Tax for Poverty Reduction

1. Tax for Poverty Reduction Max Everest-Phillips DFID London HMRC conference 21 September 2009

2. OUTLINE • Development and Taxation • What Have We Done? • What Have We Learnt? Tax and: • Economic Development • Growth • Global Trends • Tax Administration • Governance • What we are doing

4. Development and Taxation 1 Increasing tax revenues combined with sustainable economic growth eventual exit strategy for developing countries from aid dependency. Taxes, if designed well, can promote economic growth, lessen extreme inequalities, tackle climate change and fund the delivery of the MDGs, significantly improving the lives of all citizens and especially poor people. Tax is a core part of state-building • Fair and transparent tax collection demonstrates good governance and shapes government legitimacy by • promoting accountability of governments to tax-paying citizens, and by • stimulating effective state administration and good public financial management.

5. Development and Taxation 2 Taxes shape investment and economic growth: tax revenues that increase with economic growth ensure sustainable funding of essential public services for poor people: ‘public goods’ such as security, health and education on which economic growth and social development depend. Gender issues around taxation poorly understood • Anti-corruption, rent-seeking and tax evasion closely inter-connected with weak governance; anti-corruption strategies only work where states can effectively tackle tax evasion and corrupt tax expenditures, through ‘social contract’ of accountability between citizen and state.

6. Development and Taxation 3 Tax is central to the ‘Monterrey Consensus’ by which developing countries committed themselves to deliver ‘effective, efficient, transparent and accountable’ taxation systems, in return for increased international development assistance. Developing countries must be able to show their serious intent to maintain this commitment. Evidence of partner countries’ ‘tax effort’ matters for sustaining public support in OECD countries for international development. • Aid effectiveness concerns that aid can become a ‘resource curse’, undermining the accountability between state and taxpaying citizens. • Improving tax systems is essential to maintain public finances during the current financial crisis.

7. What have we done?DFID tax projects: 2001-06 • 181 tax or tax-related projects/ programmes [67 in Africa] • an attributable total financial commitment of £159 million [£99m in Africa] • major focus on the strengthening of tax and customs administrations

8. What Have We Learnt?(1) Tax and Economic Development • Tax shares in GNI are low in most DCs • DCs need both higher sustained growth and increased tax/GNI shares • DCs need to broaden tax base. For business taxation: • Tackle exemptions • Limit discretion (minimise corruption) • Offer informal sector and small firms simple processes and incentives to comply • Personal income tax receipts are low in DCs

9. What Have We Learnt? (2) Tax and Growth • improve linkages between tax policy and tax administration; • Different sectors have different METRs; • Good tax systems minimise fiscal barriers to investment, and promote growth • Importance of SMEs for Growth – neglected area

10. What Have We Learnt?(3) Some Global Tax Trends • Changing role of Customs • Decline of tariffs • VAT a necessity? (High thresholds will limit to large firms who can really comply) • Financial crisis …

11. Impact of financial crisis: Poverty Number of different estimates: • DFID estimate: Estimate that 90 million more people will be in poverty after 2010 than had been previously anticipated. • WB estimate: Estimate that 53 million more people will fall below the poverty line of $1.25 a day in 2009. • ILO estimate: Estimate that an extra 93 million will be in working poverty over 2007-2009.

12. Increase in Debt to GDP ratios of Low Income Countries Revenue Ratios expected to fall by 2% or more in a quarter of LICs Diminished Fiscal Position

13. What Have We Learnt?(4) Tax Administration • Address vested interests and ineffective working (inefficiencies and harassment) and build trust and customer service • Simplifying tax system lowers compliance costs, boosts compliance, widens tax net BUT • apply change-management techniques • technical lessons learnt by one Revenue Authority assist in helping others • embed revenue reforms in the broader public sector reform effort

14. What Have We Learnt? (5) Tax and Governance Understand Tax as State-Building: the ‘Fiscal Social Contract’ – critical in states with weak governance and limited legitimacy Political economy matters: • The politics of Taxation • Political commitment to tax reform

15. Tax as State-Building State-Building Goals Traditional Revenue Goal Tax as SYSTEM: Political culture: Social Contract Legitimacy Political commitment to ‘Rule of Law’ ‘National Purpose’ – ie. Equity and Economic growth • Raise revenue for government expenditure

16. What DFID is doing on Tax: • Tax: Renewed focus on PSD and Growth • Tax: State-building • Politics of Tax: e.g. tackling exemptions, Decentralisation and sub national tax systems • Informality/SMEs tax Against background of: • Financial crisis (help get tax systems right now) • Exit from aid - ready for scaling down aid • Climate change and environmental taxes • Gender dimensions of tax systems • Changes in patterns of tax e.g. customs and VAT; land and property taxes • International: Regional tax harmonisation

17. Current DFID Programme Ongoing bilateral country programmes With World Bank: • To improve the business enabling environment by reducing the time and financial cost of complying with tax • To achieve politically and administrative sustainable pro-growth revenue collection through more effective and transparent administration and broadening the tax base With International Tax Dialogue • To establish a network of tax practitioners which will participate in the replication and scaling up of implementation programme. With Civil Society • Increase civil society demand for better tax systems

18. New research centre How can developing states successfully raise domestic revenues in ways that promote political stability, economic growth and social cohesion? expected outcomes: • Improved conceptual and empirical understanding of tax systems within public finances that promote economic growth and social inclusion, and capable and accountable states. • Improved engagement in and better support for state effectiveness through policy relevant tax research. • Better results for tax reform initiatives through stronger and clearer evidence of ‘what works’. • Greater uptake of new and existing research findings through more effective synthesis, channelling and communication of conclusions.