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Tax To Finance The SDGs, But Not To Undermine Them

This blog post was jointly authored by Nora Lustig, Brahima Coulibaly, Ian Gary, Sanjeev Gupta, Warren Krafchik & Wilson Prichard

This week over 170 policymakers, government officials, and members of academia, civil society and international organizations will gather in Berlin to discuss the future of the Addis Tax Initiative (ATI). The overarching goal of the ATI is to improve domestic revenue mobilization (DRM) in order to finance the Sustainable Development Goals (SDGs). More than 55 countries, regional and international organisations have joined the ATI, which commits donors to collectively double their assistance to DRM, developing countries to step up their tax collection efforts, and all members to ensure “policy coherence for development.” However, noticeably absent from the ATI’s progress monitoring is the issue of equity. Indeed, analysis by Oxfam finds that only 7% of DRM support reported by ATI donors in 2017 contained clear goals related to equity or fairness in revenue systems.

The importance of equity
If the primary goal of DRM projects and reforms is simply to collect more revenue, this can have negative consequences for development efforts. For example, revenue targets (like collecting 15% of GDP in tax) can create perverse incentives to collect wherever it is most feasible- which can harm those without political power such as the poor or women the most. Tax and transfer systems in low and middle-income countries are, in general, far less effective than those in OECD countries at reducing poverty and inequality. In fact, research by the CEQ Institute shows that in 16 out of the 29 countries analyzed, taxes and direct transfers to the poor actually increased income poverty. Of course, part of that pattern reflects the inadequacy of social spending, but it equally reflects the need for a greater focus on the equity implications of tax reforms.

Priority areas for increasing equity in DRM
Given that in low and middle-income countries, taxes on consumption currently make up over 60% of revenues, there is a great deal of room for making tax systems more equitable at the national level. We suggest four priority areas for reform:

1. Strengthening taxation of income and wealth: OECD countries collect about 10% of GDP in personal income taxes, while non-OECD countries collect only slightly more than 2% of GDP on average. There is much developing countries can do to better tax professional incomes, increase the progressivity of income tax schedules, and tax inheritance and capital gains. When it comes to wealth, it remains largely undertaxed, despite a surge in ultra-high net worth individuals (especially in developing countries). An increasing amount of that wealth is being concentrated in real estate, yet property tax collection is similarly low. Non-OECD countries on average collect merely 0.5% of GDP from property taxes (compared to 2-3% in OECD countries). If low and middle-income countries as a group could reach 1.5%, this would be equivalent to an additional $28.9 billion in government coffers annually: more than total combined aid disbursed by Canada, France, Netherlands, Norway and Sweden in 2017.

2. Rationalizing the use of tax incentives: Tax incentives to attract investment can play a legitimate role in economic policy. Unfortunately, studies suggest that tax incentives in developing countries frequently continue to be characterized by excessive discretion, poor monitoring and little transparency. The result is reduced revenue and little new investment – in effect, a handout to corporations and wealthy interests. More transparent and accountable governance of tax incentives is needed.

3. Reducing the burden of consumption taxes and informal and nuisance taxes on the poor: While many assume that the poor do not pay much tax in low-income countries, they actually bear a heavy fiscal burden due to a wide array of consumption and informal taxes, small subnational taxes and levies, and formal and informal user fees to access essential services. In low and middle-income countries, consumption taxes make a significant proportion of the poor poorer than they were before taxes and transfers. Unless the poor can be sufficiently compensated with transfers, exemptions for basic foodstuffs and other essential goods may thus be necessary. Studies from Sierra Leone and the DRC suggest that total formal and informal burdens of direct taxes, levies and user fees make up as much as 10-20% of the incomes of poor households. Limiting these burdens should be given significantly greater priority.

4. Enhancing the participation of accountability stakeholders: Civil society organizations, academic institutions, women’s rights groups, and journalists have a critical role to play in monitoring and pressing for increased fairness in tax systems, voicing the concerns of the vulnerable, and advocating for the translation of tax revenues into public benefits. Nevertheless, in 2017, only 7% of DRM aid (reported to ATI) supported these actors.

Parallel action is also needed at the global level to make the ATI’s third commitment to “policy coherence” a reality:

1. Reforming the international tax system: While the BEPS Action Plan was a useful first step in trying to combat aggressive tax avoidance, it is not enough. Low-income countries continue to be disadvantaged by restrictive tax treaties and often still have little voice in global decisions that impact their taxing rights. All countries should be given the opportunity to raise their voice in the BEPS 2.0 negotiations, even if they are not members of the OECD Inclusive Framework – a situation that pertains to half of ATI partner countries. Meanwhile, existing international rules continue to be difficult to implement in lower-income countries, which are substantially more dependent on corporate tax revenues than OECD countries. A continued push for developing country taxing rights and priorities, including simplified approaches to enforcement, is needed.

