-The following is an extract from the Unlocking Investment and Finance in Emerging Markets and Developing Economies (EMDEs) World Bank program with Michael Keen
So why is domestic results mobilization so important? Is it just about raising money? Well not really how revenues raised can be just as important as how much is raised. And there are several aspects to that. One of course we need to ensure the taxes themselves that get in the way of growth and development. So for example a number of countries still have quite a lot of work to do in moving away from tariffs unleashing the full potential in that way we also need to make sure that to the environment for investment foreign and domestic is attractive another aspect is that of paying taxes itself burdensome takes a lot of time involves paying of corrupt officials and so on what’s going to happen well compliance is going to go down that’s going to be mutual distrust between taxpayers and the authorities and we’re gonna end up possibly in a kind of low level like with a broom when nobody compliance because nobody else complies and the government assumes that nobody’s going to comply.
It’s a big challenge is to move away from that kind of equilibrium this is not a set of issues similar in many ways if people perceive that others are getting special treatment they’re enjoying exemptions reduced rates or more generally if they think that for some reason the better off all the people with powerful friends aren’t really paying their fair share of taxes. Closely linked to all this is the perception of well what actually happens to the money when you pay all taxes people obviously more likely to pay if they see the schools nearby in the children’s education and health getting better. More general of course when we think about taxes we have to think always about fairness and equity and a key point there is that we really need to think of taxes spending instruments together it doesn’t really make sense to look at just one side of the budget not look at the other.
For example many people worried that the V. A. T. is a regressive tax that the value added tax will practically heavily on the poorest but we have to think not only about well one of the old realistic alternatives to raising money from the V. A. T. but more fundamentally we have to take account of the spending that finances whether through cash transfers all through health education basic services of that kind. We have to think of the two sides together that is. So well the bottom line of revenue collection does matter hugely so does how precisely we get that. So what are the main challenges that countries have to face if they are to meet the ambitious revenue targets and meet the SDGs? Well look in the recent past tax ratios in lower income countries that is revenue tax revenues a share of GDP has actually been on a modest upward trend since the turn of the century. As it is not quite not resilient in many countries during the global financial crisis and now around half of developing countries have tax to GDP ratios above fifteen percent. So that’s the good news of course the glass is also half empty it means that half have GDP ratios below fifteen percent with clear scope and need to do more. So what are the main challenges that have to be faced in in doing this? Well the IMF we advise about a hundred countries a year on issues of revenue mobilization both administration and policy and there are a few things that stick out in our minds as big challenges to be faced maybe top of the list is the kind of unspectacular but critical work of making tax administration’s work properly and there are several dimensions to this it’s a large task but for example it means try to understand better why you are not collecting the full tax that legally you should be collecting?
So where are the compliance gaps? why are they rising? what can you do to address them? Things like having coherent strategies for dealing with the radius that is people who pay late and they’re really no simple answers to many of these things. For example information technology can play a crucial role but on its own. Our experience has been doesn’t necessarily lead to great improvement has to be integrated with improved processes risk based analysis and so on. So a whole suite of what still needs to be done on this unspectacular but important area of a strengthening revenue mobilization. another broad area is dealing with exemptions incentives that you find often all over the tax system which often we also find tend to achieve no real effect on but of course along the way undermined revenues that will come up in a number of the years is all about to mention.
One key tax for now pretty much all countries is the value added tax which is counts for often core from more of revenue in many developing countries. and the key there is to make sure that is broad based which means you can levy at the tax at a relatively low general rate you don’t have an undue influence on activity or behavior or investment and that’s a big task for countries to want to take the still of what to do on the value added tax a lot of the work of the last twenty years or so has been introduced the value added tax now the challenge is to make it work properly. Another area where there’s a lot of work to do is to introduce ought to make a effective a broad based and for personal income tax.
This of course is the main way in which we deal with all fairness and equity concerns on the tax side and in many countries many developing countries income tax at a personal level rate doesn’t extend very far beyond big enterprises state owned enterprises. So a key challenge is to make sure that the personal income tax is broad based again and effective and is attuned to the government’s own equity and fairness objectives. There are plenty of examples of countries that have made real progress on some or all of these areas.
One that comes to mind is for example Mauritania which through a combination of policy measures and administered measures redesigning the income tax For example has managed but on several points of GDP and just a few years. That brings us to the corporate income tax which is a major concern always and countries in terms of making sure that they’re doing all they can to attract and encourage investment both foreign and domestic and they have courses been a worldwide trend towards reduced stature to rates of tax that seems likely to continue importantly to preserve revenue comes again after think again very hard about many of the exemptions the tax holidays this special incentives under the corporate tax.
That when you look at them closely do little to encourage the particular desirable activities but often benefit influential groups and certainly there’s a lot of attention these days to issues of international taxation perfectly in relation to tax avoidance by multinationals with a very ambitious project led by the OECD in G aiming at closing down some of the loopholes in the system and that’s a particularly important project for many developing countries who we see as many in many respects more vulnerable even on some advanced economies to avoid this by multinationals for several reasons one is that they are more reliance on the corporate tax revenue than a higher income countries which means that if the corporate tax revenues under pressure they may feel it more but also secondly they are potentially have fewer alternatives and sounds of other instruments to used to compensate for lost revenue from the corporate tax.
The V.A. T. is often very stretched tariffs as we’ve seen would probably if anything want to reduce personal income taxes work in progress. Another important air for many countries is the tax treatment of the extractive industries that is minerals oils gas and so on. Many countries are heavily reliant on revenues from the sector as a source of revenue and clearly is critical to get the design of the tax regime right not only to ensure that the government gets a decent share of the revenue but to ensure at the same time that investing in the sector remain sufficiently attractive for investors and that can require cut a rather delicate balance between the kinds of instruments that you raise.
You may want to have a special tax on profits at the same time as having a tax that’s related more to the volume of production which in a way kind of gives you some insurance against a different possible outcomes in terms of results prices and so on. That’s the final area which I thought I’d mention where we see a lot of potential is in terms of the property tax. This is very under used in many countries it’s a tax that can be attuned as people would like to the equity concerns. If something pops in some countries for the medium to longer term because it does require a fairly substantial investment in is establishing a record of properties and so on but we say this is one important way in which countries can reconcile these difficult objectives of raising significant additional sums doing in a way that is relatively easy to administering comply with and it is also consistent with the fundamental fairness and equity objective.