Importance of Tax
“According to the United Nations Report on Financing for Development, taxes play a vital role in financing state spending on basic social services such as education, health care and social security”. Effective public spending, which responds to the needs of the people, requires the collection of sufficient tax revenue. Experience has shown that tax structures, no matter how brilliant on paper, are of limited effectiveness if applied in an inefficient or corrupt manner. Thus, a simple tax system and a transparent, accountable and corruption-free tax administration capable of reducing tax evasion and avoidance should be created.
Ideally, this is how you would want it to go:
Unfortunately (and unsurprisingly) this model does not represent reality for many developing countries.
Tax revenues and spending on critical sectors not always related
In an ideal world, developing countries raise more tax revenues so that they can provide essential services to the public. For example, in the sectors of healthcare and education. To see whether this applies in real life, I have looked at data from 20 developing countries for the period ranging from 2005 to 2016 or 2017, depending on the availability of recent data. I have used data from the World Bank, and when incomplete, from OECD. My main finding is that an increase in tax revenues does not directly translate to increased public spending on health or education. This suggests that a separate advocacy effort on the spending side is very much needed.
Table: computation of World Bank and OECD data.
In this table, Pearson H stands for Pearson correlation between tax revenues and spending on health, Pearson E stands for education. When looking at Vietnam for example, we see that tax revenues are volatile, but spending on education and health has been stable over the course of 10 years – hence the negative correlation. For El Salvador, we see contrasting outcomes. When looking into the country-specific data, we see that health expenditure has increased only 1% over the entire period of analysis, while tax revenues have gone up with an impressive 6,5%. Thus, it is far from self-evident that public expenditure in developing countries increases (sufficiently) when tax revenues go up.
I came across a study by USAID that did find a link between revenues and spending on social sectors. However, that study also included aid revenues, not just tax revenues. A possible explanation for the contrasting findings is that developing countries receive aid (often tied) for the health and education sector, and the government feels no need to allocate more revenues from tax collection to these sectors. Dependency on foreign aid is understandably undesirable: not only is it not sustainable long-term solution. With more and more right-wing populists in power, one can only expect aid to shrink. Hence, tax revenue collection by governments is of great importance.
Back to the data analysis: there can be many reasons why increased tax revenue does not lead to increased spending on health and education. One of the key issues is corruption. When taking a step back, and looking at why for some countries tax revenue does not increase in the first place, we come across another key issue: tax dodging. During my work at Oxfam, I have come across a perfect example of a country that experiences both issues.
Nigeria: inequality sustained by corruption and tax dodging
Nigeria is one of the countries participating in the Fair Tax Monitor (FTM) project, developed by Oxfam Novib in collaboration with Tax Justice Network Africa (TJN-A) and partner organizations within the countries. For each participating country, a report is written that analyses the national tax system, identifies the bottlenecks and can be used to score a country’s tax system on its fairness. While co-writing the report, I found that Nigeria is struggling with two of the key issues mentioned above: corruption and tax avoidance. Here are some facts:
- 69% of the population lives under the poverty line.
- There is corruption: according to the Economic and Financial Crimes Commission (EFCC), $20 trillion has been stolen from the treasury by public office holders between 1960 and 2005. An amount larger than US’s GDP in 2017.
- Lawmakers make 63 times the GDP per capita
- Tax incentives are managed in a non-transparent way, and there are multiple cases of companies getting away with not paying taxes. Nigeria has lost $3.3 billion in tax revenues to oil companies alone during the period of 1999-2012.
- Nigeria’s Open Budget Index, the world’s independent and commonly used comparative measure of government budget transparency, is dramatically low: 17/100
If the economic and political climate of Nigeria allows for tax evasion, how can tax revenues ever increase? If there is corruption, how will the public ever see healthcare and education improve in quality? And, why would they pay taxes in the first place if there is no trust in the government?
Disclaimer/Note: Me pointing out what’s problematic in Nigeria does not mean I’m blind to what is happening in my home country. The Netherlands is one of the biggest tax havens and while corruption does not play a major role per se, tax avoidance here is enormous and is in that sense not an exemplary country.
How to go about it?
Even though corruption and tax dodging are extremely hard to fight, Oxfam’s Even it Up! Team is battling unceasingly. Actions include but are not limited to;
- Equipping civil society organizations so that they are equipped to demand transparency and accountability at governmental level
- Creating awareness among citizens about their rights as taxpayers, so that they are empowered to demand more from their government.
- Lobbying for better and fairer rules nationally and internationally
Just like I stated two key issues, there are two key solutions. Everyone knows that corruption can only be tackled by creating (1) increased transparency and (2) increased accountability. I dearly hope that by unifying and informing citizens, pressuring governments for transparency, the political elite will have no room for questionable behavior anymore. This way, resources can be distributed in a fairer way, trust in the government will be restored and poverty can be alleviated through appropriate public spending.
Author: Esther ter Horst
Date: 24th of June
 UN A/55/100 Report of the UN High-level Panel on Financing for Development
 Inequality in Nigeria: Exploring the Drivers – Oxfam International (2017)