REVENUE MOBILIZATION IN SUB-SAHARAN AFRICA

Victoria PerryVictoria PerryNairobi, Kenya

March 21 22 2011March 21-22, 2011

Overview

• Context

• Objectives, trends and strategies

• Issues and lessons

• Institutions and transparency

• Conclusions• Conclusions

ContextContext

• The fiscal situations of most developing countries were left l ti l th d b th t fi i l/ i i irelatively unscathed by the recent financial/economic crisis …

• …but there nonetheless remains urgent need for more revenuef l f—for low income countries, 4 points of GDP to meet MDGs

• The IMF has long been a lead provider of technical assistance with t t thi irespect to this issue

—stock-taking Board Paper in February 2011 (on the web)

A d h i i f d• And there is now even stronger interest from donors—G20 request to international organizations; TA Trust Funds established at IMF

OBJECTIVES, STRATEGIES, TRENDS

ObjectivesObjectives

Revenue not the only concern—quality mattersRevenue not the only concern quality matters

Effi i d thEfficiency and growth

Evidence limited for lower income countries

—For advanced economies, hierarchy:

Real estate (best) – VAT/excises – CIT (worst)

—Some signs efficiency gains from VAT

—And that trade liberalization fosters growth

Distributional effectsDistributional effects—Need to consider impact of all taxes (and spending)—Who really bears tax burden not always as it seems—Who really bears tax burden not always as it seemsE.g. capital income taxes may fall not on (mobile) capital but on (immobile) labor

--A critical issue

State buildingTaxation is a central element of government power and sovereignty--bargaining between state and citizens, a crucial part of wider state building

h i d i t li d t—emphasized in recent policy documents

StrategiesStrategies

There are many common challenges in taxationThere are many common challenges in taxation in developing countries (issues are also found in advanced economies—but loom larger here):advanced economies but loom larger here):—Large hard-to-tax sectors

—Weak administrations low taxpayer morale governanceWeak administrations, low taxpayer morale, governance problems

—Heavy reliance on sophisticated MNEsy p

—Shallow use of financial institutions

—Challenges from trade reform (much now unstoppable), including regional integration, and tax competition

B t l i t i l diff tl iBut lower income countries also differ greatly, in—Natural resource wealth

—Geography: e.g. small islands vs. large landlocked

—History: not just post-conflict, but legal tradition

—Constitutions: constraint from allocation of powers

Strategies of reform must reflect both—Some aspects of good practice are very general

E.g. managing largest taxpayers

—But differing capacities and priorities call for different emphasis and sequencing

TrendsTrendsWorldwide trends in tax revenue—LICs less affected by crisis

35.0

40.0

Tax Revenue(Group median. Dynamic income groups.)

25.0

30.0

10.0

15.0

20.0

0.0

5.0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

High income Low income Lower middle income Upper middle incomeg pp

Resource wealthResource wealth

• Clearly affects total revenue for low andClearly affects total revenue for low and lower-middle income countries…

• …as well as (in reverse) tax revenues

Tax Revenue Trends in SSA by Income Level, 1980–2005(Simple averages)

Total tax revenue / GDP (%)32

Non-resource tax revenue / GDP (%)32

20

24

28

20

24

28

8

12

16

80 82 84 86 88 90 92 94 96 98 00 02 04

8

12

16

80 82 84 86 88 90 92 94 96 98 00 02 04

198

198

198

198

198

199

199

199

199

199

200

200

200

LICs LMICs UMICs

198

198

198

198

198

199

199

199

199

199

200

200

200

LICs LMICs UMICs

Assessing the scope to raise moreAssessing the scope to raise more

• Many factors affect revenue mobilizationMany factors affect revenue mobilization—in addition to resource wealth, foreign grants seem to discourage

• Econometrics can only be suggestive—but it suggests:gg

—’Effort’ (= ratio of actual to potential revenue) not especially low in lower income countries

—But LICs with the lowest effort could plausibly raise 3-4% GDP more

l l i t i h...as several lower income countries have

ISSUES AND LESSONS

Administrative reformAdministrative reform

• Progress essential for improved revenue mobilizationProgress essential for improved revenue mobilization(“Tax administration is tax policy”—yes (and vice versa))

—aimed at effective self-assessment essential notaimed at effective self-assessment, essential not least for PIT and to improve governance

• Organizational changes have been constructiveI t t d f ti b d t t—Integrated, function-based structures

—Taxpayer segmentation, starting with large taxpayers

Revenue authorities: have not lived up to (overly high)—Revenue authorities: have not lived up to (overly-high) expectations, but signs of progress

• Much to do:—Compliance costs high—Revenue administrations hampered by under-resourcing misallocationresourcing, misallocation—Tax-customs coordination poor—Compliance strategies (audit dealing with hard-to-—Compliance strategies (audit, dealing with hard-to-tax,…) under-developed—Corruption: progress can be madep p g

• For all this to succeed strong politicalFor all this to succeed, strong political commitment needed—and reforms need entrenching to avoid reversaland reforms need entrenching to avoid reversal

Value Added Tax160

N th120

140• Now the norm

80

100

• Often 25% all revenue

40

60

• Evidence that relatively

ffi i t0

20efficient

High Income Other Countries

Spread of the VAT in SSA, 1980 20091980-2009

25

30

35

10

15

20

0

5

1980 1985 1990 1995 2000 2005 2009

Hi h I Oth C t iHigh Income Other Countries

To capitalize on potential strengths of VAT p p g(substantial revenue, reasonably fair and easy to comply with and administer) standard advice is for:

• Single rate

• Broad base—with only some exemptions (for hard to tax sectors, e.g., most financial services universally exempt; and consumption of a few basic commodities by the poorest generally recommended in LICs)by the poorest, generally recommended in LICs)

• Reasonably high threshold• Reasonably high threshold

What about equity?

