taxation, resource mobilisation and governance in sub-saharan africa jonathan di john

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Taxation, resource mobilisation and governance in Sub-Saharan Africa Jonathan Di John Slide 2 Taxation and tax reform is central to state-building governments must be able to ensure sustainable funding for social programs, and for public investments to promote economic growth and development. taxation is the main nexus that binds state officials with interest groups and citizens. taxation, particularly in the form of land and property taxes, customs and border collection can help increase the territorial reach of the state and help secure property rights. fiscal capacities are needed to build a legitimate state. Democratic elections do not themselves ensure state legitimacy Slide 3 The Political Economy of Taxation and Tax Reform Introduction: The Problem of State Capacity and Taxation in Less Developed Countries Taxation is not considered one of the five fundamentals of good governance (as spelled out in the World Bank Development Report, 1997). Yet, as Schumpeter notes: the fiscal history of a people is above all an essential part of its general history Slide 4 Challenges Facing Sub-Saharan Africa In sub-Saharan Africa, improving taxation to meet developmental needs is one of the main challenges facing the region (Gupta and Tareq, 2008). The average tax-to-GDP ratio in sub-Saharan Africa has increased from less than 15 percent of GDP in 1980 to more than 18 percent in 2005. But virtually the entire increase in tax revenue in the region came from natural resource taxes, such as income from production sharing, royalties, and corporate in-come tax on oil and mining companies. Non-resource-related revenue increased by less than 1 percent of GDP over 25 years (Keen and Mansour, 2008). Slide 5 Structural Factors Limiting the tax take: 1)a large share of (subsistence) agriculture in total output and employment, 2)large informal sector and occupations; 3)many small establishments, 4) small share of wages in total national income, 5) small share of total consumer spending made in large, modern establishments Slide 6 Challenges Facing Low-Income Counties high revenues from trade taxes high levels of non-tax revenue (especially from mineral rents) narrow base of tax payers (hence the importance of large taxpayers office (LTOs) Dominance of capital/main city in generating tax revenues higher rates of tax evasion Non-state rivals to tax collection in some contexts One of the greatest challenge facing low income African economies is how to replace declining trade taxes in the face of economic liberalization. Trade taxes represent over one-third of all tax revenues in Sub-Saharan African (SSA) economies. Slide 7 Political Economy Factors Elite Bargains, Limited Access Orders (North et al. 2009) and the limits on tax collection Neo-patrimonial systems of government can generate corruption and weak tax collection incentives Mineral Rents and Aid: Reduced Incentives for Domestic Tax Effort? Donor Conditionality and coercive methods of tax collection Slide 8 Differences in Capital Flight across regions Slide 9 Variation in Revenue Performance Despite these challenges, there is a wide variation in tax performance across countries and within countries over time. IMF (2005) study suggests that in tax revenue growth in low- income countries has coincided with a strengthening of income tax revenues, suggesting that the burden of adjustment has not been borne solely by shifting to taxes on consumption. This result is important since it contradicts the conventional wisdom that consumption taxes are the main source offsetting trade tax revenue. Diversification of tax revenues central to recovering losses from trade taxes Slide 10 Taxation and commodity booms Missed opportunities? Example: Copper Mining Royalties in Zambia policy implications urgent need for mineral abundant states to enter into a renegotiation of mining contracts when they are unfavourable. need for governments to develop productive strategies that exchange mineral rights for local content conditions, whereby foreign investors are obligated to use domestic suppliers on an increasingly greater scale. Local content management has been one of the main ways in which FDI can be utilised for the benefit of national productive capacity. capacity-building in the geological survey capacity in sub-Saharan Africa needs to be developed in order to improve the bargaining power of states vis- -vis multinationals. This is an area where the international financial institutions can play a leading role. Slide 11 1. Taxation as Indicator of State Performance Main Advantage---Objective Indicator Components of the indicator: Monopoly over Tax Collection Territorial Reach of Tax Collection Direct Income Tax Collection Tax Effort Compliance and coercion in tax collection Slide 12 Level and Structure of Taxation in selected African Countries (annual average 1984-2004) Slide 13 Table 2: Share of Direct Taxes as a Percentage