Beneficial not boring: the hidden triumphs of tax reform
by Iain Nelson
The push to eradicate global poverty was again on the agenda at the World Economic Forum in Davos last week. Whilst some approaches are moving mountains, one of the least-trumpeted, but nonetheless important ways to reduce poverty, still goes relatively unnoticed.
The global agreement on tax reform signed in Addis Ababa last summer has pushed income-generating initiatives up the agenda. UK international development secretary Justine Greening said: “Job creation, economic growth and tax generation in developing countries is ultimately what success looks like … tax systems that will enable developing countries to reap the benefits of growth and build stronger health and education systems themselves.”
Here are three ways governments are championing tax reform:
1. Providing investment in public services
Development relies on key public services. Revenue can mobilise resources for education, health and welfare services, and serve as an investment in skills development programmes and infrastructure. If governments can collect more revenue to finance public services, a better provision of schools and hospitals and other public services can reduce poverty.
In Afghanistan, tax reform has provided billions of dollars in extra revenue. Between 2002 and 2012 revenue increased nine fold. These increases are a result of a number of factors but dedicated administrative, policy and legal reforms in tax were a key part of Afghanistan’s improved fiscal position. This extra revenue has provided the government with the foundation for more effective public services. This increase was enough to pay for one million extra patient days in hospital per annum.
2. Promoting economic growth
Tax reform can promote economic growth and build private sector confidence by boosting incomes and employment. By simplifying cumbersome laws and administrative processes, the cost of doing business is reduced and investment encouraged.
Tax law harmonisation in Nigeria has reduced the cost of doing business through small revenue reforms to unlock new employment opportunities. Taxpayer compliance has already improved and taxpayers are reporting reduced administrative time and costs.
3. Strengthening government
Tax reform can strengthen transparency and improve government accountability. Strong tax systems can reduce the likelihood of making decisions that do not benefit the citizens’ best interests. When a government relies on a broader section of the population for its income, it is forced to pay greater attention to their interests.
In Pakistan, where only about 500,000 Pakistanis file tax returns, the public is being encouraged to be more aware of such issues by explaining the linkage between revenue and service delivery. Increasing awareness and targeted lobbying is pushing the government to be more accountable to its citizens.
Governments should finance better public services by taxing larger companies and tax the highest earners. Because some households spend a higher proportion of their income on certain goods such as food, care needs to be taken to ensure that these goods are treated differently.
The impact of tax reform goes beyond revenue; it changes how governments can practically support citizens and creates a relationship that goes beyond taxpayer versus the state.
Tax reform is the underdog of poverty reduction strategies. Owned by governments, it’s rarely a conversation starter, but the results speak for themselves. Small reforms result in big wins.
Adam Smith International works with governments across the world to provide targeted revenue reform services, including projects in Afghanistan, Nigeria and Pakistan.