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AFRICA: Widening Tax Bases “Key to Development and Democracy”

Julio Godoy

PARIS, Jul 12 2010 (IPS) - African countries should deepen their tax bases to collect more revenues to finance their development, build state institutions and to improve national dialogue and, more generally, their social contracts with citizens.

These are some of the conclusions in two new studies on the taxation systems in Africa.

The 2010 African Economic Outlook, by the Organisation for Economic Cooperation and Development (OECD), which represents rich countries, concludes that African countries’ deepening of their tax bases does not necessarily mean increasing tax rates.

Instead, taxes must be applied to different economic activities, from the extraction industries to personal income, while exemptions must be systematically eliminated.

In the long term, Jean-Philippe Stijns, main author of the OECD study, told IPS that, “African countries must create a highly qualified, well-paid, and honest tax administration elite to make sure that the state can collect the financial resources it needs to pay for development programmes”.

Stijns, an economist with the Africa and Middle East desk at the OECD Development Centre, named two examples of African countries that have succeeded in creating such elites.

“Uganda and Rwanda, two of the countries with the lowest income in the African continent and which suffered devastating civil wars in the recent past, have been able to put in place a qualified, efficient tax administration consisting of an elite of public servants isolated from political struggles,” Stijns said.

If low income countries have accomplished that, every other country in Africa can do it, Stijns pointed out.

But the tax administration reform “must also create a modern system based on voluntary compliance by taxpayers, backed by risk-based selective audits to enforce compliance,” he added.

Moreover, in low income states where technical capacities in both the public and private sectors are weak, tax systems must be relatively simple and transparent, easy for taxpayers to understand and payment procedures for taxpayers should be simplified.

Stijns said that eliminating the myriad of exceptions that make present systems so cumbersome is essential for efficiency. “A good example of the benefits and the feasibility of eliminating exceptions is Morocco,” he told IPS.

“Morocco carried out a tax expenditure survey to evaluate all tax exemptions in the country,” Stijns explained. “The survey showed that the exemptions were arbitrary and extremely costly in terms of revenues for the state. The study raised awareness among Moroccan legislators and gave them incentives to question and eliminate the exceptions.”

Such tax expenditure surveys should be carried out everywhere.

The 2010 African Economic Outlook, co-authored by experts from the African Development Bank and the United Nations Economic Commission for Africa, confirmed that African economies have been weakened by the recent global recession at a time when they are under pressure to make additional efforts to achieve the millennium development goals.

The world economic crisis brought a period of high growth in Africa to a sudden end. Average economic growth was slashed from about six percent in 2006-2008 to 2.5 percent in 2009.

The crisis further reduced already low tax revenues, especially in the poorest countries. Annual taxes per capita in 2008 ranged from between 20 to 40 dollars in Burundi, Guinea-Bissau, the Congo Democratic Republic, Sierra Leone and Ethiopia, to almost 5,000 dollars in Equatorial Guinea and almost 12,000 dollars in Libya.

In addition to increasing revenues for the state, tax systems hold multiple democratic and institutional benefits for developing countries, Stijns said.

“Beyond tax collection efficiency issues lurks the much bigger issue of the political credibility of the state and the extent to which potential taxpayers feel there exists a valuable ‘social contract’,” Stijns told IPS.

“Helping African states to broaden their tax base gives them incentives to engage more directly with their citizens and better consider their needs,” Stijns insisted. These incentives also encourage the building of legitimate state institutions and to enhance social dialogue.

These conclusions correspond with those of another report, titled “Africa Tax Spotlight”, by the London-based Tax Justice Network (TJN), that summarises recent studies carried out by African, European, and U.S. economists on the African tax systems.

Samuel Fakile, professor of economics and state finances at Covenant University, Ota, Nigeria, told IPS that, “tax revenues are relatively low in most countries in Africa. Raising additional tax revenue is further constrained by weak state legitimacy, as taxes have often not translated into improvements in public service delivery.”

Furthermore, Fakile said, “taxation is a core governance function. It has the potential to shape relationship between state and society in significant and distinctive ways. In Europe, tax not only helped create the state, it helped to shape the state.”

Fakile complained that international trade liberalisation has forced African countries to reduce tariffs and thus to collect less tax revenues. Further liberalisation will worsen this loss.

He also called for the abolition of free zones that offer tax holidays. “Free zones lead to a shrinking in the tax base and to further complication of the tax administration and are a major cause of revenue loss and leakage from the taxed economy,” Fakile said.

A key element for the future of tax justice in African countries, he pointed out, is the “education of the young, the next generation of taxpayers, on the significance and role of taxes.

“Outreach activities including TV and radio coverage, advertising and tax- themed programmes will help children and adults to understand the civic responsibilities of paying taxes.”