Guest Article by Prof. Mick Moore*
Institute of Development Studies (IDS), University of Sussex, UK
In our first guest article on ‘Talking Economics’, British political-economist and taxation specialist, Prof. Mick Moore, argues that, as developing countries strive to move away from their dependence on foreign aid, the discussion on the role of tax in development is getting renewed attention. ‘Taxation’ is being increasingly seen not purely as a technical fiscal topic, but also in the context of broader imperatives of governance, accountability, and state-building.
In March of this year, the IMF published a new policy paper on Resource Mobilisation in Developing Countries. Much of the advice that it offers to developing countries is very familiar, including the need to simplify tax systems, to broaden tax bases by reducing the range of tax exemptions and tax holidays, and continuously to improve the quality of tax administration. However, Resource Mobilisation also includes some departures from the previous IMF orthodoxy. Three are particularly significant. First, it states clearly that many governments need significantly to increase the proportion of national income that they collect in taxes to fund a range of social needs. Second, it argues the case for more emphasis on property taxes, especially as a way of dealing with the neglected problem of adequately funding sub-national governments. Third, it acknowledges that taxation may serve purposes beyond simply raising public revenue, and talks positively of ‘taxation and state building’ – if only to step back immediately by suggesting that the meaning of the phrase is unclear.
The Role of Taxation: Renewed Debate
Resource Mobilisation is not going to set the world afire. However, in the context of the narrow and rather staid and stable world of orthodox public finance specialists, it does represent a real policy shift. What brought this about? Why did the IMF feel the need to declare a new policy stance? One possible answer is that it simply represents lessons learned from experience. The new ideas are indeed pragmatic and sensible. The IMF has shifted its tax advice in the right direction. But the shift does not result only from the power of reason and experience. It also reflects the fact that a number of other international organisations are now competing with the IMF to define international policy in the field of ‘taxation and development’.
While the IMF is still the main repository of technical expertise, other organisations have been setting the pace in the global policy debate. The G20, the European Commission and the European Parliament have decided that revenue mobilisation is a key dimension of development policy. Hilary Clinton made this the main subject of a speech in Brussels this summer. The OECD, that has long been the main alternative source of expertise and influence to the IMF, has been getting a much wider audience. Even the sleepy United Nations has realised there might be something interesting here. Below the radar, aid and development organisations probably have organised more seminars, meetings and conferences on ‘tax and development’ in the last two years than they did in the previous twenty. The topic is hot, and the IMF feels the need to show that it is being responsive. But why is it so hot?
The dominant reason is the way in which the 2008 private banking crisis has transmuted into fiscal stresses and crises in most of the richer countries. The least fortunate governments are struggling even to meet their immediate financing needs without defaulting on their debts. Most of the others face large and long term public sector deficits, which they will have to finance just as their own populations age and become more of a fiscal burden. All governments are looking for revenues, and for ways of closing tax gaps and loopholes. Under pressure from the richer countries, tax havens have been rushing to clean up their acts, and get off the OECD’s list of ‘uncooperative jurisdictions’. The US Treasury has begun to pummel and bully Swiss banks into cooperating more with US tax authorities. Developing countries are not the main actors in this drama, but they now seem to merit at least a place on the stage. Previous campaigns drawing attention to the extent of capital flight from poor countries, facilitated by weak tax administration, did not get much attention from rich country governments. This is now changing. If tax evaders begin to lose the generous protection afforded them for decades by Swiss banks and small Caribbean tax havens, they will be looking create new havens in places like Brazil, China, India, Nigeria or South Africa? Not only do the OECD governments now see an interest in discouraging such countries from becoming tax havens, but they also increasingly would like the active cooperation of their tax authorities in tracing international capital movements and identifying tax evaders. That cooperation in turn implies that tax authorities in the developing world become more powerful and effective. Interests have begun to converge. OECD governments can support with genuine enthusiasm new international rules and practices that will simultaneously help them close their tax gaps and enable developing country governments to raise more revenue to finance the achievement of the Millennium Development Goals.
Away from Aid and the Taxation-Governance Link
While it is the urgent fiscal needs of many OECD government that has propelled ‘tax and development’ to the centre of the current development policy stage, there is more of a back story. The ground has been under preparation for several years. First, over the past decade, a number of international advocacy organisations have become increasingly active in exposing the extent to which rich people and transnational companies have been funnelling capital out of poor countries, partly as a result of weak tax administration, sometimes in volumes that seem to equal or even exceed the levels of aid going in the opposite direction. The figures remain very uncertain and disputed. But organisations like Tax Justice International, Global Financial Integrity, Christian Aid, and Action Aid have sowed serious seeds of doubt. Does it make sense continually to pressure governments of richer countries to increase aid to Africa if similar sums are coming back clandestinely from Africa to the OECD countries and to tax havens as a result of tax evasion and transfer mispricing?
