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WHAT CAN BE DONE
Developing countries also have the lowest tax-to-GDP ratios, meaning they
are farthest from meeting their revenue-raising potential. While advanced
economies collected on average 34 percent of GDP in taxes in 2011, in
developing countries this was far lower – just 15 to 20 percent of GDP. 372 Oxfam
estimates that if low- and middle-income countries – excluding China – closed
half of their tax revenue gap they would gain a total of almost $1tn. 373 The lack
of tax collection undermines the fight against inequality in the countries
that most need public investment to achieve national development and
reduce poverty.
Tax collection in developing countries is also undermined by a lack of
government capacity. Sub-Saharan African countries would need to employ
more than 650,000 additional tax officials for the region to have the same ratio
of tax officials to population as the OECD average. 374 Unfortunately, no more
than 0.1 percent of total Official Development Assistance (ODA) is channelled
into reforming or modernizing tax administrations, 375 and programmes that
would strengthen public financial management, tax collection and civil
society oversight are not prioritized.
Tax breaks: A multitude of tax privileges, but only for the few
The ‘race to the bottom’ on corporate tax collection is a large part of the
problem. Multilateral agencies and finance institutions have encouraged
developing countries to offer tax incentives – tax holidays, tax exemptions and
free trade zones – to attract foreign direct investment (FDI). Such incentives
have greatly undermined their tax bases.
In 1990, only a small minority of developing countries offered tax incentives;
by 2001 most of them did. 376 The number of free trade zones offering
preferential tax arrangements to investors has soared in the world’s poorest
countries. In 1980, only one out of 48 sub-Saharan African countries had a free
trade zone; by 2005, this had grown to 17 countries; and the race continues. 377
In 2012, Sierra Leone’s tax incentives for just six firms were equivalent to 59
percent of the country’s entire budget, and more than eight times its spending
on health and seven times its spending on education. 378 In 2008/09, the
Rwandan government authorized tax exemptions that could have been used
to double health and education spending. 379
This race to the bottom is now widely seen as a disaster for developing
countries, tending to benefit the top earners far more, as well as cutting
revenue for public services. 380 Developing countries are more reliant on
corporate tax revenues and less able to fall back on other sources of revenue
like personal income tax, meaning any decline hits them hardest. 381 Recently
the IMF has demonstrated that the ‘spillover’ effects that tax decisions made in
one country have on other countries can significantly undermine the corporate
tax base in developing countries, even more so than in OECD countries. 382
Tax havens and tax dodging: A dangerous combination
Failures in the international tax system pose problems for all countries.
Well‐meaning governments attempting to reduce inequality through
progressive tax policies are often hamstrung by a rigged international
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