Taxation, resource mobilisation and governance
in Sub-Saharan Africa
Jonathan Di John
Taxation and tax reform is central to state-building
• governments must be able to ensure sustainable funding for
social programs, and for public investments to promote
economic growth and development.
• taxation is the main nexus that binds state officials with
interest groups and citizens.
• taxation, particularly in the form of land and property taxes,
customs and border collection can help increase the territorial
reach of the state and help secure property rights.
• fiscal capacities are needed to build a legitimate state.
Democratic elections do not themselves ensure state
legitimacy
The Political Economy of Taxation and Tax Reform
• Introduction: The Problem of State Capacity and
Taxation in Less Developed Countries
• Taxation is not considered one of the five fundamentals
of good governance (as spelled out in the World Bank
Development Report, 1997).
• Yet, as Schumpeter notes: “the fiscal history of a people
is above all an essential part of its general history”
Challenges Facing Sub-Saharan Africa
•
In sub-Saharan Africa, improving taxation to meet developmental needs is
one of the main challenges facing the region (Gupta and Tareq, 2008).
•
The average tax-to-GDP ratio in sub-Saharan Africa has increased from
less than 15 percent of GDP in 1980 to more than 18 percent in 2005.
•
But virtually the entire increase in tax revenue in the region came from
natural resource taxes, such as income from production sharing, royalties,
and corporate in-come tax on oil and mining companies.
•
Non-resource-related revenue increased by less than 1 percent of GDP
over 25 years (Keen and Mansour, 2008).
Structural Factors Limiting the tax take:
1) a large share of (subsistence) agriculture in total
output and employment,
2) large informal sector and occupations;
3) many small establishments,
4) small share of wages in total national income,
5) small share of total consumer spending made in
large, modern establishments
Challenges Facing Low-Income Counties
•
•
•
•
•
•
•
high revenues from trade taxes
high levels of non-tax revenue (especially from mineral rents)
narrow base of tax payers (hence the importance of large
taxpayers office (LTO’s)
Dominance of capital/main city in generating tax revenues
higher rates of tax evasion
Non-state rivals to tax collection in some contexts
One of the greatest challenge facing low income African
economies is how to replace declining trade taxes in the
face of economic liberalization. Trade taxes represent over
one-third of all tax revenues in Sub-Saharan African (SSA)
economies.
Political Economy Factors
• Elite Bargains, Limited Access Orders (North et al.
2009) and the limits on tax collection
• Neo-patrimonial systems of government can
generate corruption and weak tax collection
incentives
• Mineral Rents and Aid: Reduced Incentives for
Domestic Tax Effort?
• Donor Conditionality and coercive methods of tax
collection
Differences in Capital Flight across regions
Table 5. Capital Flight as a Share of Private Wealth in
Latin America and East Asia
(percentage)
1980-9 (a) 1990-8 (a) 1980-9 (b)
Sub-Saharan
Africa
Latin America
&Caribbean
East Asia and
Pacific
1990-8 (b)
27.6%
30.1
27.4
30.3
8.5%
9.0
7.5
7.9
4.5
5.0
2.0
2.7
Note: (a) all observations; (b) full data points only
Source: Collier et al. (2004, Table 1A, p.22)
Variation in Revenue Performance
•
Despite these challenges, there is a wide variation in tax
performance across countries and within countries over time.
•
IMF (2005) study suggests that in tax revenue growth in lowincome countries has coincided with a strengthening of
income tax revenues, suggesting that the burden of adjustment
has not been borne solely by shifting to taxes on consumption.
•
This result is important since it contradicts the conventional
wisdom that consumption taxes are the main source offsetting
trade tax revenue.
Diversification of tax revenues central to recovering losses
from trade taxes
•
Taxation and commodity booms
• Missed opportunities?
• Example: Copper Mining Royalties in Zambia
• policy implications
• urgent need for mineral abundant states to enter into a renegotiation of
mining contracts when they are unfavourable.
