Post 2015: Global Action for an Inclusive and Sustainable Future

CHApTER SEvEn
Taxation can
promote
development not
only by increasing
the volume and
quality of finance
but, through
its effects on
governance,
by making states
more willing to
align development
policies to
citizens’
priorities.
110
and more effective tax administrations will ultimately
enhance public financial management. tax reform
may also contribute to better state–society relations
by encouraging citizens to engage in relevant
debates (prichard, 2010), for instance on progressive
taxation. Few governments have established effective
tax systems without first entering into a national
dialogue on taxation (tilly, 1992). moreover, when
governments depend on tax revenues they have an
incentive to improve governance and transparency in
order to encourage compliance (prichard, 2010). this
suggests that taxation can promote development not
only by increasing the volume and quality of finance
but, through its effects on governance, making
states more willing to align development policies to
citizens’ priorities.
7.2.2 Challenges for taxation to contribute
to development
Efforts to increase the contribution that domestic
taxation can make to financing development have
been the subject of considerable academic research
and empirical experience (ImF, 2011; bräutigam et
al., 2008; oEcD, 2008a; oEcD, 2011b; byiers and
Dalleau, 2011). there needs to be a broad tax base to
provide a sizable, predictable and sustainable source
of development finance. It is also essential that tax
systems form part of an equitable fiscal system if
they are to contribute to inclusive development. as
box 7.1 and box 7.2 illustrate, however, for a variety
of political and economic reasons the tax systems in
developing countries often do not meet these criteria:
tax bases are narrow, governments have only limited
capacity to levy taxes and fiscal systems may not be
sensitive to distributional concerns.
Narrow tax base
much of the increased tax revenue raised in
developing countries over the past decade seems
to have derived more from natural resources than
EuropEan rEport on DEvElopmEnt 2013
from broadening the tax base. peru, for instance,
increased its tax performance from 6% to 13% of
GDp over the 1990s and to around 17% of GDp by
2010 (ImF, 2011), largely based on higher revenues
from natural resources (peru case study – barrantes
and berdegué, 2012). the african Economic
outlook 2010 highlights a similar phenomenon. the
average national tax revenue as a share of GDp has
been increasing since the early 1990s and african
countries now tend to collect similar levels of revenue
to those of other countries at comparable stages of
development (afDb et al., 2010). again, however, this
has been driven mainly by resource-related revenue
and other tax revenues have stagnated at best (afDb,
2010). Where governments rely on receipts from
natural resources rather than widening the tax base,
taxation is unlikely to become an effective source
of development finance. First, the ecological and
financial sustainability of the tax base is questionable
because revenues depend on depleting finite
resources. moreover, the revenue is unpredictable
because of market volatility (ImF, 2011), which makes
it an unreliable source of long-term investment in
development. Second, their reliance on revenue from
natural resources might discourage governments
from broadening the tax base. third, such reliance
might indirectly impede development by having
perverse effects on governance, for instance by
stabilising authoritarian governments (morrison,
2009; ross, 2001) or raising tensions and conflict
in resource-rich countries (ross, 2004; collier and
Hoeffler, 2005; arellano-Yanguas, 2011).
a further challenge for using taxation as a
means to finance development is that many of
the countries most in need of such finance have
limited tax potential. 76 the calculations of tax
potential show that umIcs are generally better able
to mobilise enough resources through taxation to
fund development spending than are the groups of
76 Econometric work has linked national tax performance and potential with a range of structural characteristics. many (such as the agricultural
share in the economy, per capita income or past political instability) are beyond the control of public authorities, especially in the short term.
tax potential calculations use the variables of agriculture as a share of GDp, trade openness and GnI per capita (oEcD, 2011b). the difference
between tax potential and tax performance includes both inefficiencies and tax policy issues. For a critical account of the determinants of tax
performance in developing countries see Ivanyna and von Haldenwang (2012).