2. Increasing cooperation on tackling offshore tax avoidance and evasion by wealthy individuals: It is estimated that Africans hold $500 billion in financial wealth alone offshore, which results in governments losing around $15 billion per year in unpaid taxes. Progress must be made to include developing countries effectively in automatic exchange of information processes and ensure effective collaboration in cases of tax evasion, while strengthening rules on beneficial ownership.

3. Continuing external support: In low-income countries, even the most substantial improvements in DRM will not generate enough revenue to finance adequate social protection and human development floors. External support such as aid will therefore remain critically important in pursuing equity at the global level.

Prioritizing equity in the ATI agenda
The theme of this week’s conference is “Towards a Roadmap for the ATI post-2020.” In drawing that roadmap, we are calling on ATI members to focus more explicitly on equity and inclusion. Along with the priorities outlined above, we propose that members of the ATI:

1. Adopt specific indicators on revenue composition in monitoring progress on Commitment 2, in order to prioritize not only collecting more revenue, but from more progressive sources, like direct taxes on income and property, rather than indirect taxes on consumption.

2. Regularly assess, under Commitment 3, tax spillovers and the distributional impact of tax policy reforms. ATI donor countries should conduct tax spillover analyses to ensure that their own corporate tax rules and practices, and tax treaties, are not undermining their DRM support. ATI partner countries should conduct distributional impact assessments in order to ensure the drive for more revenue does not come at the expense of achieving the SDGs, particularly on inequality and poverty.

3. Make a collective commitment to increase tax transparency. All government ATI members should commit to transparency on data about tax collection, tax policy decisions, administrative practices, and the amount of revenue raised from each type of source. In addition, all ATI members should commit to encouraging and facilitating the engagement of accountability stakeholders, and to support the effective representation of developing countries in international policy-making forums.

Rhiannon McCluskey (ICTD), Paolo de Renzio (IBP), Nathan Coplin (Oxfam) and Ludovico Feoli (CEQ) also contributed to this piece.

For more on this topic, read our brief: What Might an Agenda for Equitable Taxation Look Like?

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Please join us Mondays at noon for our Fall speaker Series
Markets, the State, and Democracy in Latin America
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In the 2019 fall series, Markets, the State, and Democracy in Latin America, speakers will discuss emerging issues that have surfaced as the result of the opportunities and challenges to democratic governance that markets have brought to the region. Latin America experienced a major influx of investment, particularly in the resource sector, over the past several decades. While this foreign investment helped hasten economic development, it also brought a backlash of resource nationalism and increased calls for redistribution. Moreover, Latin America is now a model in its own right, with other countries in the Global South adopting its state-sponsored development strategies in the resource sector. These presentations will also explore how Latin America is navigating a sea change in geopolitics, with China emerging as a challenger to the United States as the region’s main trade partner and ally.

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Latin American Writers Series: Alberto Barrera Tyszka

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Ecuadorian writer and Tulane Visiting Scholar Gabriela Alemán interviews Venezuelan writer Alberto Barrera Tyszka about his life, interests, and influences. Their discussion will be followed by an open Q&A and an informal reception. This event will be held in Spanish.

About the Latin American Writers Series

This series brings together Latin America’s most representative creative voices and the editorial entrepreneurs that publish them. By way of interviews conducted by renowned Ecuadorian writer Gabriela Alemán and presentations of various editorial missions, the guests will shed light on a literary world shaped by the contemporary issues of the continent. Moving forward, their conversations will comprise the centerpiece of a digital archive that introduces their ideas to a global audience.

Este serie reúne a los autores más representativos de la escritura continental y los editores que los publican. A través de entrevistas con la reconocida escritora ecuatoriana Gabriela Alemán y presentaciones de proyectos editoriales, los invitados explorarán los vínculos entre el mundo literario y la realidad continental. Sus conversaciones se convertirán después en el eje de un archivo digital que busca llevar estas ideas a un público global.

About the Author

Born in Caracas, Alberto Barrera Tyszka has published over a dozen works of poetry, short story, chronicle, novel, and biography. His most recent publications include the novels Patria o Muerte (2015) and Rating (2011), the poetic anthology La inquietud (2013), the collection of chronicles Un país a la semana (2013), and the short story collection Crímenes (2009). In 2005, he collaborated with Cristina Marcano to write the definitive biography of Hugo Chávez, Hugo Chávez sin uniforme: una historia personal (2005). Patria o muerte won the 2015 Premio Tusquets de Novela, and his novel La enfermedad, translated into English as The Sickness (2010), received the 2006 Herralde Award. Barrera also writes for television and has scripted soap operas for Venezuelan, Mexican, Colombian, and Argentinian networks.