Photo Credit: UN
Second in a series by Steven Damiano (LBJ MGPS Graduate) covering his internship at Bread for the World Institute.
This summer, at the Bread for the World Institute, I researched a topic not typically associated with international development: taxation. The subject may seem far from the realm of Bread for the World’s mission of combating hunger, but the connection is a sensible one. Public goods, social safety programs, and other services necessary to transform economies and bring people out of hunger hinge on a government’s ability to spend collected tax revenues. Proper taxation creates effective states, which, in turn, enable development. And, once governments tax their citizens, people are more likely to demand more social services and democratic reforms.
Yet many developing countries struggle to collect tax dollars from their populations. Low income countries and low middle income countries on average collect only 15 and 17 percent of their GDP in tax revenues, respectively, compared to approximately 30 percent for high income countries. There are several reasons for this. Low-income countries suffer from low tax morale, meaning citizens avoid paying taxes because they do not trust their governments to use the revenues to provide public services. This distrust is well-placed: tax bureaus are often corrupt or lack the administrative capacity to efficiently collect taxes. Also, free trade agreements have led developing countries to collect reduced revenues through customs taxes. And, finally, many low-income countries have large agricultural and informal sectors, which governments struggle to tax. If all these factors were not enough, developing countries lose as much as 10 percent of their tax revenues due to tax evasion techniques by international corporations.
Thankfully, donor countries have finally begun to emphasize the role that taxes play in development, due in large part to their own unwillingness to spend more money on foreign aid. This year marks the end of the Millennium Development Goals (MDGs), which the UN created in 2000 to mobilize the world around achieving clear development outcomes. The international community has now come up with an even more ambitious set of goals that all countries should achieve by 2030 — the Sustainable Development Goals (SDGs). However, unlike the MDGs, which featured increased foreign aid from wealthy countries, these benefactors now want developing countries to use more of their own resources.
In July, the international community met at the Third Financing for Development Conference in Addis Ababa, Ethiopia to negotiate how they would develop these resources. At this meeting, developing countries committed to raise more of their own domestic resources for development – a process called domestic resource mobilization (DRM) – and wealthy countries committed to support this process. DRM includes a wide swath of public and private resources including tax revenues, natural resource revenues, the philanthropic sector, public sector bonds, remittances, and public-private sector partnerships.
In particular, countries participating in the conference focused on mobilizing tax revenues. To this end, the US, the Netherlands, Germany, and the UK created the Addis Tax Initiative, which attracted the support of 29 countries, including nine developing countries. Under the initiative, donor countries agreed to double the amount of official development assistance they spend on technical assistance for tax revenue mobilization, and developing countries agreed to use additional revenues raised through DRM to achieve their own SDG targets. However, this does not mean developing countries will necessarily be raising tax rates. Rather, donors will help reform developing countries’ tax bureaus by improving their ability to collect taxes, in part by reducing corruption.
While the actual funds involved through the Addis Tax Initiative are small, they could have a catalytic impact on the resources available for development. The OECD estimates that in 2012 only .22 percent of all DRM funds were committed to tax revenue mobilization. Yet these limited funds have achieved astounding success stories. Following the Rose Revolution in 2003, Georgia with the support of the USAID and other donors implemented tax reforms that allowed it to double its tax revenues, from 12 to 25 percent of GDP. Similarly, El Salvador with the help of USAID implemented tax reforms after 2004 that contributed to a $350 million increase in annual tax revenues and a $160 million increase in annual spending for social services. Although these are best-case scenarios, almost all developing countries could collect more tax revenues as a percentage of GDP.
If the Addis Tax Initiative helps narrow the tax collection gap between developed and developed countries, developing countries could have significantly more resources for development, meaning more schools, more roads, and less hunger.
Edited by Jon Brandt