•
need for governments to develop productive strategies that exchange
mineral rights for local content conditions, whereby foreign investors are
obligated to use domestic suppliers on an increasingly greater scale. Local
content management has been one of the main ways in which FDI can be
utilised for the benefit of national productive capacity.
• capacity-building in the geological survey capacity in sub-Saharan Africa
needs to be developed in order to improve the bargaining power of states visà-vis multinationals. This is an area where the international financial
institutions can play a leading role.
1. Taxation as Indicator of State Performance
• Main Advantage---Objective Indicator
•
•
•
•
•
•
Components of the indicator:
Monopoly over Tax Collection
Territorial Reach of Tax Collection
Direct Income Tax Collection
Tax Effort
Compliance and coercion in tax collection
Level and Structure of Taxation in selected African Countries
(annual average 1984-2004)
Country
Higher Tax States
Angola
Botswana
Kenya
Malawi
South Africa
Zambia
Zimbabwe
Nigeria
Lower Tax States
Cameroon
Congo. Democratic
Republic
Ghana
Rwanda
Senegal
Sierra Leone
Tanzania
Uganda
Mozambique
Tax
share
Trade
Tax
Domestic
Tax
Nontax
Revenue
Direct
Tax
Indirect
tax
32.08
34.34
18.75
16.87
23.14
18.23
23.13
18.85
4.73
15.32
17.10
16.06
3.62
30.08
10.91
9.67
12.82
56.30
17.96
34.79
34.33
32.56
36.15
6.90
10.24
20.47
14.69
14.43
7.01
4.93
9.13
44.88
71.34
47.76
29.38
50.19
54.26
32.38
46.66
38.08
18.42
31.78
50.68
35.38
38.51
62.64
44.22
16.52
13.56
5.34
16.03
23.76
36.37
26.58
12.41
29.66
30.67
27.29
53.15
50.34
14.15
9.89
15.83
8.73
11.36
8.51
10.52
25.90
31.83
22.08
36.33
39.63
49.87
17.34
28.58
28.68
47.77
14.13
56.12
10.24
5.06
8.66
7.31
13.52
22.09
24.79
22.75
22.45
31.86
14.21
18.38
62.83
72.14
67.01
66.29
53.73
78.48
68.11
25.15
49.80
17.30
Table 2: Share of Direct Taxes as a Percentage of Total Taxes, 2007
Country
Share of Direct Taxes (%)
South Africa
55%
Zambia
45
Rwanda
37
Mozambique
33
Tanzania
32
Uganda
26
DRC
18
Source: OECD (2010a)
Tax Effort in African Case Studies, 2007
Country
Fiscal Revenue per capita
(US $)
Tax Effort Index
(excluding resource rents)
Zambia
219.2
1.29
Uganda
66.7
1.19
Rwanda
57.1
1.17
Mozambique
66.1
1.02
Tanzania
70.6
0.96
DRC
30.7
0.88
2. Taxation and the Elite Bargain
• The creation and deployment of economic rents and
privileges to relevant elites is the essence of elite
bargains.
• In turn, exploring tax patterns can illuminate
important insights into the shape and character of the
elite bargain, which has been argued to be important
in generating state resilience in general.
• At the same time, the nature of elite bargains provides
a window into the political limits of expanding tax
capacity.
Taxation and the Elite Bargain
• high levels of tax evasion are tolerated
• the negligible collection of urban and rural property taxes
• relatively low rates of taxation on agriculture which (while
part of investment incentives) be seen to benefit elite
landowners and particularly large farmers and agro-processors.
• a significant decline in the corporate tax burden on big
business which has benefitted both foreign firms (particularly
in mining) and political and economic elites.
Taxation and Production Strategies
• a pro-revenue approach often takes precedence over a
pro-growth approach in tax policy.
