is receiving increased attention from governments and analysts:
- DRM is at the forefront of planning for the Financing for Development conference to be held in Addis Ababa, Ethiopia in next month. It is regarded as central to financing the Sustainable Development Goals (SDGs).
- Developing country leaders are driving the conversation. In a recent op-ed Liberian President Ellen Johnson Sirleaf said that developing nations, “Need to invest in modern tax collecting systems, stem corruption…and crack down on tax evasion.”
- This month analysts and policymakers discussed the U.S. role in promoting DRM at the Brookings Institution. During the discussion, U.S. officials revealed the Addis Tax Initiative, a multilateral DRM package to be rolled-out at the conference in Addis Ababa.
- USAID and the U.S. Treasury Department have expressed increasing interest in using more international development assistance on DRM, helping developing nations with their tax administration – collection and spending – to be more self-sufficient in reaching their development goals.
DRM and tax are experiencing their 15 minutes of fame, but more development assistance for DRM is not enough. It needs to be done right. In addition to ensuring that taxation is pro-poor and progressive other key principles include:
- Strong country leadership: Reforming the tax sector can be politically hazardous, so using development assistance to help countries improve their tax collection and spending is only workable in countries where there is demonstrated and authentic political will to do so.
- Long-term support: Increasing DRM is a long-term process that can take more than a decade. Reform needs to be sustained by ongoing support.
- Donor coordination: Lack of donor coherence for improving DRM can create confusion rather than reform if donors promote different systems in the same country.
- Include civil society: Supporting taxpayer associations and other civil society organizations will help hold government revenue generating agencies more accountable and transparent.
Taxation is moving to center stage in development finance, and could be a key tool in achieving the SDGs. If the increased focus on DRM contributes to the achievement of the ambitious SDG goals, including eliminating extreme poverty within a generation, than its newfound fame will be well-deserved.