Tax reform is generally undertaken to improve the efficiency of tax administration and to maximise the economic and social benefits that can be achieved through the tax system. A tax itself can be defined as ‘a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state, or the functional equivalent of a state’ (Granger, 2013, p. 1). Taxes can include direct taxes on income and wealth (e.g. personal and corporate income taxes, property tax), and indirect taxes on consumption (e.g. Value Added Tax (VAT), excise duties).
There has been increasing global and donor interest in developing country domestic revenue mobilisation, and in particular taxation (Mascagni et al., 2014; Fjeldstad, 2014). There is growing recognition of the role of taxation in state-building, in terms of enhancing state capacity and state-society relations (see Statebuilding). The 2008 financial crisis brought about a temporary fall in aid levels, and a renewed focus by donors on aid effectiveness and ensuring that donors support rather than discourage developing countries’ own revenue-raising efforts. Some activists (e.g. Byanima, 2014) also argue that the current international tax regime is dysfunctional, creating a race to the bottom to offer favourable, but infeasible, tax conditions to attract investment which further exacerbate inequality.
Tax reform can reduce tax evasion and avoidance, and allow for more efficient and fair tax collection that can finance public goods and services. It can make revenue levels more sustainable, and promote future independence from foreign aid and natural resource revenues (see Sustainable revenue and reducing aid and natural resource dependence). It can improve economic growth (see Economic growth) and address issues of inequality through redistribution and behaviour change (see Inequality and redistribution).
This topic guide looks at the key issues in relation to supporting tax reform in developing countries. Development outcomes looks at the key development outcomes from tax reform and Approaches, interventions and tools looks at the emerging lessons learned and recommendations in terms of approaches, interventions and tools for tax reform in developing countries.
Mascagni, G., Moore, M., & McCluskey, R. (2014). Tax revenue mobilisation in developing countries: Issues and challenges. Luxembourg: European Union.
This literature review, written for the European Parliament, highlights the rising prominence of domestic revenue mobilisation in development policy debate and provides recommendations for European and international actions to improve revenue mobilisation in developing countries. The gap between what developing countries could collect with efficient systems and what they do collect is estimated at three times foreign aid receipts. Significant contributors to these ‘tax gaps’ include tax evasion and avoidance, tax exemptions, and inequitable rent-sharing in the extractive sector. The report recommends: supporting and pushing forward existing international initiatives to reform the global tax system; providing increased financial and technical assistance to support local capacity in tax administrations; and supporting existing regional organisations like the African Tax Administration Forum in developing shared principles on issues such as tax exemptions, and tax regimes for natural resource contracts.
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Fjeldstad, O. H. (2014). Tax and development: Donor support to strengthen tax systems in developing countries. Public Administration and Development, 34(3), 181-192.
This peer-reviewed journal article reviews literature on aid and tax reform in developing countries, with a particular focus on Sub-Saharan Africa. The article argues that considerable and sustained efforts are required by all actors before the tax systems in most low-income countries will be significantly broadened and perceived as legitimate by the majority of citizens. Donors should complement the traditional ‘technical’ (i.e. administration-focused) approach to tax reform with measures that encourage constructive engagement between governments and citizens over tax issues. The article concludes by cautioning against donor duplication and fragmentation, which may weaken reform efforts by diverting local capacities, reducing local ownership and undermining the coherence of reform programmes.
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Granger, H. (2013). Economics Topic Guide: Taxation and Revenue (EPS-PEAKS Topic Guide). EPS-PEAKS.
This literature review of quantitative and qualitative evidence provides an overview of taxation and other revenue sources and their role in the economy. The guide provides a summary of key economic concepts, definitions and theories related to taxation and revenue function. This includes the principles of tax design (e.g. Optimal Tax Theory; impacts on producers, consumers, revenue mobilisation and behaviour change) and the links between revenue and growth (e.g. tax implications of growth theory, tax effort and the role of tax in good governance).
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- Byanima, W. (2014, 2 May). Developing countries must be at the heart of Global Tax Reform [Blog post]. See document online