Dr. Dereje Alemayehu
Chair, Tax Justice Network – Africa
The following quotation from Christian Aid’s rationale for Christian Aid when it decided to engage in global tax justice advocacy and campaign is a good summary
“The neglect of tax as a development issue has gone on for far too long. …For Christian Aid, in particular, this is an area where the moral impetus demands a position – to address the poverty and inequality that the donors’ tax consensus will not, and to stress the moral principle that it is right that those most financially able to do so, bear the proportionately larger responsibility to contribute, through tax, to building a world without poverty”.
As Tax Justice Network – Africa, our mission is to enhance domestic resource mobilisation for poverty eradication and inclusive development by promoting tax as reliable and sustainable source of development finance which ends the aid dependency syndrome.
To achieve this we need to focus on the following four priorities:
1. To bring about a paradigm shift in development policy and thinking across the continent based on the recognition that tax is the only reliable and sustainable source of development finance.
In the development discourse of the past the emphasis was one-sidedly given to ODA, FDI and foreign credit as major sources of development finance. The problem of illicit financial flows was neglected. Domestic resource mobilisation was not given due attention.
To put taxation at the centre of domestic resource mobilisation would require a shift in economic policy prioritisation by creating a virtuous link between taxation and wealth creation. This means building productive capacity to promote value addition and employment creation as a major means of enhancing state revenue. In other words, the kind of tax policy required to make taxation a reliable and sustainable source of development finance should be an integral part of any economic policy which seeks to “enhance linkages and stop leakages” in national economies.
Admittedly, there will always be a tension between pro-growth tax policy to improve the “investment climate” and pro-poor progressive tax policy aimed at redistribution and poverty eradication. But this should not be considered as an unsolvable tension. Pervasive poverty is a hindrance to growth by itself, and, in the long run its eradication creates a more conducive situation for legitimate profit making; even more conducive than any pro-growth tax policy could hope to attain in the short run. Research and policy dialogue could help us overcome the false “either-or” dilemma between these two options frequently raised in tax related discourse.
2. To put across the message in the African development discourse that bringing tax to the centre of domestic resource mobilisation for sustainable development goes beyond revenue collection: it is about promoting citizenship; it is about re-founding state-society relationship on a rights holder-and duty bearer basis
Taxation plays a pivotal role in socio-economic and political transformation
- Dependence on taxation enhances accountability and responsiveness of governments. Citizens as tax payers check “value for money” of their contribution and governments are compelled to deliver to be able to collect revenue in a predictable and sustainable manner.
- Dependence on tax revenue enhances political capability and bureaucratic efficiency of states. It enhances political capability in the sense that governments need to determine and prioritise societal needs and nurture a culture of bargain and compromise between competing and, at times, conflicting interests. It enhances bureaucratic and technical capability in the sense that governments need to design and implement effective policies in order to deliver public services more efficiently and effectively.
- Dependence on taxation serves as an incentive by compelling governments to nurture the goose rather than devouring the eggs! The more dependent the state is on generalised taxation, the more its stake in the prosperity of the country.
- Generalisation of taxation as a main source of state revenue is a key factor in state building. When taxation becomes the nexus between states and citizens, it enhances interest-based and thus issue- and policy-based engagement by a country’s population in policy and political processes. It is at the heart of transforming ‘patron – client’ relationships into ‘rights holder- duty bearer’ relationships between citizens and governments on the basis of a quasi “fiscal contract”.
3. To promote the recognition in African CSO and among policy makers that only tax policy which pursues the following “4 Rs” as its core objectives can ensure an inclusive and sustainable development with social cohesion and political stability.
- Revenue – to ensure steady state income for essential functions of government and provision of adequate services;
- Redistribution – to ensure equitable development and poverty eradication;
- Re-pricing – to minimize externalization of costs and ensure wellbeing of the social fabric;
- Representation – to give voice to societal interests in how public resources are generated and spent;
4. To advance the recognition in the political and policy space that enhancing tax revenue and domestic resource mobilisation in Africa requires urgent measures to plug the five main leakages that diminish public revenue:
a) Tax due on income earned by multinationals and then moved offshore without paying appropriate tax
b) Tax due on income earned from assets which are held offshore
c) Tax that would have been received had rates not been reduced by tax competition between countries seeking to attract foreign investment.
d) Tax due but not paid – (due to corruption, weak enforcement mechanisms; low tax revenue collection capacity, exemptions and privileges granted through the patronage system )
e) Tax due on the shadow economy
- Leakages (a) and (b) are about capital flight and illicit and illegitimate resource outflows from African countries. These could hardly be plugged by the efforts of African countries alone. For example, plugging leakage (1) would require international cooperation to curb at least the ease with which stolen or illicitly acquired assets could be stashed in offshore jurisdictions. Measures taken through international cooperation to tackle leakage (b) would not only enable developing countries to retrieve stolen assets but could also serve as a deterrent against future looting.
- Leakage (c) is about revenues forgone or forsaken due to tax incentives & “race to the bottom” tax competition between African countries. Leakages (d) and (e) could be considered as “homework” for national stakeholders – governments, the private sector and civil society in developing countries.
- Leakage (d) has partly to do with patronage systems within the political structure and corruption within national revenue authorities. Plugging it is linked to the struggle for transparent and accountable governance. Enhancing the capacity of revenue authorities, both in terms of resources and expertise is of vital importance. It also has to do with doing away with misguided tax policies which set out exemptions as a means of attracting investment. Doing away or at least minimising exemptions will not only signify equal treatment of taxpayers, but also expedites tax compliance by simplifying obligations. Incidentally, beneficiaries of these exemptions include diplomatic representations, international organisations and aid agencies.
- Leakage (e) is more complex. Many African countries have a large small-scale agricultural sector which is outside the tax bracket. Shadow economy also characterises many urban centres. Illegal commerce is rampant. Some in the formal business sector partially take “refuge” in this sector because it is largely outside the tax net. However, in many cases this is where the excluded, not tax dodgers, undertake economic activities to ensure their survival.
- There is no readymade solution on how to bring the rural small holder and subsistence agriculture as well as the urban shadow economy into the tax bracket. However, attempts to bring these sectors into the tax net must go hand in hand with an inclusive development strategy. Coercive administrative measures far from integrating the shadow economy will expose the vulnerable in the sector to arbitrary and extortionist taxation.
- Research has shown that refusal to pay taxes is high when potential tax payers see little or no return in terms of public services and investments, and that readiness to pay tax increases with improved service delivery. The lesson from this is really simple: Taxation is taking and giving!
In conclusion, our struggle is to ensure that:
- There is a paradigm shift in development policy to “enhance linkages and plug leakages” in African economies;
- A progressive taxation regime is in place that curbs tax evasion and abusive tax avoidance and at the same time ensures horizontal and vertical equity
- An effective and efficient tax administration is in place which promotes non-coercive tax compliance so that transparent and accountable use of public revenue with a “virtuous circle” prevails: enhanced government responsiveness and tax payer compliance