Make Tax Fair: Why Fair Taxation
There are a couple of reasons why fair taxation could benefit a country.
Realizing the tax potential
Tax revenues in developing countries continually fall short of what realistically could be obtained when analysing these countries' actual productive potential. In many cases rich countries collect as a percentage of GDP more than twice as much public revenue, as developing countries. 18% of GDP comes from tax revenue in African countries compared to an average of 38% in Western European countries.
Oxfam research found that improving tax collection could potentially raise $269 billion annually, which is enough to cover up to 60% of the financing requirements for achieving the Millennium Development Goals.
Promoting pro-poor economic growth
Taxation is the most sustainable, largest and stable source of state income. Tax makes countries less dependent on foreign aid, foreign direct investments, loans, and income from natural resources, which are highly volatile. The economic crisis of 2008 has left a $64.4billion dollar hole in the budgets of developing countries and is now leading to many rich countries cutting their aid flows.
To date, developing countries' tax policies have often been strongly influenced by the advice of the International Monetary Fund (IMF) and the World Bank. The (negative) impact of these policies on the (re)distribution of wealth and the poorest sections of society was not analysed carefully enough.
Achieving domestic resources mobilization
Broadly, African tax systems are biased towards consumption and wage taxes which impose a higher tax burden on poorer households and formal sector employees. To make the system fairer, tax reform is necessary to shift the tax burden to wealthier households and (multi)national companies.
Improvements could be achieved by:
- Enhanced tax regulations on trade
- Tackling tax evasion through tax havens
- Responsibly formalizing part of the informal economy
- Reducing tax exemptions
- Raising direct taxes, especially taxes on non-wage incomes.
Take, for example, oil in Uganda. Contract transparency and enhanced regulation of the extractives sector can mobilize significantly more domestic resources. Unjust corporate practices and the opacity of company accounts, such as manipulation of intra-group trading prices, artificially depressing profits via tax havens, make a farce of any real attempt to monitor the financial resources that are expropriated from developing countries.
Bolstering democratic governance
Tax contributes to strengthening citizenship and downward democratic accountability. Taxation is at the heart of the social contract between citizens and their government and as such shapes public accountability to citizens.
No taxation without representation and No representation without taxation.
When citizens become more aware of their rights and responsibilities as tax payers, public scrutiny over revenue collection increases. This goes beyond their role as voter and can result in enriched public debate and scrutiny over the use of public money and ultimately more equitable national and international tax policy environments.
One of the main conclusions of Oxfam research on progressive taxation (2011) is that governments in developing countries have not made the most of tax policies as a tool for achieving poverty reductions. Policies have instead opposed positive reforms to deal with inequality.
Depending on the country context, some of the factors behind the failed tax policies in developing countries that can and should be reversed include:
- Overall tax revenues falling short of those that theoretically could be obtained when countries' productive potential is analysed.
- The imbalance between direct and indirect taxes in total revenue collection and the very little tax revenue obtained from taxing businesses and the owners of capital. Instead taxation has focused on levying taxes on consumption which is potentially regressive.
- Tax breaks chiefly benefiting rich people and the profits of national and international companies. There is little evidence to indicate that these exemptions are attracting the kind of added-value investments that would have a positive impact on development.
- Tax dodging by medium and large companies in the informal economy. Some measures taken to tax the more vulnerable sectors of the informal economy are often arbitrary and undermine poverty reduction efforts.
- In some countries, taxes with less political costs, affecting company interests and the rich sectors of the population as little as possible, are currently being promoted. These taxes are easier to collect but are not necessarily the most appropriate to the situation of developing countries. Their likely impact on the redistribution of wealth or their negative impact on the poorest sections of the population was not analysed carefully enough before they were introduced.
- Secrecy jurisdictions, more commonly known as tax havens, have been a barrier to increasing taxation of the population's richest sectors and of companies that operate in developing countries.
- The OECD explains in its BEPS (Base Erosion and Profit Shifting) report that there is a serious problem of under taxation of multinational companies which it calls `double non-taxation'. This is allowed and indeed encouraged by some features of current international tax rules. Significant changes are needed to current rules including tax treaties (OECD, February 2013).
- Multiple taxation where the poor and small and medium scale companies are taxed by various tiers of government for similar things.