• Examples of developmental taxation:
• Mauritian export tax on sugar (19th and 20th centuries)
• Colombian Coffee Federation
Taxation, state territorial reach and
production strategies
• History provides several examples of the importance of land
and property taxes in enhancing the territorial, social and
economic reach of the state (Japan, South Korea, Taiwan, US
in 19th century)
• important feature of the land tax was that it was introduced as
part of a production strategy to help improve agricultural
production. The link between tax collection strategies and
production strategies is often lost in contemporary discussion
of tax collection.
• the role of agricultural marketing boards have played in some
countries an important role in expanding the territorial reach of
the state and in linking rural interest groups to the state
Taxation, state territorial reach and
production strategies
• In the case of Mauritius, export taxes on sugar, the main export
commodity in the 19th and most of the 20th century had several
positive effects on state-society relations and in increasing the
productive capacity of the sugar sector (Bräutigam, 2008).
• First, the tax was an effective substitute for income taxes, and was
generally progressive as it shifted the burden of taxation and
redistributive spending on the wealthy and middle classes.
• Second, the tax was used by the state to finance research and
development, infrastructure, and marketing which enhanced
production and productivity growth in the sugar sector.
Export taxes in Mauritius (cont.)
• Third, the export tax helped the private sector organize, and it
built their capacity to interact with the government over time.
As well, it helped both the state and society to solve collective
action problems they faced in building skills and in supporting
research on sugar.
• Finally, the export tax helped develop the territorial reach of the
state since the tax affected the main employer in the countryside
and promoted mutually beneficial rights and obligations
between the state and farmers, both large and small.
Taxation, state territorial reach and
production strategies
• The Colombian experience with its national coffee
federation also provides evidence that the state can
use taxation of agriculture to solve collective action
problems in production (such as the provision of
funds for storage, distribution, and marketing for
thousands of dispersed smallholder producers) and
help forge strong state-society negotiations and
mutual obligations (Thorp, 2000).
Marketing Boards
• The role of agricultural marketing boards have played in
some countries an important role in expanding the
territorial reach of the state and in linking rural interest
groups to the state.
•
Marketing boards were also an important source of state
resource mobilisation through the mechanism of
monopolising the purchase of cash crops at below world
market prices and selling such crops abroad at world market
prices.
• The surplus generated was often of similar magnitudes to
formal total tax collection levels, particularly in SubSaharan African economies in the 1960s and 1970s.
Marketing boards were effective in some countries such as in
Taiwan, South Korea, Indonesia, and India because the state
gave something in return to producer groups such as services,
infrastructure, research, and price stability.
Marketing Boards--Kenya-Tanzania Comparison
• Bates (1995) argues that the Kenyan coffee board was, in
the 1970s and 1980s more effective than the Tanzanian
coffee board because the nature of the political coalition
in power differed in the two countries.
• In Kenya, large and medium-sized coffee farmers were a
powerful interest group; whereas in Tanzania, coffee
farmers were not a powerful group in the national
government’s support base. As a result, policies were in
Kenya were developed in ways that extracted much fewer
net resources from coffee producers than in Tanzania.
Marketing Boards and Political Stability
• Even where marketing board policies were relatively
ineffective such as in Tanzania and Zambia, they have played
an important role in increasing the territorial reach of the state,
developing state-rural interest group links, and in providing
social infrastructure and services.
• the inclusive reach of marketing boards may have contributed
to the maintenance of political stability and nation-building in
both these cases.
•
Further comparative historical work is required to assess the
differential impacts marketing boards have had in statebuilding and in enhancing the territorial reach, and legitimacy
of the state.
Policy Implications
• Because tax is a more objective measure of
governance than many prevailing governance
indicators, donors and academics might more
systematically incorporate it into indicators of
fragility, resilience and governance more generally.
• tax reform process requires political analysis to
understand what types of reforms are feasible in a
given context. In particular understanding how the
elite bargain is constructed and how it is related to
political stability is central to proposing tax reforms
that are politically sustainable.
