Taxation, Resource Mobilisation, and Economic Development Notes

Importance of Taxation

• Governments use tax revenue to fund social programs and public investments.
• Taxation builds state capacity and demarcates the state's territorial reach, securing property rights.
• State legitimacy relies on fiscal capacity, not just representative democracy.

Legitimating Tax Collection

• "No service, no pay" concept is important for legitimizing tax collection.
• Afrobarometer data shows varying changes in support for government's right to collect taxes across African countries between 2011-2021.

Lecture Themes

• Mainstream Approaches to Taxation: neoclassical, administrative.
• Thinking differently about tax strategies: a late developmental approach.
• Tax, Elite Bargains, and Alternatives.
• Additional Notes:
  • Urban property taxes.
  • Illicit flows and offshore/tax havens.
  • Mining revenue and mining tax regimes.

Neoclassical Approaches to 'Optimal' Taxation

• Traditional tax analysis focuses on designing tax systems for efficient and equitable financing of public spending.
• Key Questions:
  • What is the 'necessary' level of taxation?
  • Who should be taxed?
  • How should they be taxed?
• Traditional tax analysis examines:
  • The consequences of income or wealth taxation for incentives and risk-taking.
  • The effects of corporate taxes on investment and distribution of profits.
  • How different households or groups are affected or burdened by tax changes (tax incidence).

Taxes and Growth

• Two opposing neoclassical views on the relationship between taxes and growth:
  • Hard Line: Taxes, especially income taxes, disincentivize growth (North, 1990; Olson, 1993). Dominant post-1990.
  • Moderate Line: Taxes are necessary to finance public goods (education, health, infrastructure) for physical and human capital accumulation (Lucas, 1988).

Types of Taxes and Tax Incidence

• Direct:
  • Personal Income Tax.
  • Corporate Income Tax.
  • Property/Land taxes.
  • Tend to be progressive.
• Indirect:
  • Consumption Taxes (sales tax, VAT).
  • Trade Taxes (import and export taxes).
  • Tend to be regressive (sometimes neutral if basic goods zero-rated, and luxury goods have higher tax rates).
• Excise (e.g., sin taxes—tobacco, alcohol).
  • Progressive for luxury goods, regressive for tobacco.
  • Public health goals to change behavior.

Tax Levels and Composition

• Tax composition differs between richer and poorer countries.
• Richer countries emphasize broad-based consumption and excise taxes.

Global Corporate Tax Rates

• Referenced Cobham, Alex and Janský, Petr (2018) research on global distribution of revenue loss from corporate tax avoidance.

Neoliberal Approach to Taxation in LDCs

• Keep taxes as low as possible to avoid distorting resource allocation.
• Promote FDI with 'investor-friendly' tax regimes.
• Privatize SOEs.
• Liberalize financial markets and the capital account.
• Shift from income and corporate tax towards consumption taxes.
• Liberalize trade (lower import tariffs, eliminate export taxes).
• Supply-side economics: small state is the best pro-growth policy.
• Difficulty for low-income economies to replace declining trade taxes due to economic liberalization.
• Trade taxes can represent more than one-third of all tax revenues in Sub-Saharan Africa (SSA).

Tax and Growth: Empirical Evidence

• Weak statistical relationship between growth rates and taxation levels or rates (Easterly and Rebelo, 1993).
• Difficult to isolate the tax regime from other macroeconomic and microeconomic interventions.

Evidence Against Supply-Side View?

• Comparison of government revenues, expenditures, and productivity growth across countries.
• Table shows government revenues, government expenditure, and real GDP/hour worked for various countries in 1973 and 1996.

No Evidence for the Supply-Side View

• Table shows tax levels and economic growth with regional comparisons.
• OECD has higher average tax revenues and GDP/capita growth compared to Sub-Saharan Africa, South Asia, East Asia & Pacific, and Latin America & Caribbean.

Financing Development

• Low tax revenue results in low levels of social spending.
• Raising revenue could help countries move to a higher growth path.

Tax Capacity

• Revenue mobilization remains limited in low-income countries.
• Data from IMF Fiscal Monitor April 2017.

Trends in Tax Collection in SSA

• Total taxes, non-resource taxes, and resource taxes in billions of USD and as a percentage of GDP, along with per capita figures.
• Data from 1980 to 2010.
• SSA is doing less well than you are often told (even with increases in VAT, income taxes are very low).
• Political economy factors:
  • Unwillingness to alienate elites by taxing them.
  • Tolerance for tax evasion (due to elite bargains and tax exemptions).
  • Massive illicit flows out of Africa.
  • Unwillingness to tax certain professionals.

Tax Collection Perspective in SSA

• Advanced industrial countries collect significantly more per capita than SSA.
• Implications for governance and production are often ignored.

