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Taxation, resource mobilisation and governance in Sub-Saharan Africa

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Title: Taxation, resource mobilisation and governance in Sub-Saharan Africa


1
Taxation, resource mobilisation and governance
in Sub-Saharan Africa
  • Jonathan Di John

2
Taxation and tax reform is central to
state-building
  • governments must be able to ensure sustainable
    funding for social programs, and for public
    investments to promote economic growth and
    development.
  • taxation is the main nexus that binds state
    officials with interest groups and citizens.
  • taxation, particularly in the form of land and
    property taxes, customs and border collection can
    help increase the territorial reach of the state
    and help secure property rights.
  • fiscal capacities are needed to build a
    legitimate state. Democratic elections do not
    themselves ensure state legitimacy

3
The Political Economy of Taxation and Tax Reform
  • Introduction The Problem of State Capacity and
    Taxation in Less Developed Countries
  • Taxation is not considered one of the five
    fundamentals of good governance (as spelled out
    in the World Bank Development Report, 1997).
  • Yet, as Schumpeter notes the fiscal history of
    a people is above all an essential part of its
    general history

4
Challenges Facing Sub-Saharan Africa
  • In sub-Saharan Africa, improving taxation to meet
    developmental needs is one of the main challenges
    facing the region (Gupta and Tareq, 2008).
  • The average tax-to-GDP ratio in sub-Saharan
    Africa has increased from less than 15 percent of
    GDP in 1980 to more than 18 percent in 2005.
  • But virtually the entire increase in tax revenue
    in the region came from natural resource taxes,
    such as income from production sharing,
    royalties, and corporate in-come tax on oil and
    mining companies.
  • Non-resource-related revenue increased by less
    than 1 percent of GDP over 25 years (Keen and
    Mansour, 2008).

5
Structural Factors Limiting the tax take
  1. a large share of (subsistence) agriculture in
    total output and employment,
  2. large informal sector and occupations
  3. many small establishments,
  4. small share of wages in total national income,
  5. small share of total consumer spending made in
    large, modern establishments

6
Challenges Facing Low-Income Counties
  • high revenues from trade taxes
  • high levels of non-tax revenue (especially from
    mineral rents)
  • narrow base of tax payers (hence the importance
    of large taxpayers office (LTOs)
  • Dominance of capital/main city in generating tax
    revenues
  • higher rates of tax evasion
  • Non-state rivals to tax collection in some
    contexts
  • One of the greatest challenge facing low income
    African economies is how to replace declining
    trade taxes in the face of economic
    liberalization. Trade taxes represent over
    one-third of all tax revenues in Sub-Saharan
    African (SSA) economies.

7
Political Economy Factors
  • Elite Bargains, Limited Access Orders (North et
    al. 2009) and the limits on tax collection
  • Neo-patrimonial systems of government can
    generate corruption and weak tax collection
    incentives
  • Mineral Rents and Aid Reduced Incentives for
    Domestic Tax Effort?
  • Donor Conditionality and coercive methods of tax
    collection

8
Differences in Capital Flight across regions
9
Variation in Revenue Performance
  • Despite these challenges, there is a wide
    variation in tax performance across countries and
    within countries over time.
  • IMF (2005) study suggests that in tax revenue
    growth in low-income countries has coincided with
    a strengthening of income tax revenues,
    suggesting that the burden of adjustment has not
    been borne solely by shifting to taxes on
    consumption.
  • This result is important since it contradicts the
    conventional wisdom that consumption taxes are
    the main source offsetting trade tax revenue.
  • Diversification of tax revenues central to
    recovering losses from trade taxes

10
Taxation and commodity booms
  • Missed opportunities?
  • Example Copper Mining Royalties in Zambia
  • policy implications
  • urgent need for mineral abundant states to enter
    into a renegotiation of mining contracts when
    they are unfavourable.
  • need for governments to develop productive
    strategies that exchange mineral rights for local
    content conditions, whereby foreign investors are
    obligated to use domestic suppliers on an
    increasingly greater scale. Local content
    management has been one of the main ways in which
    FDI can be utilised for the benefit of national
    productive capacity.
  • capacity-building in the geological survey
    capacity in sub-Saharan Africa needs to be
    developed in order to improve the bargaining
    power of states vis-à-vis multinationals. This
    is an area where the international financial
    institutions can play a leading role.

