Collecting taxes is vital for the developing countries: by tax revenues countries can provide public well-being, such as healthcare, education and infrastructure as well as reduce dependence on development assistance. The tax system in Sub-Saharan Africa is much less diverse as in industrial countries. Taxation in Sub-Saharan Africa is dominated by indirect taxes, meaning taxes on goods and services: in 2012 VAT alone formed 22% of revenues in Africa and as being a regressive tax, has had a negative distributional impact. In industrial countries direct taxes, such as income tax and corporate taxes are utilized more to collect revenues.
In most least developed countries public revenues account for 10-20% of GDP; in comparison, in 2013 the average revenue percentage of the OECD countries was 34,1%. This is due to lower income levels, smaller taxes, limited collection capacity and illicit capital outflows, in which alone Africa loses twice as much as it receives international aid. In fact, it has been estimated that many developing countries would need substantial additional revenue to finance poverty reduction: according to an IMF working paper, in many low-income countries an additional 4% of GDP would be needed just to meet the United Nations Millennium Development Goals. What then should be done to improve taxation in Sub-Saharan Africa?
a. Economic growth is a political process. It is obvious that corruption can dampen even the brightest taxation structure. Trustworthy, well-paid revenue authorities that are separated from political leaders are a key factor. On the longer haul, critical media and educated population can help monitoring the non-corrupted tax system.
b. The formal fiscal arrangement needs to be inviting. The informal sector, the micro- and small-sized enterprises (MSEs) as well as individuals, should be integrated into the formal sector since MSEs constitute 80-90% of taxpayers but only 5-10% of revenues, according to the IMF. However, it is important that this relationship is bilateral: when entering the formal system, people and MSEs need to have immediate gains (such as legitimacy and protection) as well as long-term gains (like wider markets, stability and functional public services). In other words, people need to get something concrete for the taxes they pay.
c. The tax base needs to be widened, also in resource-rich countries. Even they should not rely solely on their natural resources. The participation of the state is important: when involved in natural resource production, bigger revenues can be collected. This means also adopting a new perspective on foreign investments: companies shouldn’t simply be attracted by low taxes. Instead, a long-term, sustainable industrial policy should be created by national ownership. Besides this, indirect taxes have a big influence on the poor but don’t really make a difference to the rich whereas collecting progressive direct taxes have a positive distributional impact. According to UNCTAD, taxation should be focused on higher incomes and higher value urban properties as well as luxury goods, financial transactions and import tariffs, whereas VAT should be reduced. It is important that the tax system is fair and plausible: people with no wealth or outside the formal sector cannot be taxed.
Clearly, these suggestions aren’t simple to follow but in many countries it would be beneficial, as they can contribute to building sustainable and self-reliant nations.