26 July 2016
New ESID research asks how political institutions affect tax capacity in developing economies. In this complimentary World Bank Blog first published here, Jim Brumby highlights the view that successful tax reform in developing countries depends on taking into account the specific political environment:
This week, the World Bank, together with the International Monetary Fund, the Organisation for Co-Operation and Development, and the United Nations, submitted recommendations to the G20 on how we can best work to strengthen the capacity of our client countries to build fair, efficient tax systems. Responding to a request the G20 made in February, and working as the recently-formed Platform for Collaboration on Tax, we dug deep into our collective years of policy-setting, technical advice, and on-the-ground experience to arrive at guidance for providing assistance and suggestions for funding that work. In short, we looked at how best we could help.
The recommendations in our report, “Enhancing the Effectiveness of External Support in Building Tax Capacity in Developing Countries,” present an ambitious agenda for development partners to support developing nations to strengthen their tax systems and realize their development objectives, as well as strive for achievement of the Sustainable Development Goals.
Adequate tax capacity is vital to our client countries. Well-functioning tax systems allow countries to chart their own futures, pay for essential services such as education and healthcare, and build trust with their citizens. Indeed, tax capacity is a fundamental development issue. Countries with tax revenues below 15 percent of GDP have difficulty executing basic state functions. Sadly, more than one-third of the world’s poorest countries are below this threshold, as are 70 percent of countries afflicted by conflict and violence.
In our findings we emphasize that enthusiastic country commitment is vital to success in tax reforms. This cannot be created from the outside. Countries and their governments need to make their own decisions on strengthening their tax systems, reflecting their specific needs and circumstances.
We identify five factors that provide an environment receptive to tax reform and provide specific recommendations for the role of international organizations, donors and other providers of development support in these areas:
- Assisting countries to develop a coherent revenue strategy as part of a development financing plan;
- Coordinating effectively among providers of capacity development;
- Making accessible a strong knowledge and evidence base;
- Promoting regional cooperation and support; and
- Strengthening participation of developing countries in international rule-setting.
The report sets out concrete next steps for implementing the recommendations. These include putting in place three-to-five pilot programs that would help selected countries develop medium-term revenue strategies and provide support for them to participate effectively in international tax policy discussions and institutions. The platform’s partners will also continue to build on experiences gained through implementing the report’s recommendations. We will provide a follow-up report in three years.
Increasingly, tax capacity is an international issue that is gaining traction among donors and others in the international development arena, not least with the commitment of those who signed the Addis Tax Initiative to double funding to this area by 2020. There is wide recognition that countries need to improve revenue collection, and that they must have technical and financial support to do it.
Improvement of tax capacity is an issue that will require coordination across borders and across sectors. In writing this report, we collaborated across organizations and we also sought your input. We heard what you said: that successful tax reform requires a practical approach that takes into account the specific political environment; that you recognize the need for tax policy that promotes economic growth and legal, fair and transparent tax collection; that you are in favor of improving technical and managerial skills in tax administration, as well as analytics and strong regional cooperation; that you prefer support through technical cooperation rather than incentives; that you caution against duplication of data efforts; that as a member of the private sector, you would like better access to the legal framework underpinning countries’ tax policies and you would like to see countries have updated legislation; that tax assistance should include investment in infrastructure and not just technical advice and training; that you are concerned about a proliferation of diagnostics that may overburden our partner countries; that you think the legislature in developing countries should receive technical training on tax matters; that you think some of our recommendations could be bolder and more ambitious; that civil society organizations and citizens should be included in training on tax issues.
Let’s continue the conversation. For more detail on where we landed, please read our full recommendations to the G20. We believe that if we work together, we can help to make a difference. We can encourage safe political space for reform in governments that have the will; we can offer solid, well-placed technical advice; and we can pass on knowledge and experience that will build good tax institutions. This is unfinished business. Please join us.