Structural Problem

• Mainstream argument: developing countries have:
  • Large share of agriculture.
  • Large informal sector.
  • Many small establishments.
  • Small share of wages in national income.
  • Small share of consumer spending in modern establishments.

Structural Factors Limiting Tax Take

• Presumption that weak 'tax handles' make it inevitably hard to collect taxes.
• Mainstream view misses the wide variation in taxes collected at similar development stages.

Difficulties Facing Low-Income Countries

• Narrow base of tax payers (importance of large taxpayers office).
• Dominance of capital city in generating tax revenues.
• Higher rates of tax evasion.
• High levels of non-tax revenue (especially from mineral rents).
• Non-state rivals to tax collection in some contexts.
• High revenues from trade taxes.
• Difficulty in replacing declining trade taxes.
• Trade taxes represent a significant portion of tax revenues in SSA.

Tax Revenue as a Percentage of GDP by GDP/Capita Category

• Data comparing low, middle, and high-income countries, plus overall average (Bird and Zolt, 2005 data cited).

Administrative Constraints

• Weak administrative capacity:
  • Insufficient skilled staff.
  • Low public sector wages.
  • Lack of up-to-date equipment and facilities.
  • Ill-defined and complex tax laws.
  • Poor enforcement and corruption.
  • Poor information collection and identification of tax payers.

Policy Solutions (I)

• Simplify tax rates and laws.
• Make revenue authorities autonomous from political pressure.
• Base tax policy on implementation capacity of tax administration.
• Prefer VAT/indirect taxes due to ease of collection.

Policy Solutions (II)

• Autonomous revenue collection authorities.
• Promotion of semi-autonomous revenue agencies (SARAs).
• Shift tax collection responsibilities from Ministries of Finance to (semi-) autonomous bodies.
• Fitted the 'new public management' movement pushed by UK donors and consultants in the 1990s.

Administrative Approach – Institutional Reforms

• Replacement of hierarchical public sector organizations with disaggregated systems.
• Delivery units had more operational autonomy and contractual relationships.
• SARAs were adopted as signaling, confidence-building devices to aid donors and international organizations.

Critiques of SARAs

• SARA officials don't always consider tax collection and policy as part of an overall production strategy.
• Senior tax professionals are increasingly well-connected transnationally and able to migrate between public and private sector roles.
• Reforms have made it possible to raise revenue from the organized private sector, but also increased the possibility that taxation systems will be shaped by private sector interests.

Thinking Differently About Tax Strategies

• Alternative mechanisms and policies.

Late Development Perspective on Taxation

• Tax policy prioritizes growth rather than short- to medium-term redistribution.
• Resource mobilization depends on taxation and other mechanisms (SOE profits, forced savings).
• Success understood in a political economy framework, analyzing country histories.

Alternative Tax and Resource Mobilization Policies

• Tariffs can provide alternative incentives for infant industries.
• State-owned enterprises profits.
• More progressive mining taxation.
• Assess national benefits analysis of EPZs.
• Urban and land property taxes.
• Promotion of national savings (forced savings schemes).
• Export taxes (Mauritius).
• Marketing Boards (Kenya, Colombia, Brazil).

Taxation and Production Strategies

• Examples of developmental taxation:
  • Mauritian export tax on sugar (19th and 20th centuries).
  • Colombian Coffee Federation.

Taxation, State Territorial Reach, and Production Strategies

• Land and property taxes enhance the territorial, social, and economic reach of the state.
• Link between tax collection and production strategies.
• Agricultural marketing boards expand the territorial reach of the state.

Taxation of Sugar in Mauritius

• Export taxes on sugar had positive effects on state-society relations and productive capacity.
• Effective substitute for income taxes, shifted burden to wealthy/middle classes.
• Financed research and development, infrastructure, and marketing in the sugar sector.

Export Taxes in Mauritius (cont.)

• Helped the private sector organize and interact with the government.
• Developed the territorial reach of the state and promoted beneficial rights and obligations.

Taxation, State Territorial Reach and Production Strategies (Colombian Coffee Federation)

• Evidence that taxation of agriculture can solve collective action problems in production.
• Helped forge strong state-society negotiations and mutual obligations.

Tax, Elite Bargains, and Alternatives

• (See Di John, 2010 in further readings).

Taxation and the Elite Bargain

• Creation and deployment of economic rents and privileges to relevant elites.
• Tax patterns reveal insights into the shape and character of the elite bargain.
• Nature of elite bargains provides a window into the political limits of expanding tax capacity.

