Public financial management and accountability

Taxation, revenue, citizenship and accountability

Tax policy and tax administration are the means by which governments raise revenue to finance spending on public goods and services. Tax policy refers to the choice of tax instruments, the rates at which taxes are set, the nature of exemptions and the assignment of taxes to different levels of government. Tax administration refers to the efficient and effective implementation of tax policy. Although tax administration is conventionally separated from tax policy, the two are closely linked in practice.

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Where is a good place to start?

Moore, M, 2004, ‘Taxation on the Political Agenda, North and South’, Forum for Development Studies, vol. 31 no.1, Centre for the Future State, University of Sussex, Brighton
Compared to their prominence in Organisation for Economic Co-operation and Development (OECD) countries, taxation issues appear infrequently on public political agendas in most Southern countries. What are the structural and historical reasons for this difference? This article in the Forum for Development Studies addresses this question and looks at how recent changes in the fiscal environment in the South will raise the profile of taxation issues. This is likely to contribute to better governance and to development generally, although such an outcome is contingent on factors not yet understood.
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Tax policy and poverty reduction

Developing country governments face significant challenges when deciding on an appropriate tax policy. Where governments lack reliable economic data (especially on the informal sector), it is hard for them to estimate the size or value of their potential revenue base, or predict the impact of changes to the tax system.  Whether the tax system is equitable is of particular concern in countries with large numbers of poor people and high inequality. There may even be strong arguments for a progressive tax system; that is, a system where the rich pay proportionately more tax.

Bird, R.M. and Zolt, E.M., 2003, 'Introduction to Tax Policy Design and Development', Draft prepared for a course on Practical Issues of Tax Policy in Developing Countries, World Bank.
Developing countries face a difficult task in designing and implementing suitable tax systems. In practice, countries have often relied heavily on taxes on international trade, but this tax base is also becoming increasingly hard to implement in the face of pressures for trade liberalisation. This paper from a World Bank course on tax policy asks: How can developing countries best design and develop tax policies to achieve their policy objectives, given the complex economic and political environments they face?
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Gemmell, N and Morrissey, O, 2002, 'The Poverty Impacts of Revenue Systems in Developing Countries', Report to DFID
Few taxes are actually paid by the poor, the tax system does not provide the best instruments to target the poor. These are the two principal beliefs that this DFID report aims to assess by reviewing analytical methods for, and evidence on, the effects of tax reform on the poor. This report states that these beliefs are largely true. However, there are important exceptions. The authors start by reviewing the core features of tax systems in LDCs, then move onto the main features of tax reforms implemented in recent decades. 
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Tanzi, V. and Zee, H., 2001, 'Tax Policy for Developing Countries', Economic Issues, no. 27. International Monetary Fund, Washington, D.C., March.
The approach to setting tax policy presented in this paper is based on a practical evaluation of difficulties encountered when applying the revenue procedures of industrialized countries to developing countries. Practical recommendations are made regarding both the macroeconomic (level and composition of tax revenue) and microeconomic (design aspects of specific taxes) elements of tax policy.
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Mostajo G., R., 2004, ‘Prospects for an Integral Tax Reform With Equity: Toward a Fiscal Covenant in Peru’, Executive Summary of Report for DFID, Lima.
Since the 1990s, Peru has undertaken a series of tax reforms with the aim of improving collection. Although these have had some positive impact, the tax system is still not functioning well enough to meet the needs of the population. This study, commissioned by the Department for International Development, argues that reforms must address issues of governance and equity if they are to help the poor in the longer term.
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Munoz, S, and Cho, S, 2003, ‘ Social Impact of Tax Reform: The case of Ethiopia, IMF Working Paper, Washington DC
This International Monetary Fund (IMF) working paper conducts a Poverty and Social Impact Analysis (PSIA) of replacing Ethiopia’s sales tax with a value-added tax (VAT) in 2003. This reform has not had a major adverse effect on the poorest 40 percent of the population. The VAT is progressive in its incidence, and the higher revenues it brings can provide additional funds for poverty-reducing spending, e.g. primary education. There is significant scope for making education spending more pro-poor by increasing the access of low-income households to schools.
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Tax administration

Where the capacity of the state to collect taxes is weak, certain taxes may be preferred to others because they are relatively easier to collect. In these cases tax policy is determined by feasibility, rather than efficiency or equity. Increasing the government's capacity for tax administration is therefore essential to enabling better tax policy as well as a precondition to implementing it successfully. A range of interventions have proved effective in improving tax administration, including addressing institutional issues (for instance, by introducing semi-autonomous revenue agencies) and better targeting of resources.

Department for International Development, 2001, Evaluation of Revenue Projects Synthesis Report, DFID, London
The evaluation concludes that in the short term, revenue projects can help countries achieve macro-economic stabilisation and hence increased growth. In the longer term they can aid poverty reduction by supporting tax reforms or increasing the capacity of revenue authorities. However, this is dependent upon favourable conditions, which are difficult to achieve in many developing countries.
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The following document provides a detailed examination of the institutional factors influencing reform of revenue authorities.

