Sometime in the next month or so, I’m going to sit down at my dining room table, open up a file folder stuffed with paper, and double-click on TurboTax. Then, like most Americans, I’m going to fill out forms that connect me to my government – forms that create a connection stronger, perhaps, than a passport application or even a ballot. Yes, my 1040.
Paying taxes is never fun, but it is an essential part of the relationship citizens and corporations have with their governments, national governments have with states or provinces, and citizens have with other citizens. All those relationships are features of a functional state that can express both ambition and compassion.
While most Americans don’t enjoy paying taxes, we certainly like and use the roads, schools and services they pay for. But let’s think for a moment about what it means when those systems barely exist.
Tax systems in many Sub-Saharan African countries are severely underdeveloped. Governments are starved for resources to serve their citizens because they don’t collect enough taxes from a sufficiently diverse set of sources, and they don’t generate revenue for public purposes in a way that is transparent and free from corruption and evasion.
In many countries in the region, tax as a share of GDP has risen little in the past 15 years; in some countries it has declined. Most high-income countries have a tax as a share of GDP of 25 to 45 percent, but in African countries, on average, it’s about 16 percent. And most of the taxes that African governments do collect come not from tax on income and goods and services, as is common in higher-income countries, but from international trade taxes like import duties.
The most obvious consequence of low levels of tax collection is that there are simply not enough domestic revenues to pay for health care, roads, schooling, police and civil defense, water systems, energy grids . . . and on and on. Poor countries have even poorer public services and infrastructure and they become more dependent on external donors than they should. Governments that tax poorly are losing out on a host of opportunities to build and strengthen the social contract that keeps nation together.
Transparent, well-designed and well-administered taxation serves many purposes beyond collecting money. For instance, it is through a progressive tax structure that well-off households share with those who have less. It is through sharing of tax revenues that a national government can even out regional differences in resources. It can adjust, for instance, for the disproportionate wealth in coastal regions that have the benefits of trade and tourism, and for the disproportionate poverty in inland regions that do not. Through a balanced tax system, a government can live up to the promises of economic and social equity. That knit together the social fabric, reduce the risks of civil conflict, and create national unity.
A fit-for-purpose tax system can appropriately capture a portion of the gains from commercial activity. This is a particularly important challenge to grapple with in developing countries, where the informal economy plays such a significant role and the informality itself leaves so many people – especially women – so vulnerable.
Informal workers such as street traders supply essential goods and services, but they operate outside of government regulation and, usually, evade taxes. Without regulation they are also without protection, and are subject to abuses; police can confiscate their goods, and chase them from their place of business. In concert with other policies, a well-designed tax regime can help to create the regulatory framework that recognizes informal work, and treats it like other forms of economic activity – with all the responsibilities and all the benefits.
A strong, responsible tax system can help reduce corruption in both the public and corporate sectors. For example, professionally run revenue collection can mitigate the risk that a public official will be bribed so that a wealthy business owner can get away without paying his fair share. And good tax policy, implemented well, can greatly reduce the more than $1 trillion in illicit financial flows that are draining out of low-income countries each year.
Finally, a tax system that touches most people gives citizens a stake in what their governments do, a hook to hold governments to account for delivering quality services at the local level, and making the right big-picture budget allocation decisions at the national level. Yes, voters can demand accountability; but voters who are also taxpayers have a much louder voice and greater legitimacy in making their claim.
In short, the policies and practices that permit governments to raise resources from domestic sources are hugely important to both the tangible development we all care about – the staffed and stocked clinics, the pipes to deliver clean water – and to the intangibles – the quality of relationships among and between citizens and their governments. It’s hard, in fact, to think of a domain of policy and public sector action that has a greater influence over both near- and long-term development outcomes.
Taxes are important to all aspects of development and agencies like the U.S. Agency for International Development, the Millennium Challenge Corporation and the World Bank have a huge role to play in building the capacity to make and implement good tax policy.
For long-term development, helping to build a tax system that is appropriate to the context and draws on good practices from around the world is surely among the most important contributions to sustainability and good governance. In fact, it’s essential to fulfill the oft-claimed ultimate goal of development work – to “put ourselves out of business.” And the return on investment can be remarkable: A $5.8 million USAID project to strengthen tax administration in El Salvador, for example, yielded a $350 million increase in annual revenue. Moreover, development agencies can and should invest in the capacity of civil society groups to hold governments accountable for fair tax practices, and good use of the money raised. This is a crucial element to reinforce good policies and practices.
Are donor countries stepping up to the challenge? There are some positive signs, but a long way to go. Let’s just take a look at what the United States is up to. In September 2014, Secretary of State John Kerry announced that the United States would invest $63.5 million, focused on mobilizing domestic resources for health. And last July at the Financing for Development Conference, for instance, the United States joined more than 30 countries – wealthy and poor alike – in an initiative to strengthen tax systems in developing nations.
This is important progress. But it’s starting from a low baseline. To help countries improve their tax systems, USAID currently spends a tiny amount – something like two-tenths of a percent of its global development and health budgets. A big bump in resources on domestic resource mobilization is long overdue, and will bring not just the cold, hard cash to fill public coffers that are running low, but also a strong and healthy relationship between governments and civil society.
What all this means to me, as an American taxpayer, is that when I sit down to fill out my 1040 I’ll be thinking about the one penny (or less) per dollar that goes to development assistance. And I’ll be hoping that a larger share of that penny will be used to help other countries beef up their own capacity to collect shillings, francs, centavos, and naira in ways that build stronger, safer and more just societies.