Taxes are not very popular when it comes to paying them, but they are essential to the well-being of any community organised at the local, regional, national or supranational levels, in our own region, in the South, and all over the world. Glo.be interviewed Romain Houssa, Professor of Economics at the University of Namur and academic coordinator of the BeFinD research group, to shed light on the issue of taxation as a motor for development.
An impassable road, defective hospital or located too far away to be reached in case of emergency, no access to drinking water, a village without electricity, a school without educational material, an ineffective police, a justice which is inaccessible to the average citizen. These are a few examples of basic public services or infrastructures that are often lacking in certain developing countries. The state or local authorities must provide these services to their citizens. Yet they need the financial means to do so.
A catalyst effect
According to researchers from the BeFinD group, domestic taxation must be an important instrument in financing development. Indeed, development aid is not sufficient to meet all development financing needs. Similarly, debt financing is limited by sustainability considerations. Thus, financing through taxes provides additional resources. Moreover, and fundamentally, the tax burden makes it possible to strengthen the relationship between policymakers and the population. Citizens who pay taxes to the government expect a return. It’s a make-it-or-break-it situation! Either there is a tangible return (schools, roads, hospitals, infrastructure and services, etc.) and the population is satisfied to see their well-being and quality of life increase. In its turn this creates a very positive catalyst effect for tax revenues and therefore for development financing. As a result, citizens are less reluctant to pay their taxes. They are even more disposed to contribute because they see a benefit for themselves and their families. Or else there is no return from the public authorities: the money is misdirected, corruption reigns, the budget is misused. Under these conditions, citizens will no longer agree to pay their taxes: taxes are bypassed, there is tax fraud, undeclared work is the rule.
BeFinD – Acropolis: an academic support to decision-making.
BeFinD is the Belgian policy research group on Financing for Development. BeFinD is part of the Acropolis platform which also focuses on climate research (Klimos research group) and on the effectiveness of development assistance in fragile states (DR Congo, Mali, Niger, Burundi, Rwanda). The research group supports the political decision-making process from conceptualisation to implementation. It brings together scientists from UNamur, KULeuven and UAntwerpen.
Romain Houssa is the academic coordinator of BeFinD.
Good governance and tax burden
Good governance and the overall institutional framework are key elements. The social contract between the government and the governed is based on a relationship of trust and must result in a win-win outcome. Institutions play a catalytic role in improving the tax burden in order to benefit from stable financial resources, unlike aid or other more volatile non-tax resources (loans, etc.). Taxes ensure predictability and hold leaders in charge of development policy accountable.
The graph below represents five levels of tax burden, indicating that low income countries (red curve) have a low tax burden. In high-income countries (blue curve), the tax burden is high. The amount of tax revenue depends on the income of the population. These parameters are interdependent. To meet development needs, it is necessary to exceed 15 % and approach 20 %. The graph is rather encouraging: it shows that even if low-income countries are still far from the target rate, the gap is narrowing (the curves converge). BeFinD researchers have shown that the improvement in the quality of governance as well as the introduction of value added tax (VAT) have significantly contributed to improving the tax burden in these countries.
The tax system must be improved, and founded in particular on the principles of equity and efficiency. Everyone contributes in proportion to his/her means.
The observation is clear: the tax system must be improved, and founded in particular on the principles of equity and efficiency. Everyone contributes in proportion to his/her means. Legislation must be clear and implemented, without too many exonerations and exemptions. The tax collection system must be digitised and auditors properly trained and paid to prevent them from falling into the trap of corruption. Sanctions in the event of fraud must be planned and effective, without “speech effect” (announcing a sanction without applying it). In Benin, for example, the government gives strong signals in the event of misappropriation. A unscrupulous director of a social security fund, close to the government, was put in prison.
Belgium has made commitments
In 2015, Belgium signed up to the Addis Tax Initiative (ATI), adopted at the Addis Ababa conference, the third international conference on financing for development. It clearly identifies the mobilisation of domestic resources as the main source of development financing, particularly because of its stability and sustainability. Capacity building of tax administrations, the fight against tax fraud and evasion and against illicit financial flows are well defined as key factors for increased mobilisation of domestic resources.
The ITA commits its member countries to:
- strengthen technical assistance in the mobilisation of national/tax resources (objective: collectively double it by 2020);
- increase the mobilisation of national resources to stimulate development and achieve the Sustainable Development Goals (SDGs) and inclusive development;
- ensure policy coherence.