11
1. Taxation as Indicator of State Performance
  • Main Advantage---Objective Indicator
  • Components of the indicator
  • Monopoly over Tax Collection
  • Territorial Reach of Tax Collection
  • Direct Income Tax Collection
  • Tax Effort
  • Compliance and coercion in tax collection

12
Level and Structure of Taxation in selected
African Countries (annual average 1984-2004)
13
Table 2 Share of Direct Taxes as a Percentage
of Total Taxes, 2007
14
Tax Effort in African Case Studies, 2007
15
2. Taxation and the Elite Bargain
  • The creation and deployment of economic rents and
    privileges to relevant elites is the essence of
    elite bargains.
  • In turn, exploring tax patterns can illuminate
    important insights into the shape and character
    of the elite bargain, which has been argued to be
    important in generating state resilience in
    general.
  • At the same time, the nature of elite bargains
    provides a window into the political limits of
    expanding tax capacity.

16
Taxation and the Elite Bargain
  • high levels of tax evasion are tolerated
  • the negligible collection of urban and rural
    property taxes
  • relatively low rates of taxation on agriculture
    which (while part of investment incentives) be
    seen to benefit elite landowners and particularly
    large farmers and agro-processors.
  • a significant decline in the corporate tax burden
    on big business which has benefitted both foreign
    firms (particularly in mining) and political and
    economic elites.

17
Taxation and Production Strategies
  • a pro-revenue approach often takes precedence
    over a pro-growth approach in tax policy.
  • Examples of developmental taxation
  • Mauritian export tax on sugar (19th and 20th
    centuries)
  • Colombian Coffee Federation

18
Taxation, state territorial reach and production
strategies
  • History provides several examples of the
    importance of land and property taxes in
    enhancing the territorial, social and economic
    reach of the state (Japan, South Korea, Taiwan,
    US in 19th century)
  • important feature of the land tax was that it was
    introduced as part of a production strategy to
    help improve agricultural production. The link
    between tax collection strategies and production
    strategies is often lost in contemporary
    discussion of tax collection.
  • the role of agricultural marketing boards have
    played in some countries an important role in
    expanding the territorial reach of the state and
    in linking rural interest groups to the state

19
Taxation, state territorial reach and production
strategies
  • In the case of Mauritius, export taxes on sugar,
    the main export commodity in the 19th and most of
    the 20th century had several positive effects on
    state-society relations and in increasing the
    productive capacity of the sugar sector
    (Bräutigam, 2008).
  • First, the tax was an effective substitute for
    income taxes, and was generally progressive as it
    shifted the burden of taxation and redistributive
    spending on the wealthy and middle classes.
  • Second, the tax was used by the state to finance
    research and development, infrastructure, and
    marketing which enhanced production and
    productivity growth in the sugar sector.

20
Export taxes in Mauritius (cont.)
  • Third, the export tax helped the private sector
    organize, and it built their capacity to interact
    with the government over time. As well, it helped
    both the state and society to solve collective
    action problems they faced in building skills and
    in supporting research on sugar.
  • Finally, the export tax helped develop the
    territorial reach of the state since the tax
    affected the main employer in the countryside and
    promoted mutually beneficial rights and
    obligations between the state and farmers, both
    large and small.

21
Taxation, state territorial reach and production
strategies
  • The Colombian experience with its national coffee
    federation also provides evidence that the state
    can use taxation of agriculture to solve
    collective action problems in production (such as
    the provision of funds for storage, distribution,
    and marketing for thousands of dispersed
    smallholder producers) and help forge strong
    state-society negotiations and mutual obligations
    (Thorp, 2000).

22
Marketing Boards
  • The role of agricultural marketing boards have
    played in some countries an important role in
    expanding the territorial reach of the state and
    in linking rural interest groups to the state.
  • Marketing boards were also an important source
    of state resource mobilisation through the
    mechanism of monopolising the purchase of cash
    crops at below world market prices and selling
    such crops abroad at world market prices.
  • The surplus generated was often of similar
    magnitudes to formal total tax collection levels,
    particularly in Sub-Saharan African economies in
    the 1960s and 1970s. Marketing boards were
    effective in some countries such as in Taiwan,
    South Korea, Indonesia, and India because the
    state gave something in return to producer groups
    such as services, infrastructure, research, and
    price stability.

23
Marketing Boards--Kenya-Tanzania Comparison
  • Bates (1995) argues that the Kenyan coffee board
    was, in the 1970s and 1980s more effective than
    the Tanzanian coffee board because the nature of
    the political coalition in power differed in the
    two countries.
  • In Kenya, large and medium-sized coffee farmers
    were a powerful interest group whereas in
    Tanzania, coffee farmers were not a powerful
    group in the national governments support base.
    As a result, policies were in Kenya were
    developed in ways that extracted much fewer net
    resources from coffee producers than in Tanzania.

24
Marketing Boards and Political Stability
  • Even where marketing board policies were
    relatively ineffective such as in Tanzania and
    Zambia, they have played an important role in
    increasing the territorial reach of the state,
    developing state-rural interest group links, and
    in providing social infrastructure and services.
  • the inclusive reach of marketing boards may have
    contributed to the maintenance of political
    stability and nation-building in both these
    cases.
  • Further comparative historical work is required
    to assess the differential impacts marketing
    boards have had in state-building and in
    enhancing the territorial reach, and legitimacy
    of the state.