Urban property taxes
•
The role of land and property taxes is especially important as local governments seek to
raise revenues in the context of decentralization reforms. The same is true for local
governments in urban areas. Why focus on this tax?
•
one of the most underutilized forms of taxation in LDCs and can potentially provide
the financing of urban infrastructure investment which is central to improving the
production and export capacity of light manufacturing plants, many of which are located
in urban centres.
•
provides one of the few potential sources of taxation for municipal governments.
•
can provide the impetus for the creation of urban property databases which could
help improve the synergy between municipal taxation and urban planning.
•
provides one of the few mechanisms through which progressive taxation can be
developed in LDCs.
•
contributes to making property rights more secure.
Tax Policies to Improve the Fiscal legitimacy of the State
• there is a need to improve the capacity and legitimacy of Large Tax Payer
Offices (LTOs)
• Harsh tax enforcement in situations with poor service delivery may
contribute to undermining the legitimacy of local government and increase
tax resistance. Trying to meet very ambitious tax targets can be
counterproductive
• Tax exemptions of donor employees creates a bad demonstration effect for
low-income states trying to build domestic tax bases.
• Avoid the problem of the ‘dual public sector’ in aid delivery
• Need to re-think the composition of aid towards infrastructure and
economic production
• Taxing the informal sector may require linking tax policy to production
strategies.
Taxation, Governance and Growth
•
Inherent in much of the recent work on taxation is that a broader-based taxation system
will consolidate state-interest group bargaining which will, in turn, generate a greater
degree of legitimacy which supposedly will generate more effective governance. Good
governance, in turn, is seen as central for sustained rapid economic growth (World
Bank, 1997, 2002).
•
The problem with much of the new literature, however, is that it identifies the tax
nexus as the main source of a state’s legitimacy. This is problematic in the context of
economically underdeveloped countries.
•
Because tax rates and composition are not systematically correlated with economic
growth, it is not helpful to focus on taxation in isolation of other factors that affect
capital accumulation, the efficiency of investment and economic growth. For instance,
national savings and particularly public savings (which in part come from the efficient
operation of state-owned enterprises) may be as if not more important to the growth
prospects of an economy.
•
Limited fiscal basis of the state makes good governance agenda unrealistic.
Aid and its Effects on Taxation and State-Building
• Positive effect of setting up Large Taxpayer Offices
•
Four important elements to the Rwanda Revenue Authority strategy, which has
underpinned its relative success to date
•
First, the principle objective of revenue policy is to promote economic growth,
rather than simply maximising revenue collection.
•
Second, they have followed the general trend advocated by the IMF of moving
from models of collection based on tax type to models based on types of taxpayers;
•
Third, sought to widen the ownership of the tax effort beyond the revenue
authority, establishing Tax Advisory Councils at the provincial and district levels
involving parliamentarians and chaired by a governor, mayor or security institution. In
the same vein, they organised a national Tax Appreciation Day where the RRA accounts
publicly for what it has done and hears from people what they would like to see done.
The “best taxpayers” are given an award by the head of state.
•
Fourth, gradually phased out technical assistance from line positions within the
authority and took control of technical- assistance contracting and management, moving
from long-term technical assistance to short-term contracts around very specific needs.
Aid and its Effects on Taxation and State-Building
•
the extent to which aid is by-passing the state in the delivery
of social services (the problem of the dual public sector)
• In the DRC, OECD estimates that 146 parallel management units currently
exist, which is four times the 2006 number.
• In Afghanistan, research suggests that the problem of the dual public
sector in aid delivery can be overcome by through setting up “dual-control
oversight mechanisms” that can reduce corruption and still ensure
resources flow through the state. The Afghanistan Reconstruction Trust
Fund, which was World Bank funded, seemed to play this role.
• 3) the high levels of project aid which winds up ‘off budget’,
that is, is not reported to finance ministries.