Taxation, Governance and Resource Mobilisation in Sub-Saharan

Africa

Jonathan Di John, University of London, SOAS

Presentation for African Economic Outlook 2010, Expert Meeting

Resource Mobilisation and Aid in Africa

14 December, 2009

Taxation and tax reform is central to state-building:

• 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.

• fiscal capacities are needed to build a legitimate state.

Democratic elections do not themselves ensure state

legitimacy

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

Challenges Facing Sub-Saharan Africa

• 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

(LTO’s)

• Dominance of capital/main city in generating tax revenues

• higher rates of tax evasion

• 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.

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).

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

Political Economy Factors

• 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

Politics of Administrative Reforms: The Case of Autonomous Revenue

Authorities

• International financial institutions and aid donors have developed the

proposition that, in weak states, revenue collection authorities are more

effective when they operate autonomously from the state (and particularly

the finance ministry), as a commercial entity at arms length from the

government rather than as a department within the government

administration (see Taliciero, 2004).

• This is the reasoning behind the promotion of the so-called autonomous

revenue agencies (ARAs).

• While there is some evidence in Africa and Latin America that

autonomous revenue authorities may have been instrumental in initiating

reforms, it is less clear that such arrangements are sustainable.

Politics of Administrative Reforms: The Case of Autonomous Revenue

Authorities

• Such a technical approach to tax policy abstracts from politics in at least

three ways.

• First, the reasons why such reforms were politically feasible in the first

place are not addressed.

• Second, there is little analysis of why such autonomy is acceptable to

relevant political coalitions over time.

• Third, there is no accepted definition of autonomy. Since tax policy,

which is the domain of finance ministries, cannot practically be divorced

from tax collection (which is the domain of newly created ARAs) it is not

ultimately possible for the latter to function in purely autonomous ways.

• In effect, autonomy can never be complete where there are inter-

dependencies among agencies and thus is always a contested notion.

Politics of Administrative Reforms: The Case of Autonomous Revenue

Authorities

• Role of macroeconomic and particularly fiscal and inflationary crises has

provided opportunities for leaders to gain leverage over the reform process.

• Centralised public authority and executive support is essential for tax

reform to be undertaken and sustained (e.g. Rwanda, Ghana, South Africa,

Ethiopia)

• the creation of a (semi-) autonomous revenue authority paradoxically can

increase the political attention it receives (e.g Uganda)

• the pressure on governments to meet revenue targets can create tensions

between the state and interest groups which can undermine the tax

authority’s legitimacy.

Administrative Reforms: The Case of Autonomous Revenue Authorities

Clear and simple laws to minimize taxpayer effort and compliance costs.

Adequate enforcement power of tax administration

Function-based organizational structure: Tax departments organized

according to key functions (registration, filing and payment, processing,

enforced collection, and audit) operate more efficiently than those

structured by tax-type.

Automation promotes risk-based management and fast and simple file

returns, declarations and payments.

Treat Taxpayer as a client

Develop medium- and long-run plans to gradually widen tax

coverage, including small and informal sector firms. This will enhance

the extent of the ‘fiscal social contract’

• Source: IMF: Reforming Tax Administration and Implementing GST: 2006

Lessons from South Africa

• high degree of administrative cooperation within the state, particularly between

SARS, the Finance Ministry and the Central Bank.

• the state has historically maintained a cooperative relationship with upper-income

groups, including large firms, which helped reduce the transaction costs of

collecting income taxes.

• reforms were introduced with substantial consultation with representatives from

the state, political parties, business chambers, labour unions, and national and

international tax and legal experts.

• sustained campaign by SARS which emphasizes in its campaigns that its task

effective tax collection is central for ‘the protection of the national economy’.

• SARS was formed in the context of a strong national political party, the African

National Congress (ANC).

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.

Aid and Domestic Tax Effort

Potential Problems

• the incentive for the government to raise revenue may be diminished.

• Second, the capacity of the government to identify and assess macro-level expenditure revenue trade-offs are reduced as ministers are not forced to prioritise spending based on what revenues they can collect; instead they simply present a wish list.

• Third, there is considerable uncertainty and volatility in the actual aid flows that are dispersed creating problems for macroeconomic management and planning.

Matching Aid Funds and Domestic Tax Effort

The matching funds approach can address these concerns if

donors could agree to match a percentage of the funds

collected by the government up to a fixed limit.

The matching percentage could be reduced over time,

reflecting the increased capacity of the government to raise

revenue.

The main advantage of this approach is that it increases the

incentives for revenue collection since state officials will know

that raising extra revenue will result in additional inflows of

donor resources.

OTHER ISSUES TO CONSIDER

• 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.

• Taxing the informal sector may require linking tax policy to production strategies.

Notes for Further Discussion

Table 1: Tax Collection and Composition in selected Sub-Saharan African countries

Years Tax Revenue Trade Taxes GDP/cap

lower tax countries (as % of GDP) (as % of total taxes) (market prices*)

Congo (DR) 1998-2002 4.5% 32.0% $600

Central African Rep. 1992-96 6.1 39.0 1,055

Chad 1994-2000 6.5 34.0 801

Niger 1994-2000 7.9 57.0 678

Rwanda 1993-99 9.3 18.0 931

Tanzania 1992-99 9.6 35.0 524

Uganda 1998-2003 11.4 16.0 1,167

Mozambique 1993-99 11.4 18.0 799

Ethiopia 1993-97 12.9 40.0 814

Mali 1991-2000 12.9 30.0 784

Malawi 1993-2000 14.2 15.0 583

average 9.7 30.3 814

higher tax countries

Botswana 1993-98 32.5% 18.0% $8,347

South Africa 1998-2002 25.5 13.0 8,764

Zimbabwe 1992-97 22.5 19.0 2,498

Kenya 1992-2001 23.1 17.0 1,033

Zambia 1990-99 18.1 12.0 785

Cote d'Ivoire 1991-99 18.0 40.0 1,582

Senegal 1992-98 16.0 28.0 1,427

Nigeria 1992-2000 15.2 18.0 854

average 21.4 20.6 2,420

average (excl. Botswana, S. Africa) 1,363

Note: * at $US 2000, market prices

Source: IMF, Government Finance Statistics; Fox and Gurley (2005)

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.

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.

Recommended Readings

Baunsgaard, T. and Keen, M. (2005) Tax Revenue and (or?) Trade Liberalization,

IMF Working Paper 05/112.

Burgess, R. and Stern, N. (1993) Taxation and Development. Journal of Economic

Literature, 31, no.2, pp. 762-830.

• Brautigam, D., Fjeldstad, O-H & Moore, M. (2008) Capacity and Consent:

taxation and state-building in developing countries. Cambridge, Cambridge

University Press.

• Di John, J. (2006) The Political Economy of Taxation and Tax Reform in Developing

Countries, World Institute of Development Economics Research (WIDER) Research

Paper No. 2006/74, Helsinki: United Nations University-WIDER.

• Herbst, J. (2000) States and Power in Africa: Comparative Lessons in Authority

and Control. Princeton, Princeton University Press.

Recommended Readings

• Tilly, C. (1990) Coercion, Capital and European States: AD 990-1992. Oxford,

Blackwell.

• Gupta, S. and Tareq, S. (2008) Mobilizing Revenue. Finance and Development, vol.

45, no. 3, pp. 44-47.

• Toye, J. (2000) Fiscal crisis and reform in developing countries. Cambridge Journal

of Economics, vol. 24, no.1, pp. 21-44.

• Lieberman, E. (2003) Race and Regionalism in the Politics of Taxation in Brazil

and South Africa. Cambridge, Cambridge University Press.