Global Policy Studies & International Security Politics and Governance

A Path Forward for the Addis Tax Initiative

photo credit: UTPAL Baruah/Reuters

Third and final in a series by Steven Damiano (LBJ MGPS Graduate) covering his internship at Bread for the World. 

In my previous blog post, I noted the role taxation and domestic resource mobilization plays in international development.  In this post, I lay out the policy recommendations from my upcoming Bread for the World briefing paper on how the U.S. government can use the Addis Tax Initiative to achieve the UN’s Sustainable Development Goals (SDGs).

Fragile states and low income countries, mostly located in Sub-Saharan Africa (SSA) and South Asia, will face the biggest hurdles to achieving the SDGs.    The Organisation for Economic Co-operation and Development (OECD) defines a fragile state as having “weak capacity to carry out basic governance functions, and lack[ing]  the ability to develop mutually constructive relations with society.”  While fragile states are not always at risk for conflict, they are vulnerable to shocks that could wipe out decades of development gains.  According to the OECD’s definition, fragile states contained 4 billion people in 2014—including 43 percent of the world’s extreme poor.  More broadly fragile states and stable low-income countries face similar challenges of a lack of capacity to provide basic services, lack of democratic and inclusive institutions, and an inability to respond to the needs of their most vulnerable populations.

For fragile and low-income countries to make progress on the SDGs related to hunger and poverty alleviation, they will also need to achieve goal #16: the creation of peaceful, inclusive and well-governed societies.  Only states that develop inclusive institutions and enforce the rule of law are capable of providing social services for their most vulnerable citizens and producing the inclusive economic growth required to lift millions out of poverty and hunger. The OECD estimates that an additional 80 million people could be lifted out of poverty by 2030 if fragile states improve their institutions as fast as countries that had an institutional rate of improvement that ranked in top 70th percentile of countries from 2006 to 2012. . Similarly, the IMF found that when people in the bottom twenty percent of a country’s income distribution increase their share of national income, the country grows at a faster rate than when the top twenty percent increase their income share.

Taxation can lead countries to develop more inclusive and effective institutions, but developing countries must first reform their tax systems as part of a wider reform agenda focused on accountability and transparency.   U.S. donor agencies have had the most success funding tax reforms in countries that have good governance and political leaders committed to transparency and the eradication of corruption. For example, in the Philippines, Benigno Aquino III was elected president in 2010 based on a campaign focused on eliminating corruption. At the time of his election, the country compared favorably on governance indicators to other low-income countries, and in 2011 the Millennium Challenge Corporation (MCC) used this window of opportunity to partner with the Philippines government on a five year, $434 million country compact.  Under the compact’s Revenue Administration Reform Project, the MCC has funded administrative reforms within the country’s Bureau of Internal Revenue that have led to increased revenue collection.

Fragile and low-income countries, however, are unlikely to provide  as favorable an operating environment for tax reforms as the Philippines, which has a high economic growth rate, a favorable governance rating for its income group, and a government committed to reform.  In response, the Addis Tax Initiative offers the U.S. government a chance to expand its tax reforms efforts beyond best-case scenarios like the Philippines.  As the U.S. government fulfills its commitment under the initiative to double or significantly increase the foreign assistance funds it spends d, it should promote inclusive institutions and fiscal transparency in fragile countries.  In my forthcoming report with Bread for the World, I make the following recommendations on how the U.S. government can pursue this agenda:

  • Foreign aid remains critical to ensuring social services reach those most in need and to achieving SDGs. Even with enhanced DRM, low-income countries will lack the resources necessary to achieve the SDGs.  The U.S. government should commit to increasing the money it spends on foreign assistance.
  • The U.S. government has decreased the budget for democracy, human rights, and governance by 38 percent overall since 2009. The United States should instead increase development assistance that helps strengthen institutions and administrative capacity, builds the capacity of local civil society and promotes a better enabling environment for domestic resource mobilization (DRM).
  • The U.S. government needs to develop a domestic resource mobilization policy that is appropriate for the environment in each country. For fragile states the U.S. must ensure that tax collection is fair and transparent and serves to enhance, not weaken, government accountability in the use of public funds and the provision of public services. The U.S. could enhance funding for expenditure tracking surveys, participatory budgeting, and citizen scorecards in countries that lack sufficient commitment to reform.
  • The success of the Addis Tax Initiative depends on countries’ success in creating equitable tax systems and redistributing those funds towards the poor. The U.S. should support and make public tax and expenditure analysis as part of the DRM projects that it funds.
  • Reducing economic inequality matters both for achieving pro-poor outcomes and for creating inclusive institutions necessary for long-term economic growth. The U.S. should evaluate success in tax-focused DRM projects based on progress in reducing economic inequality and getting countries to commit to budget transparency.
  • By emphasizing fiscal transparency, the State Department can create new norms around budget transparency that will create better enabling environments for DRM. The State Department should more heavily publicize its annual fiscal transparency review and be more transparent about the methodology it uses for the review.

The U.S. government faces a tradeoff between using foreign aid for DRM in countries where it most likely to succeed and funding DRM in countries which have made the least progress towards achieving the MDGs.  U.S. donor agencies are most likely to successfully use foreign aid for DRM-driven development in countries with good governance and where political leaders have committed to transparency and wiping out corruption. the U.S. government limits tax based DRM to only countries that have suitable enabling environments, it risks leaving many countries behind.

However, if the U.S. government uses the Addis Tax Initiative as part of a wider commitment to promoting inclusive and effective institutions, it can help governments in fragile states and low-income countries make real progress towards achieving the SDGs.

Edited by Robert Arjet

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