Second, development aid itself has come under more sustained critique. Until a decade or so ago, aid generally was presented in public as a good thing and a moral obligation for rich countries. By arguing that aid might in some circumstances do harm to recipients, authors like Bill Easterly (2006) and Dambiso Moyo (2009) brought into the open views increasingly shared even by people experienced in the aid business. The notion that Africans would be better off without foreign aid – and therefore implicitly with higher domestic tax burdens – is not entirely new. It has recently become more widespread, and begun to seem more practicable, at least for some countries. There is now more informed discussion about the possible trade offs between aid and domestic tax as ways of financing the expenditures of the governments of poor countries. Norway, the world’s most generous aid donor, plays an important role in encouraging this debate.
Third, a number of academics specialising in development began to argue, especially on the basis of comparative historical experiences, that governments that were not financed principally from broad general taxation – but rather from aid or natural resource revenues – were unlikely to govern well. Taxation does not serve simply to raise revenue. It also has state-building dimensions. (See D. Brautigam et al., eds., Taxation and State-Building in Developing Countries, 2008).
African Tax Authorities: Surprisingly Exemplar
Finally, and most recently, there is emerging from Anglophone Africa in particular something of professional movement among senior tax administrators animated by this notion that good tax policy and administration can help build states and nations, and by a mission to end aid dependence. This movement has two tangible historical roots. The first is in South Africa. Tax is one of the success stories of post-Apartheid governments. The African National Congress set out to raise more revenue to finance what it often termed the ‘social debt’ of Apartheid – a legacy of poor education, bad housing and deficient health facilities. The South African Revenue Service (SARS), strongly directed from the top by senior members of the African National Congress, became a hive of institutional experimentation and innovation. Many senior posts were filled by new recruits from the private sector. The strategy was to identify the best tax practices from around the world, and adapt them to South Africa. SARS met its revenue targets, and became an inspiration for much of Africa. There were willing learners. The economic crises and stagnation that affected much of Africa from around 1970 until recently prepared the ground for some major reforms in tax administration from the 1990s onwards. In most Anglophone African countries, responsibility for tax collection has been taken away from ministries of finance and lodged in new, partially autonomous revenue authorities. In some cases, there were large scale dismissals of existing staff and fresh recruitment. This change coincided with the large scale adoption of digital information technology that has the capacity radically to improve almost every dimension of the tax business. Many senior staff has been recruited from the private sector.
While no African country can match South Africa’s record, there is a strong sense of collective achievement, and of being on the right side of history. Senior tax administrators recruited from the private sector tend to be more articulate and more willing to speak out than career public servants. This is reflected in the establishment in a well-funded new pan-African professional association, the African Tax Administration Forum (ATAF – http://www.ataftax.net/). State-building was the theme of the conference held in Pretoria in 2008 where the decision to create ATAF was taken. The South African Revenue Service currently provides secretariat facilities for ATAF, and the Commissioner-General of the South African Revenue Service was elected as the first Chair of the ATAF Council. He also co-Chairs the OECD’s Informal Task Force on Tax and Development, and thus has a very direct influence on the international policy debate.
‘Tax and development’ is very much on the agenda, not purely as a technical fiscal topic, but also as a dimension of broader concerns about governance, accountability and state-building. The debate is animated by an optimistic sense of movement, progress and mission, not by pessimism about threatening or intractable problems. And Africa, for once, is in the lead.
*Prof. Mick Moore is currently Professorial Fellow at the Institute for Development Studies (IDS), University of Sussex, and is also the founding Chief Executive Officer of the new International Centre for Tax and Development (ICTD) based at the IDS. Mick has done extensive field research in Asia and Africa, especially Sri Lanka, Taiwan and India. He has taught at the Massachusetts Institute of Technology, USA. His focus research and policy input areas include taxation, governance; politics and power; state capacity; and public policy. He has written extensively in international journals and other publications worldwide.
The IPS is collaborating with the ICTD to organise an ‘International Conference on Taxation, Governance and Development’ in November this year.
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Pulling Ourselves Up: Taxation, Development, and Away from Aid