Implications for LDC Tax Policy

• High levels of tax evasion are tolerated.
• Close connection between state officials and business elites.
• Negligible collection of urban and rural property taxes.
• Low rates of taxation on agriculture benefiting elite landowners.
• Decline in corporate tax burden on big business, benefiting foreign firms and political/economic elites.
• Most mining contracts are secret.

Complementary Notes

Urban Property Taxes

• Important as local governments raise revenues in decentralization reforms.
• Underutilized in LDCs.
• Can finance urban infrastructure investment.
• Potential source of taxation for municipal governments.
• Creation of urban property databases.
• Progressive taxation in LDCs.
• Contributes to making property rights more secure.

Issue of Illicit Flows and Off-Shore Tax Havens

Defining Illicit Financial Flows (IFF)

• Illegal movements of money or capital from one country to another.
• Trade-related IFFs in/out of developing countries are significant.
• Lost tax revenues could support economic growth.
• Private assets held abroad by Sub-Saharan Africans exceeds the region’s external debt.
• Mechanisms: Trade Misinvoicing, anonymous shell companies, tax havens.

Trade Misinvoicing

• Fraudulently manipulating price, quantity, or quality on invoices submitted to customs.
• Diagram illustrates basic trade misinvoicing.

Tax Avoidance & Tax Havens

• DOUBLE IRISH DUTCH SANDWICH strategy explained.

Starbucks UK Tax Avoidance

• Shifting profits overseas through royalty payments, coffee bean purchases, and loan interest.

Illicit Financial Flows from Developing Countries

• Data from 2004-2013 in billions of U.S. dollars.

Tax Avoidance and Implications for Industrial Policy

Negative Effects of Tax Avoidance/Evasion

• Reduces domestic private savings and investment.
• Reduces tax collection.
• Creates speculative asset bubbles.
• Creates unfair competition.
• Makes enforcement of developmental policies difficult.
• Reduces effectivity of tax incentives/holidays.
• Reduces cooperative dialogue between the state and business groups.

Capital Flight from Africa

• Total capital flight from 30 African countries amounts to $2 trillion (1970-2018).
• Represents a significant percentage of total GDP.

Capital Flight Compared to Other Flows

• Capital flight surpasses ODA, Remittances, FDI, and Portfolio investment.

Capital Flight and External Debt

• Table showing capital flight, debt stock and net external assets in selected African countries as of the end of 2018.

Negative Effects of Tax Avoidance/Evasion (cont.)

• Reduces domestic private savings and investment as a result of capital flight.
• Reduces tax collection.
• Creates speculative asset bubbles.
• Creates unfair competition.
• Can make the enforcement of developmental policies more difficult.

Counterarguments

• Open capital markets discipline governments against appropriation, macro instability, and excessive taxation.
• Offshore use can increase FDI.
• $(30\%)$ of India’s inward direct investments came from Mauritius in 2011; $(25\%)$ Brazil’s came from The Netherlands; $(60\%)$ of China’s came from Hong Kong and the British Virgin Islands (IMF, 2020).
• Weak link between tax/GDP and economic growth or investment levels.
• Causation question: is tax avoidance the result of ineffective industrial policy and investment climate or vice-versa?

Taxing Mining Industries

• Mainstream has for a long time neglected mining taxation.

Vast Under-taxing of non-oil Mining in SSA

• Mining entails extracting subsoil assets and transforming these into financial assets.
• Economic rent should be appropriated by the government.
• Balance private incentive to invest with government revenue, through taxation or direct equity share.

Assessing reasonable potential revenue

• Benchmarking exercise (the relationship between mining to GDP and mining to domestic revenue).
• 'Mineral revenues should be a greater share of total revenue relative to the sector value added'.
• Neo-liberals prioritize 'tax-friendly' policies to attract FDI.

Identifying Missed Opportunities

• Average annual contributions of mining to GDP and Domestic Revenue, 1998-2011 for countries like Zambia, Tanzania, Ghana, South Africa, Botswana and Chile.

Zambia and Chile Comparison

• Zambia under collected copper tax revenue compared to Chile.
• If Zambia had behaved like Chile it would have collected $6$ billion in copper tax revenue; it actually collected $1.6$ bn (1998-2011).

Lessons from Chile

• Greater state ownership share (50-75%) versus 10% in Zambia
• Greater use of withholding and profit-based windfall taxes
• Less extensive use of tax holidays and exemptions
• Greater investment in geological survey capacity.

Summarizing the Impact of Neo-Liberalism on Mining

• Neo-liberal reforms and policies exacerbate the problem.
• No political analysis of the elite bargain.
• No link of mining tax policies and illicit flows data.
• A pro-revenue approach takes precedence over a pro-growth approach in tax policy.

