Domestic Resource Mobilisation in
an aid-dependent economy
Presentation at a workshop on “training on tax”
organised by Policy Forum, Tanzania.
Dar es Salam, 6-7 August 2012
Dereje Alemayehu
Chair – Tax Justice Network - Africa
East Africa Representative – Christian Aid
The rationale for CSO to engage with
tax issues
When Christian Aid decided to make tax justice a priority
advocacy and campaign issue a couple of years ago, the
rationale for this decision was stated as follows:
• “The neglect of tax as a development issue has gone on for
far too long. …For Christian Aid, in particular, this is an
area where the moral impetus demands a position – to
address the poverty and inequality that the donors’ tax
consensus will not, and to stress the moral principle that it is
right that those most financially able to do so, bear the
proportionately larger responsibility to contribute, through
tax, to building a world without poverty”.
1. Recognition of tax as the reliable and sustainable source of
development finance can come only with a paradigm shift in
development policy
• In the development discourse of the past the emphasis was
one-sidedly given to ODA, FDI and foreign credit as major
sources of development finance. The problem of illicit
financial flows was neglected. Domestic resource mobilisation
was not given due attention.
• To put taxation at the centre of domestic resource mobilisation
would require a shift in economic policy prioritisation by
creating a virtuous link between taxation and wealth creation.
• This means building productive capacity to promote value
addition and employment creation as a major means of
enhancing state revenue.
Paradigm Shift in development Policy –contd
• The kind of tax policy required to make taxation a reliable and
sustainable source of development finance should be an integral part
of any economic policy which seeks to “enhance linkages and stop
leakages” in national economies.
• There will always be a tension between pro-growth tax policy to
improve the “investment climate” and pro-poor progressive tax
policy aimed at redistribution and poverty eradication.
• But this should not be considered as an unsolvable tension.
Pervasive poverty is a hindrance to growth by itself, and, in the long
run its eradication creates a more conducive situation for legitimate
profit making; even more conducive than any pro-growth tax policy
could hope to attain in the short run.
2. Putting taxation at the centre of domestic resource
mobilisation for sustainable development signifies the
recognition that taxation is not only about revenue collection
Taxation plays a pivotal role in socio-economic and political transformation
• Dependence on taxation enhances accountability and responsiveness of
governments. Citizens as tax payers check “value for money” of their
contribution and governments are compelled to deliver to be able to collect
revenue in a predictable and sustainable manner.
• Dependence on tax revenue enhances political capability and bureaucratic
efficiency of states. It enhances political capability in the sense that
governments need to determine and prioritise societal needs and nurture a
culture of bargain and compromise between competing and, at times,
conflicting interests.
• It enhances bureaucratic and technical capability in the sense that
governments need to design and implement effective policies in order to
deliver public services more efficiently and effectively.
Tax is more than revenue collection
• Dependence on taxation serves as an incentive by compelling
governments to nurture the goose rather than devouring the eggs!
• The more dependent the state is on generalised taxation, the more its
stake in the prosperity of the country.
•
Generalisation of taxation as a main source of state revenue is a key
factor in state building. When taxation becomes the nexus between
states and citizens, it enhances interest-based, and thus issue- and
policy-based engagement by a country’s population in policy and
political processes.
• It is at the heart of transforming ‘patron – client’ relationships into
‘rights holder- duty bearer’ relationships between citizens and
governments on the basis of a quasi “fiscal contract”.
3. Only a tax policy which incorporates the “4 Rs” in its
objectives can ensure reliable and sustainable finance for
development.
– Revenue – to ensure steady state income for
essential functions of government;
– Redistribution – to ensure equitable development
and poverty eradication;
– Re-pricing – to minimize externalization of costs
and ensure wellbeing of the social fabric;
– Representation – to give voice to societal interests
in how public resources are generated and spent;
3. To enhance domestic resource mobilisation plug the five
main leakages that diminish tax revenue should be plugged
1. Tax due on income earned by multinationals and then
moved offshore through profit shifting without paying
appropriate tax
2. Tax due on income earned from assets which are held
offshore
3. Tax that would have been received had rates not been
reduced by tax competition between countries seeking to
attract foreign investment.
4. Tax due but not paid – (due to corruption, weak
enforcement mechanisms; low tax revenue collection
capacity, exemptions and privileges granted through the
patronage system )
5. Tax due on the shadow economy
Leakages 1 & 2 – illegitimate resource
outflow
• Leakages (1) and (2) could hardly be plugged by the
efforts of developing countries alone.
• For example, plugging leakage (1) would require
international cooperation to curb at least the ease with
which stolen or illicitly acquired assets could be
stashed in offshore jurisdictions.
• Impounding and forcible repatriation of illicit assets
can only happen through international cooperation.
• This would not only enable developing countries to
retrieve assets but could also serve as a deterrent
against future looting.
Leakage 3 – Tax incentives & harmful tax
competition
• It also has to do with doing away with misguided tax
policies which set out exemptions as a means of attracting
investment.
• Doing away or at least minimising exemptions will not only
signify equal treatment of taxpayers, but also expedites tax
compliance by simplifying obligations.
• (Incidentally, beneficiaries of these exemptions include
diplomatic representations, international organisations and
aid agencies)
• Stopping “race to the bottom” tax competition between
African countries;
• scrapping tax incentives that make no economic or
developmental sense;
Leakages 4 – results from political system based on
“pyramidal patronage” and rampant corruption
• Leakage (4) has to do with patronage systems within the
political structure and corruption within national revenue
authorities.
• Plugging this leakage is linked to the struggle for transparent
and accountable governance.
• Plugging this leakage could be considered as “homework” for
national stakeholders – governments, civil society and the
private sector in African countries. They constitute the
“domestic agenda” of our tax justice movement
• Equitable and transparent revenue collection & accountable &
responsible expenditure will be key to plug this leakage
• Enhancing the capacity of revenue authorities, both in terms of
resources and expertise is also of vital importance.
Leakage 5 – small holder economy and
informal sector
• Leakage (5) is more complex. In Africa, a large
small-scale agricultural sector is virtually outside
direct taxation. Shadow economy also
characterises many urban centres. Illegal
commerce is rampant. Some in the formal
business sector partially take “refuge” in this
sector because it is largely outside the tax net.
• However, in many cases this is where the
excluded, not tax dodgers, undertake economic
activities to ensure their survival.
Leakage 5 – contd.
• There is no ready made solution on how to bring the rural
small holder and subsistence agriculture as well as the urban
shadow economy into the tax bracket.
• However, attempts to bring these sectors into the tax net must
go hand in hand with an inclusive development strategy.
• Coercive administrative measures far from integrating the
shadow economy will expose the vulnerable in the sector to
arbitrary and extortionist taxation.
• Research has shown that refusal to pay taxes is high when
potential tax payers see little or no return in terms of public
services and investments, and that readiness to pay tax
increases with improved service delivery. The lesson from this
is really simple: Taxation is taking and giving!
4. Conclusion: tax revenue can be enhanced and tax
can be made a reliable and sustainable source of
development finance if:
• There is a paradigm shift in development policy to
“enhance linkages and plug leakages”
• A progressive taxation regime is in place that curbs tax
evasion and abusive tax avoidance and at the same time
ensures horizontal and vertical equity
• Transparent and accountable use of public revenue with
mutually reinforcing effect prevails: enhanced
government responsiveness and tax payer compliance
• An effective and efficient tax administration is in place
which promotes non-coercive tax compliance