Presentation on theme: "Domestic Resource Mobilisation in an aid-dependent economy Presentation at a workshop on “training on tax” organised by Policy Forum, Tanzania. Dar es."— Presentation transcript:
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