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IDS: What’s so exciting about tax and development? A new global focus on tax policy, aid and good governance


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Source: Institute of Development Studies

Author: Mick Moore

Date: 16th August 2011

In March 2011, the International Monetary Fund (IMF) published a new policy paper on Revenue Mobilization in Developing Countries. Normally, taxes are not the kind of thing that fires the public imagination. So why is the IMF paper so important for the development process?

First, the IMF has shifted its position on several important policy issues:

  • The report states that many governments need to collect a larger proportion of national income in taxes to fund social programmes.
  • It argues for using property taxes to help fund neglected sub-national governments.
  • It acknowledges that taxation can serve purposes beyond simply raising public revenue, including state building.

But what motivated the new policy is even more exciting: international actors – including the G20OECDUN, and the European Commission and European Parliament – are competing to put tax at the centre of the development policy agenda. Even Hillary Clinton made this the main subject of a speech in Brussels this summer.

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 be responsive.

But why is tax and development such a hot topic right now?

Financial crises sharpens the focus on tax and development

The biggest factor behind interest in tax is the fiscal crisis facing richer countries. Governments are looking for new revenues, and ways to close tax gaps and loopholes.

Developing countries are starting to play a larger role in this story. OECD governments want developing country tax authorities to help trace international capital movements and tax evaders.

Can taxes step up where aid lets off?

But there is more to the story. Over the past decade, international advocacy organisations have revealed how much capital has been funnelled out of poor countries by rich people and transnational companies. Although the figures are disputed, the outflow has at times exceeded aid flows into a country.

Does it make sense to pressure governments of richer countries to increase aid to Africa if similar sums are quietly coming back as a result of tax evasion and transfer mispricing?

At the same time, development aid has come under sustained critique. The view that Africans would be better off without foreign aid – and therefore with higher domestic tax burdens – has become more widespread. There is now more informed discussion about trade-offs between financing government expenditures with aid versus domestic taxes.

African nations lead on using tax policy for nation building

Tax also has state-building dimensions. Development researchers have demonstrated that governments that were financed by aid or natural resource revenues – rather than through domestic taxation – were unlikely to govern well (See Taxation and State-Building in Developing Countries).

Taxation does not serve simply to raise revenue; it can also stimulate better governance

In English-speaking African countries, a new group of senior tax administrators has begun to mobilise around the notion that good tax policy can help build nations. Motivated by a mission to end aid dependence, this group formed the African Tax Administration Forum (ATAF).

‘Tax and development’ is on the agenda not only as a fiscal issue, but also as a part of governance, accountability and state-building. The debate is animated by an optimistic sense of progress and mission.

And African nations are in the lead.


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