• Most studies find VAT no less progressive than taxes it replaces—and may underestimate fairness (purchases from small retailers and by non-compliant firms)from small retailers, and by non-compliant firms)

• Preferences benefit most the better-off —the poor may spend relatively more on (e.g.)food but rich spend

20

25

food, but rich spend absolutely more (Mexico)

5

10

15

• Even limited ability to target spending may be enough

0I II III IV V VI VII VIII IX X

Percent of total subsidy Percent of income

y g p g y gfor poor to benefit from uniform rates: e.g. Ethiopia

VAT challenges:

• Understanding and managing non-complianceUnderstanding and managing non compliance

• Improving refund procedures and audit• Improving refund procedures and audit

• Now limited room to raise rates in many lower income countries…but expanding the base can help greatly…

—perhaps 2% of GDP in some low-income countriesp p

Trade taxesTrade taxes• Rates, revenue in decline

E ll b b d14

Low Income

• Easy to collect, but bad for growthCh ll

10

12

• Challenges– Recovering lost revenue

has been problematic in6

8

Tax Revenue

Trade Revenue

has been problematic in some LICs

– Administrative challenges2

4

Administrative challenges from formation of customs unions (how i l t th VAT ith t i t l f ti ?)

0

implement the VAT without internal frontiers?)

21

T R d T d R SSA 1980 2009

18

Tax Revenue and Trade Revenue SSA 1980 -2009(Low and Lower Middle Income)

10

12

14

16

2

4

6

8

01980-1984 1985-1989 1990-1994 1994-1999 2000-2004 2005-2009

Tax Revenue (% GDP) Trade Revenue (% GDP)

Personal income tax• Revenue stagnant in LICs

– Almost all is wage withholding by large firms and governmentg g y g g

• ‘Global’ PIT (tax on sum of income from all sources) h f il dhas failed—move to explicit schedular systems with more coherent taxation of capital income? p

• More action on high-income individuals needed for f ifairness– Limit exemptions they can exploit– Establish specialist unitsp– Strengthen international cooperation

23

16

18

Tax Revenue and PIT Revenue SSA 1980 -2009(Low and Lower Middle Income)

10

12

14

16

2

4

6

8

01980-1984 1985-1989 1990-1994 1994-1999 2000-2004 2005-2009

Tax Revenue (% GDP) PIT Revenue (% GDP)

Corporate Income TaxCorporate Income Tax

• Statuory rates have fallen worldwide sinceStatuory rates have fallen worldwide since 1980--SSA included—though revenues have largely held up on average worldwidelargely held up on average worldwide– But the CIT raises a much larger proportion of tax

revenue in LICs than in industrial countries, so thisrevenue in LICs than in industrial countries, so this trend is a greater cause for concern

– Revenue from CIT more volatile in SSA, on e e ue o o e o a e SS , oaverage, than in higher income regions…

Developments in Corporate Tax Rates and Revenues

603.0

p pSSA 1980 -2009

(Low and Lower Middle Income)

30

40

50

1.5

2.0

2.5

nt P

oint

s

10

20

0.5

1.0Perc

en

00.0

Corporate Tax Revenue (% GDP) Corporate Tax Rate (right axis)

• but again much of this is due to resource….but again, much of this is due to resource wealth

• When resource rich countries are removed• When resource rich countries are removed, there is little positive impact from expanding tax bases on CIT revenues in SSAtax bases on CIT revenues in SSA…

CIT Rates and Non-Resource CIT Revenues in SSA, 1980–2005(Simple averages)

8

9

10

40

45

50

4

5

6

7

20

25

30

35

1

2

3

4

5

10

15

20

0

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

0

CIT R / GDP (%) CIT B (% f GDP) St t t CIT t ( i ht i ) (%)CIT Revenue / GDP (%) CIT Base (% of GDP) Statutory CIT rate (right axis) (%)

Challenges:

• Incentives

—Threaten revenue, including from profit-shiftingg p g

—Have become more pervasive in SSA: in 1980, 40 percent of countries had tax holidays, now 80 percent; none had free trade zones, now 50 percent

• International considerations growing strongerg g g—Loss of tax bases through source taxation, treaties

---Transfer pricing issuesp g

• Case for regional/wider cooperation, including on policy becoming stronger?on policy, becoming stronger?

29

ExcisesAttractive for revenue and addressing externalities

Challenges:

• Significant potential in cigarettes, fuel

b t i di ti t dd b d…but is more coordination to address cross-border issues needed to realize it?

• Mobile phones—role for excises if licences not auctioned

Small businesses

• Limited revenue potential…—and remember may already in effect pay VAT on inputs

…but importance of taxing them (effectively!) goes beyond that—competitive distortions, tax morale, state building

• Simplified regime, aligned to VAT threshold– For micro, patente; for intermediate: cash-flow/turnover

• Administrative focus on their special characteristics31

Property taxesProperty taxes

Revenue potential modest in absolute terms but:Revenue potential modest in absolute terms, but:—Could be transformative for local governments

A l ti l f i it ?—A relatively easy source of some progressivity?

Challenges

—Mainly administrative: developing cadasters y p gand valuation methods

32

INSTITUTIONS AND TRANSPARENCY

The informed discussion needed for sustained progress calls for:

• Simple, transparent, easily accessible tax rules

• Tax expenditure analysis—Costing preferences helps to decide if offsetting benefits

—Much good practice in Latin America, now starting in Af iAfrica

C bl t li it• Capable tax policy units

CONCLUSIONS

• Countries are different—and progress can be hard

• But we know a lot, thanks to successful reformers, about what works (and what doesn’t)

• One lesson is that the issue is not just capacity—political will is criticalpolitical will is critical