The key debates on tax reform relate to the development outcomes of tax reform, the tax mix to achieve these outcomes, and whether there should be greater focus on taxation at the local, national or international level.
In addition to the revenue raising capacity of taxation, emerging literature emphasises its impacts on growth, state building, and inequality (see Development outcomes). Different tax reform efforts impact differently on these development outcomes and not always in a positive way across all outcomes. For example, while a shift towards progressive taxes can reduce inequality, there is evidence that this can undermine growth (see Economic growth). At the same time there is evidence that high levels of inequality undermine growth in the longer term (see Inequality and redistribution).
There are debates about which levels taxation should focus on. Some advocate focusing on local taxation as an overlooked source of revenue and a way to improve state-society relations (see Aid modalities and aid-funded goods and services). At the national level there are criticisms of the use of tax incentives, in that they are relatively ineffective, but still undermine tax revenue levels (Economic growth). Some experts argue for a greater focus on taxing the informal sector, arguing that although this will not be a significant source of revenue, it can provide knock-on benefits for firms and support economic growth (see Taxing the informal sector). At the international level there is concern about illicit flows and tax evasion (OECD, 2014). There are debates about how to respond to the use of tax havens which can undermine governance and taxation revenue in developing countries by facilitating criminality and tax evasion (ActionAid 2013; Schjelderup et al., 2009). There are also debates about the increasing prominence of transnational corporations in a system designed for businesses with a physical presence in one country. Some experts advocate a unitary tax system which would treat them as single firms, not as a loose collection of separate entities (Piccioto, 2013; 2014).
Key reading
Bird, R. (2013). Taxation and Development: What Have We Learned from Fifty Years of Research? (IDS Working Paper 427). Brighton: Institute of Development Studies.
Based on a review of quantitative and qualitative literature, this paper provides an overview of shifts in thinking about taxation in developing countries over the last fifty years. In the 1950s and 1960s, the prevalent academic and public finance literature view was towards countries introducing comprehensive progressive personal income tax systems. Increasing evidence from theoretical and empirical studies of taxation led to a second model, prevalent from the early 1980s, which was a shift towards broad-based value-added taxes (VAT) with much lower rate personal and corporate income taxes. The current model for taxation is arguably more of a framework. It takes more into account the distributional (i.e. between rich and poor) objectives of tax, the potential of behavioural changes through tax, and the state-society impact of taxes – how taxes need public support and how they affect and are affected by government legitimacy. In terms of tax reform, this has led to a shift away from global best practice models to ‘custom built’ components of tax with greater emphasis on local actors implementing tax changes, and with external actors (i.e. experts and aid agencies) supporting rather than leading reform.
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Bird, R. (2013). Foreign Advice and Tax Policy in Developing Countries (Working Paper 13-07). International Center for Public Policy. Georgia State University.
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Prichard, W., Brun, J., & Morrissey, O. (2013). Donors, Aid and Taxation in Developing Countries: An overview (ICTD Research in Brief Issue 4) Brighton: Institute of Development Studies.
This research brief, based on a literature review, highlights the emergence of a global tax reform agenda and the convergence of tax policy and administration across a range of developing countries. The brief notes, however, that this agenda and formal changes in tax regimes have only led to modest gains in revenue mobilisation and improved practice, which have been hard to sustain. To improve the impact of donor-supported tax reform efforts and to ensure that donor policy strengthens developing country tax systems and collections, the brief recommends: (1) supporting local leadership of reform efforts; (2) incorporating political economy analysis into the design and implementation of programmes; (3) designing tax reform programmes to foster broader linkages between taxation, state building and governance; (4) paying attention to the complexity of the relationship between aid and tax effort; (5) improving the design of tax-related conditionality and performance indicators; (6) coordinating donor interventions more effectively; and (7) paying greater attention to the international policy context and its impact on local tax systems.
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Prichard, W., Brun, J. &, Morrissey, O. (2012). Donors, Aid and Taxation in Developing Countries: An Overview (ICTD Working Paper 6). Brighton: Institute of Development Studies.
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- ActionAid. (2013). How Tax Havens plunder the poor. London: ActionAid. See document online
- OECD. (2014). Tax evasion and illicit financial flows. In Illicit financial flows from developing countries: Measuring OECD responses. Paris: OECD Publishing. See document online
- Picciotto, S. (2013). Is the international tax system fit for purpose, especially for developing countries? (ICTD Working Paper 13). Brighton: Institute of Development Studies. See document online
- Piccioto, S. (2014). Is the international tax system fit for purpose, especially for developing countries? (ICTD Research in Brief Number 8). Brighton: Institute of Development Studies. See document online
- Schjelderup, G., Cappelen, A., Eriksen, M., Fjeldstad, O-H., Gerhardsen, M., Joly, E., & Torvik, R. (2009). Tax havens and development. Status, analysis and measures. (Official Norwegian Reports NOU 2009:19). Oslo: Norad. See document online