25
Policy Implications
  • Because tax is a more objective measure of
    governance than many prevailing governance
    indicators, donors and academics might more
    systematically incorporate it into indicators of
    fragility, resilience and governance more
    generally.
  • tax reform process requires political analysis to
    understand what types of reforms are feasible in
    a given context. In particular understanding how
    the elite bargain is constructed and how it is
    related to political stability is central to
    proposing tax reforms that are politically
    sustainable.

26
Urban property taxes
  • The role of land and property taxes is especially
    important as local governments seek to raise
    revenues in the context of decentralization
    reforms. The same is true for local governments
    in urban areas. Why focus on this tax?
  • one of the most underutilized forms of taxation
    in LDCs and can potentially provide the financing
    of urban infrastructure investment which is
    central to improving the production and export
    capacity of light manufacturing plants, many of
    which are located in urban centres.
  • provides one of the few potential sources of
    taxation for municipal governments.
  • can provide the impetus for the creation of
    urban property databases which could help improve
    the synergy between municipal taxation and urban
    planning.
  • provides one of the few mechanisms through which
    progressive taxation can be developed in LDCs.
  • contributes to making property rights more
    secure.

27
Tax Policies to Improve the Fiscal legitimacy of
the State
  • there is a need to improve the capacity and
    legitimacy of Large Tax Payer Offices (LTOs)
  • Harsh tax enforcement in situations with poor
    service delivery may contribute to undermining
    the legitimacy of local government and increase
    tax resistance. Trying to meet very ambitious tax
    targets can be counterproductive
  • Tax exemptions of donor employees creates a bad
    demonstration effect for low-income states trying
    to build domestic tax bases.
  • Avoid the problem of the dual public sector in
    aid delivery
  • Need to re-think the composition of aid towards
    infrastructure and economic production
  • Taxing the informal sector may require linking
    tax policy to production strategies.

28
Taxation, Governance and Growth
  • Inherent in much of the recent work on taxation
    is that a broader-based taxation system will
    consolidate state-interest group bargaining which
    will, in turn, generate a greater degree of
    legitimacy which supposedly will generate more
    effective governance. Good governance, in turn,
    is seen as central for sustained rapid economic
    growth (World Bank, 1997, 2002).
  • The problem with much of the new literature,
    however, is that it identifies the tax nexus as
    the main source of a states legitimacy. This is
    problematic in the context of economically
    underdeveloped countries.
  • Because tax rates and composition are not
    systematically correlated with economic growth,
    it is not helpful to focus on taxation in
    isolation of other factors that affect capital
    accumulation, the efficiency of investment and
    economic growth. For instance, national savings
    and particularly public savings (which in part
    come from the efficient operation of state-owned
    enterprises) may be as if not more important to
    the growth prospects of an economy.
  • Limited fiscal basis of the state makes good
    governance agenda unrealistic.

29
Aid and its Effects on Taxation and State-Building
  • Positive effect of setting up Large Taxpayer
    Offices
  • Four important elements to the Rwanda Revenue
    Authority strategy, which has underpinned its
    relative success to date
  • First, the principle objective of revenue policy
    is to promote economic growth, rather than simply
    maximising revenue collection.
  • Second, they have followed the general trend
    advocated by the IMF of moving from models of
    collection based on tax type to models based on
    types of taxpayers
  • Third, sought to widen the ownership of the tax
    effort beyond the revenue authority, establishing
    Tax Advisory Councils at the provincial and
    district levels involving parliamentarians and
    chaired by a governor, mayor or security
    institution. In the same vein, they organised a
    national Tax Appreciation Day where the RRA
    accounts publicly for what it has done and hears
    from people what they would like to see done. The
    best taxpayers are given an award by the head
    of state.
  • Fourth, gradually phased out technical assistance
    from line positions within the authority and took
    control of technical- assistance contracting and
    management, moving from long-term technical
    assistance to short-term contracts around very
    specific needs.

30
Aid and its Effects on Taxation and State-Building
  • the extent to which aid is by-passing the state
    in the delivery of social services (the problem
    of the dual public sector)
  • In the DRC, OECD estimates that 146 parallel
    management units currently exist, which is four
    times the 2006 number.
  • In Afghanistan, research suggests that the
    problem of the dual public sector in aid delivery
    can be overcome by through setting up
    dual-control oversight mechanisms that can
    reduce corruption and still ensure resources flow
    through the state. The Afghanistan Reconstruction
    Trust Fund, which was World Bank funded, seemed
    to play this role.
  • 3) the high levels of project aid which winds up
    off budget, that is, is not reported to finance
    ministries.
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