Delay, S., Devas, N. and Hubbard, M. 1999, 'Reforming Revenue Administration: Lessons from Experience,' International Development Department, University of Birmingham, report prepared for DFID
This study reviews the experience of DFID-funded projects to support revenue administration in Africa against wider international experience to determine lessons for future work in this field.
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Smith, L., 2003, 'The Power of Politics: the Performance of the South African Revenue Service and Some of its Implications', CPS Working Paper; Policy and Actors Vol. 16, No. 2, Centre for Policy Studies, Johannesburg.
The South African Revenue Service (SARS) appears to be one of the success stories of post-apartheid government. How has the South African government achieved this? This study from the Centre for Policy Studies discusses the issue of revenue-raising as a political and social phenomenon and suggests that the South African example has implications for other countries.
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Tax, revenue, citizenship and accountability

Some research suggests that there may be a link between the source of a state’s finances and its legitimacy and accountability to its citizens. Unearned income, such as income from natural resources, can negatively affect political development unless well managed, while states which derive a significant proportion of their income from tax may be able to use this as the basis for improved governance.  Other evidence points to the coercive collection of taxes and questions the viability of raising tax revenues in fragile or conflict states. The following documents explore these issues further.

Moore, M., 2004, ‘Revenues, State Formation, and the Quality of Governance in Developing Countries’, International Political Science Review Vol. 25 No. 3, pp. 297-319.
Sources of state revenue have a major impact on patterns of state formation. This article, published in International Political Science Review, investigates how far the quality of governance in developing countries might improve if states were more dependent for their financial resources on domestic taxpayers. It argues that we can best understand patterns of state formation in the South by exploring the different context in which they were formed in comparison with that of earlier western European states. 
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Fjeldstad, O-H., 2001, ‘Taxation, Coercion and Donors: Local Government Tax Enforcement in Tanzania’, The Journal of Modern African Studies, Vol 39 issue, 2, pp.289-306.
Why does tax collection vary between local authorities in Tanzania? How do donors affect revenue-raising performance and local governance? This study from the Chr. Michelsen Institute, Norway, compares revenue collection in two Tanzanian local authorities and analyses the linkages between taxation and donor aid. Revenue performance depends on the degree of coercion involved in tax enforcement. Donor aid shifts the balance of power from elected representatives to council administrators, weakening governance. Donors need to understand how local government institutions work to avoid undermining democratic development.
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Fjeldstad, O.-H., 2004, ‘To Pay Or Not to Pay?: Citizens’ Views on Taxation in Local Authorities in Tanzania’, Paper presented at REPOA’s 9th Annual Research Workshop White Sands Hotel, Dar es Salaam, 25-26 March 2004
Can tax compliance be established in poor countries without an extensive and costly enforcement apparatus? This research, conducted in Tanzania by the Chr. Michelsen Institute, suggests that this question is important because governments, seeking power on the basis of popular consent, face restrictions in their use of coercion in tax collection. The study concludes that the challenge for local government taxation in Tanzania is to raise domestic revenues from consenting citizens.
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The South African Revenue Service has seen significant improvements in its performance. This document examines the various factors to which this outcome has been attributed.

Hlophe, D. and Friedman, S., 2002, '…And their Hearts and Minds will Follow? Tax Collection, Authority and legitimacy in Democratic South Africa', IDS Bulletin Vol. 33 No. 3, Institute of Development Studies, Brighton.
Does the states’ ability to tax create a need to respond to citizens? If a state derives its resources from foreign aid, is it less inclined to consider the needs of the poor? Is there “No taxation without representation?” This paper suggests a change in tax-payer attitudes is necessary even though contrary to other developing countries, it has a tax paying culture.
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Lledo, V., Schneider, A., Moore, M., 2004, 'Governance, Taxes and Tax Reform in Latin America', IDS Working Paper No 221, Institute of Development Studies, Brighton.
Latin American tax reform in the 1990s has focussed on improving administration and macroeconomic capacity. How can programmes attempt to build national "social contracts"? How can Latin American countries increase emphasis on political and governance dimensions of taxation? This paper from the Institute of Development Studies addresses the political conditions that shape tax reform, structure and performance in Latin America.
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What other resources are available on the GSDRC?

Use the site search at the top of this page if you wish to look for wider resources on taxation, revenue, citizenship and accountability.

Additional information resources

The Centre for the Future State (CFS)
The CFS is a DFID-funded development research centre at the Institute of Development Studies at Sussex University. The first of its three research programmes is entitled ‘Financing the State’ and looks at the connection between political development and ublic finances.

The International Tax Dialogue (ITD)
The ITD Is an initiative by the IMF, OECD and World Bank to encourage and facilitate discussion of tax matters among national tax officials and international organisations. The ITDweb enables users to share good practices and to research tax policy and tax administration issues.

World Bank Tax Policy & Administration
This website provides an introduction to the theoretical and practical elements involved in reforming tax systems. World Bank Course on Practical Issues of Tax Policy in Developing Countries, April 28-May 01, 2003. Papers and presentations from this course are available online.

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