Dynamics - December 2012
Taxing times in development
Jeffrey Owens and Petr Medvedev examine how developing countries can strengthen their tax administrations, and in doing so maximize revenue for development.
There is good evidence from Rwanda, Ghana, Georgia and elsewhere to show that aid directed at capacity development in the revenue and customs sectors is money well spent.
Developing countries need to examine forthcoming changes in the development funding structure and look toward viable domestic solutions. This new approach focuses on increasing domestic revenue mobilization, particularly by improving tax administrations.
Effective taxation achieves two objectives:
- It improves the investment climate by creating a level field for all market players
- It increases the revenue flow
Taxation can also serve as a vehicle for enhancing state-society relations at the heart of a new governance contract by making the state accountable to its citizens.
This requires action on a number of fronts:
- Poor countries lack the resources and capacity to build effective tax collection systems by themselves.
- Making tax systems work is difficult, as attitudes have to be changed.
- There has been an international shift away from taxes on trade, adding to the problems of domestic revenue-raising. Striking the right balance between an attractive tax regime for investment and growth, and securing the necessary revenues for public spending, is a key policy dilemma.
- Globalization may also exacerbate fiscal problems, as internationally mobile capital becomes more difficult to tax.
- Governments are under pressure from trading partners and local citizens to ensure their tax systems are transparent and fair.
- Support for revenue and customs sectors has attracted a relatively minimal share of aid. Development organizations should now focus more directly in this area.
With G20 support, more progress has been made in combating bank secrecy as the shield for offshore non-compliance. This provides a basis for addressing illicit flow, tax evasion, avoidance and tax havens.
The development community needs to ensure all developing countries are better integrated in global trade and can take advantage of the more transparent international environment.
Going forward, key priorities should be:
- Strengthening their tax systems
- Supporting them in their development of tax policies
- Supporting reforms of tax administration