Taxing Times

Benjamin Franklin very famously wrote that ‘in this world nothing can be said to be certain, except death and taxes’.

I love a pithy turn of phrase but Franklin clearly wasn’t talking about Africa. Matt’s recent post about using revenue distribution and taxation to avoid the natural resource curse in Ghana turned me to think about taxation systems.

Let’s start from a simple premise. My vision of aid for development is not that it should ultimately provide the basics of a good life to all the world’s poor. Rather, it should help their Governments, private sectors, civil societies and private individuals develop their own capacity to provide, sustain and improve these basics.

For the institutions mentioned above to perform functions themselves they must have a revenue source with an inherent logic and sustainability. For private individuals this means a wage or ownership of resources that generate a rent. For private industry and business, this means revenues and profit from the undertaking of business.

For a Government it means tax revenue. And taxes are a very good thing, not just because they give the Government room to spend:

  • Eventually, everything aid currently does for or with Governments should be undertaken through domestically generated revenue, largely tax; this revenue gives full flexibility for locally constructed and executed policies
  • It stimulates accountability. Accountability in a Government powered by aid runs to donors. In a country run through taxation it goes from Government to the taxed: i.e. the general population – hence, ‘no taxation without representation’.
  • Taking this argument further, others suggest taxation is an essential component of state building
  • A bad taxation system, one that depends disproportionately on taxes that are easy to collect, is often regressive. This means the poor suffer more, and it is inefficient at raising revenue. Taxation systems in Africa typically depend heavily on Value Added Tax – a regressive tax.
  • A good tax system can be a tool in incorporating into the legal framework the vast ‘informal’ economic activities that characterize developing countries: activities that have assets but no capital because they are not part of a formal property system. De Soto marks this as the greatest problem in development.

Unfortunately, many African countries have poor or ineffective taxation systems, which are so partly because of their structure, partly because much of the economy is hidden (in a legal sense) from the state, and partly because the structures that do exist have a fair few holes through which revenue slips. Aid is also culpable. Governments rely less on tax than they should because aid fulfills the most important functions of tax from a Government (but not civil society) perspective, weakening the incentives for creating a strong tax structure.

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