of Total Taxes, 2007 Slide 14 Tax Effort in African Case Studies, 2007 Slide 15 2. Taxation and the Elite Bargain The creation and deployment of economic rents and privileges to relevant elites is the essence of elite bargains. In turn, exploring tax patterns can illuminate important insights into the shape and character of the elite bargain, which has been argued to be important in generating state resilience in general. At the same time, the nature of elite bargains provides a window into the political limits of expanding tax capacity. Slide 16 Taxation and the Elite Bargain high levels of tax evasion are tolerated the negligible collection of urban and rural property taxes relatively low rates of taxation on agriculture which (while part of investment incentives) be seen to benefit elite landowners and particularly large farmers and agro-processors. a significant decline in the corporate tax burden on big business which has benefitted both foreign firms (particularly in mining) and political and economic elites. Slide 17 Taxation and Production Strategies a pro-revenue approach often takes precedence over a pro-growth approach in tax policy. Examples of developmental taxation: Mauritian export tax on sugar (19 th and 20 th centuries) Colombian Coffee Federation Slide 18 Taxation, state territorial reach and production strategies History provides several examples of the importance of land and property taxes in enhancing the territorial, social and economic reach of the state (Japan, South Korea, Taiwan, US in 19 th century) important feature of the land tax was that it was introduced as part of a production strategy to help improve agricultural production. The link between tax collection strategies and production strategies is often lost in contemporary discussion of tax collection. the role of agricultural marketing boards have played in some countries an important role in expanding the territorial reach of the state and in linking rural interest groups to the state Slide 19 Taxation, state territorial reach and production strategies In the case of Mauritius, export taxes on sugar, the main export commodity in the 19th and most of the 20th century had several positive effects on state-society relations and in increasing the productive capacity of the sugar sector (Brutigam, 2008). First, the tax was an effective substitute for income taxes, and was generally progressive as it shifted the burden of taxation and redistributive spending on the wealthy and middle classes. Second, the tax was used by the state to finance research and development, infrastructure, and marketing which enhanced production and productivity growth in the sugar sector. Slide 20 Export taxes in Mauritius (cont.) Third, the export tax helped the private sector organize, and it built their capacity to interact with the government over time. As well, it helped both the state and society to solve collective action problems they faced in building skills and in supporting research on sugar. Finally, the export tax helped develop the territorial reach of the state since the tax affected the main employer in the countryside and promoted mutually beneficial rights and obligations between the state and farmers, both large and small. Slide 21 Taxation, state territorial reach and production strategies The Colombian experience with its national coffee federation also provides evidence that the state can use taxation of agriculture to solve collective action problems in production (such as the provision of funds for storage, distribution, and marketing for thousands of dispersed smallholder producers) and help forge strong state-society negotiations and mutual obligations (Thorp, 2000). Slide 22 Marketing Boards The role of agricultural marketing boards have played in some countries an important role in expanding the territorial reach of the state and in linking rural interest groups to the state. Marketing boards were also an important source of state resource mobilisation through the mechanism of monopolising the purchase of cash crops at below world market prices and selling such crops abroad at world market prices. The surplus generated was often of similar magnitudes to formal total tax collection levels, particularly in Sub- Saharan African economies in the 1960s and 1970s. Marketing boards were effective in some countries such as in Taiwan, South Korea, Indonesia, and India because the state gave something in return to producer groups such as services, infrastructure, research, and price stability. Slide 23 Marketing Boards--Kenya-Tanzania Comparison Bates (1995) argues that the Kenyan coffee board was, in the 1970s and 1980s more effective than the Tanzanian coffee board because the nature of the political coalition in power differed in the two countries. In Kenya, large and medium-sized coffee farmers were a powerful interest group; whereas in Tanzania, coffee farmers were not a powerful group in the national governments support base. As a result, pol

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