This paper reviews the state of knowledge on aid and tax reform in developing countries, with a particular focus on sub-Saharan Africa. Four main issues are addressed: (1) impacts of donor assistance to strengthen tax systems, including what has worked, or not, and why; (2) challenges in ‘scaling up’ donor efforts; (3) how to best provide assistance to reform tax systems; and (4) knowledge gaps to be filled in order to design better donor interventions. The paper argues that donors should complement the traditional ‘technical’ approach to tax reform with measures that encourage constructive engagement between governments and citizens over tax issues. The conclusion cautions against potential problems of donor duplication and fragmentation.
Donor support to taxation can be grouped into three broad working areas: (1) improving tax policy and design; (2) creating more effective tax administrations; and (3) encouraging constructive state-society engagement around taxes. The picture that emerges of reform efforts is that they have yielded significant formal changes in tax regimes across the developing world, but more modest changes in tax practices.
In spite of advances in many respects, substantial deficiencies in terms of (a) realisation of the revenue potential; (b) administrative capacity to taxing growing sectors; and (c) governance remain in many developing countries. Factors contributing to these deficiencies include a legacy of coercive and centralised tax systems; weak tax compliance by elites; large, untaxed informal sectors; ineffective local government tax systems; inconsistent patterns of business taxation; and limited administrative experience and expertise to effectively tax growing sectors such as extractive industries, tourism, telecommunication, banks and finance institutions.
Questions about inclusiveness, equity, transparency, and local government taxation should have a more prominent role in reforms. Achieving such a reordering of priorities will require (a) an effort to ‘open-up’ tax reform processes to new stakeholders, and (b) the development of a broader range of performance indicators against which tax reform efforts are measured. As long as tax performance is judged largely by comparatively short-term changes in the tax-to-GDP ratio, these ‘softer’ elements of the reform agenda are unlikely to be given priority.
The paper argues that the challenge for many developing countries is to tax a larger number of citizens and enterprises more consensually and to encourage constructive state-citizen e gagement around taxation. This is not easy for various reasons, including economic structure and history. Nonetheless, historical and contemporary experiences show that taxpayers’ behaviour can be transformed by reforming the tax and expenditure system, leading to both a greater willingness to pay and an increased propensity to mobilize demand for better public services. The paper emphasises the importance of local leadership, locally designed solutions and donor approaches that are sensitive to each country-specific socio-economic environment.