Taxation and the Elite Bargain (Mining)

• High levels of tax evasion are tolerated.
• The negligible collection of urban and rural property taxes.
• Relatively low rates of taxation on agriculture benefit elite landowners.
• A significant decline in the corporate tax burden on big business benefits foreign firms and political/economic elites.

Taxation and commodity booms

• Policy implications:
  • Urgent need for mineral abundant states to renegotiate mining contracts when they are unfavorable.
  • Exchange mineral rights for local content conditions.
  • Foreign investors are obligated to use domestic suppliers.
  • Capacity-building in geological survey capacity is needed to improve bargaining power.

The impact of reforms in SSA (Mainstream says)

Assessing trends in tax collection in SSA: Africa Rising Story

• African ‘tax effort’ generally positive
• Overall, tax revenues grew from $17.5$ per cent of GDP in 1980 to $22.3$ per cent in 2010
• About $16$ SSA-LICs out of 28 were able to raise revenue ratios by 5 percentage points of GDP or more in at least one 3-year period in the last two decades. Only five countries managed to increase their revenue ratios by double digits.
• Only 3 countries out of 28 could not mobilize revenue by more than 2 percentage points of GDP. The majority of SSA-LICs ($57$ percent) were able to reach maximum 1- year increases in revenue ratios between 2–5 percentage points.

SSA is doing much less well than you are often told

• Income taxes are still very low (increases in VAT have largely replaced declining trade taxes).
• The reasons for this varied but often involve political economy factors:
  • unwillingness to alienate elites by taxing them
  • tolerance for tax evasion (due to elite bargains; tax exemptions) and massive illicit flows out of Africa
  • unwillingness to tax professionals such as doctors, lawyers, accountants)

SSA is doing much less well than you are often told

• Non-resource rent domestic revenue mobilization has continued to be weak in most SSA countries during the past 15 years (Mansour, 2014)
• non-resource taxes improved a little in the 1980s, but have been stagnant since the early1990s (slightly over 15 percent of GDP)
• in 2010, 18 countries reported increased resource revenues, but the country concentration of such revenues was still very high, with oil revenue in Nigeria and Angola accounting for a over 75 per cent, and Francophone Central Africa for over 15 per cent
• Taxation of non-oil mining has been particularly low (due to excessive use of tax exemptions and low state ownership shares)

SSA is doing much less well in terms of tax collection than you are often told

• Real taxes per capita have declined.
• SSA had fewer budget resources per capita in 2010 than it did in the 1980s and much of the 1990s.
• The effect of inflation caused by the resource sector (combined with population growth) outweighed the impact of additional revenues from natural resources.

Assessing trends in tax collection in SSA: The not so Rosy Picture

• Table 2. Selected Tax Revenue Indicators
• 1980 1985 1990 1995 2000 2005 2010
• Total Taxes (billions of USD)
• $46.4$ $28.5$ $52.7$ $56.1$ $72.9$ $150.6$ $230.9$
• Percent of GDP
• $17.5$ $15.7$ $18.8$ $17.8$ $22.4$ $24.4$ $22.3$
• Non-resource Taxes (billions of USD)
• $27.0$ $22.7$ $40.4$ $49.8$ $49.9$ $93.8$ $157.6$
• Percent of Total
• $58.1$ $79.8$ $76.7$ $88.8$ $68.5$ $62.3$ $68.3$
• Percent of GDP
• $10.2$ $12.6$ $14.4$ $15.8$ $15.4$ $15.2$ $15.3$
• Resource Taxes (billions of USD)
• $19.4$ $5.8$ $12.3$ $6.3$ $23.0$ $56.7$ $73.3$
• Percent of Total
• $41.9$ $20.2$ $23.3$ $11.2$ $31.5$ $37.7$ $31.7$
• Percent of GDP
• $7.3$ $3.2$ $4.4$ $2.0$ $7.1$ $9.2$ $7.1$
• Number of countries reporting resource taxes
• 8 9 9 12 14 18 18
• Total Taxes per Capita (USD)
• $148.3$ $78.5$ $125.4$ $116.6$ $129.8$ $237.1$ $321.7$
• In constant 2010 USD
• $884.7$ $389.9$ $519.1$ $393.7$ $259.1$ $356.0$ $345.0$
• Total Resource Taxes per Capita (USD)
• $62.1$ $15.9$ $29.2$ $13.1$ $40.9$ $89.3$ $102.1$
• In constant 2010 USD
• $370.3$ $78.9$ $120.8$ $44.1$ $81.6$ $134.1$ $109.5$
• GDP (billions of USD)
• $265.2$ $180.8$ $280.3$ $315.6$ $324.9$ $618.1$ $1,033.1$
• Population (millions)
• $313.0$ $362.7$ $420.2$ $481.2$ $561.8$ $634.9$ $717.7$