The Role of Tax in Developing Countries

Increasing the amount of tax collected in developing countries is crucial for development. Here, Joanne Rolling argues that tax revenue has a wide array of benefits: spurring infrastructure, strengthening the social contract, and encouraging good governance.

Tax tends to be a rather technical and niche issue. Due to its niche status, it can easily be considered to be obscure or unimportant in the larger debates on humanitarian aid and development. Yet this is a mistake because development requires money to finance it, and money must be acquisitioned from somewhere. Hence there needs to be increasing discussion of the role of tax revenue in international development because it is a vital, yet often absent, component of advancement.

The current situation shows that low-income countries typically collect taxes of between 10-20 percent of GDP, while the average for high-income countries is more like 40 percent. Clearly there needs to be an organised effort to help developing countries increase their tax revenue to match a similar level as developed nations. The current problem we have in the global tax system, which affects the developing world particularly acutely, is one of chronic unfairness as businesses that can afford to pay are failing to do so. The issue can be outlined by the findings from a report commissioned by Concord. Concord, the European NGO confederation for relief and development, found that in tax revenue alone, at least $100bn was lost from developing countries through insufficient international tax policies. One example study found that if corporations paid fair amounts of tax, Honduras could “increase healthcare or education spending by 10-15 percent if the practice of profit shifting by US multinationals was stopped”. Multinational companies are evading social responsibility through their failure to contribute little or no tax. Corporate tax evasion strategies, referred to as ‘base erosion and profit shifting’ (BEPS), can be done through measures such as transfer pricing manipulation. Global Financial Integrity in Washington estimates the amount at several hundred billion dollars lost annually due to transfer mispricing.

 

Steve Rhodes / Creative Commons License

Steve Rhodes / Creative Commons License

 

There are various methods and types of taxation both for individuals and businesses and corporation tax is not the only potential avenue. The Africa Research Institute produced a paper arguing that property tax would benefit the African economy in raising revenue. They write that, “property taxation is widely regarded as highly progressive and equitable because the sum due is determined by wealth rather than being a percentage on transactions.” This ‘wealth’ tax is another potential strategy in which those that can afford to pay more, do so, and hence can help to build national infrastructure such as social housing through tier tax contributions.

There are several reasons for wanting to encourage global taxation. First of all, the implementation of domestic taxation allows developing countries to begin to finance their own infrastructure and hence to take control of their national development. In theory at least, higher tax revenues should mean that the state is able to invest and deliver a comprehensive range of public services such as schools, hospitals, the police force and social security. This allows a country to move from dependence on foreign aid and to a more sustainable and long-term approach to development. Moreover, the 17 Sustainable Development Goals set as part of the 2030 Agenda require a huge amount of financial investment. In order to fund the ambitious targets of the SDGs, developing countries can contribute through raising tax revenue at home.

Global Alliance for Tax Justice / Creative Commons License

Global Alliance for Tax Justice / Creative Commons License

 

There is also a deeper sociological reason behind taxation. Taxes establishes a certain social bond between the individual and the state. With the notion of the citizen and the state engaged in a ‘social contract’ comes the responsibility of the individual and the government to cooperate and participate in good governance. This issue of good governance, in the form of Government transparency and accountability in handling tax revenue and spending it in the benefit of its citizens, must also be a priority in addressing the economic situation of developing countries. Establishing a process of taxation could help stimulate and regulate good governance in developing countries. One practical way in which developed nations can empower the developing world to take charge of their own welfare is through such things as training and equipping tax inspectors, investing in institutional infrastructure, ensuring tight legal regulations, and supporting civil society groups.

Global tax justice is an issue which deserves much more consideration than it currently receives. By setting up a collaboration between Governments, tax experts and NGOs and adopting practical strategies around domestic taxation, the developing world can make progress in steering their own development in the international community.

 


The views expressed in this article are those of the author and do not necessarily represent the views of Development in Action.

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