Tax for Development Webinar Series 

Book conversation between Peer Schouten (DIIS) and Morten Bøås (NUPI): on Schouten's book  “Roadblocks politics: The origins of violence in Central Africa”, published earlier this year by Cambridge University Press.

About the book: Along the muddy roads and forested rivers snaking through Central Africa, rebels and soldiers, traditional authorities and civil servants, erect roadblocks where they deploy the threat of violence to impose their will on passersby. There are, in fact, so many roadblocks in Central Africa that it is hard to find a road that does not have one. Peer Schouten has mapped over a thousand of them in the Democratic Republic of Congo (DRC), Central African Republic, and South Sudan. He argues that roadblocks are not just a symptom of corruption or state failure but encapsulate a distinct and meaningful form of order-making. The book reveals the connections between roadblocks in Central Africa and global supply chains, tracking the flow of multinational corporations and UN agencies alike through them, to show how they encapsulate a form of power, which thrives under conditions of supply chain capitalism. The book also traces how crucial control over long-distance trade has been in the deep history of the region. In doing so, he develops a new lens through which to understand what drives state formation and conflict in the region, offering a radical alternative to explanations that foreground control over minerals, territory or population as key drivers of Central Africa's violent history.

Summary: This paper examines the relationship between citizens' support for taxation and their experiences along two dimensions of the social contract: (1) government provision of infrastructure and public services, and (2) the perceived fairness of the government in dealing with their ethnic group. First, using cross-sectional Afrobarometer survey data from 23 countries, it finds descriptive evidence that individuals in communities with better public infrastructure are more supportive of taxation. In contrast, individuals from ethnic groups that perceive themselves to be treated unfairly by the government are less accepting of taxation. Second, for a more causally identified relationship, it uses Afrobarometer Survey data across 17 countries over 4 rounds and exploits longitudinal variation in the ethnicity of national leaders. It finds that individuals in the ethnic homeland of national leaders are more supportive of taxation and also have access to better government infrastructure. These results highlight potential negative fiscal consequences of ethnic favoritism that exclude certain groups from the social contract.

Abstract: The authors’ evaluate a major personal income tax reform in Uganda that came into effect in 2012–13. The reform increased the tax-free lower threshold, increased tax rates for higher incomes, and introduced an additional highest tax band. Using the universe of pay-as-you-earn (PAYE) administrative data submitted by employers in the formal sector to the Uganda Revenue Authority, the study analyses the impact of the introduction of the additional top tax band on taxable income. The results indicate that the elasticity of taxable income in Uganda is somewhat larger than in developed countries, a result particularly driven by income earners at the very top. The study finds suggestive evidence of income shifting between wages and dividends. Taxpayers in the lower part of the wage distribution also responded to the reform but to lesser extent. Despite the large elasticity of taxable income at the top, the additional revenue generated from the introduction of the additional top tax band by far offset the revenue losses triggered by the more generous tax-free threshold for low taxable incomes and the behavioural response along the distribution. The paper contributes to the scarce literature on the effects of personal income tax reform on employees’ income in a low-income country in Africa.

Summary of the paper: “Historical path dependence in intergovernmental tax arrangements”: The paper (co-authored with Kaj Thomsson) investigates the role of deep historical elements in shaping intergovernmental tax arrangements, as an alternative to the various features suggested by economic theories. The authors connect historical elements and key explanatory factors embedded in ethno-cultural diversity and geography to new indicators measuring the taxing rights of sub-national governments from a novel dataset. They provide estimates of the linkages between economically relevant and historical-institutional variables and the current design of multi-layer tax arrangements across more than 70 countries in Africa, the Middle East, and Asia. The results confirm the relevance of the historical variables. Sub-national governments in countries with a higher degree of pre-colonial state centralisation tend to have greater discretionary power over tax matters today. The path out of colonisation also matters: countries that have experienced a violent independence movement tend to have a more centralised tax structure. Some, but not all, explanatory features suggested by standard economic theories do matter as well: country size and terrain ruggedness tend to foster greater decentralisation of tax-related decisions. Yet, other parameters such as ethno-cultural diversity appear to be less relevant. The results are robust to an extensive set of control variables and a range of IV-GMM estimations using ecological diversity, the Tsetse suitability index, and Neolithic transition timing as instrumental variables for pre-colonial centralisation. The paper adds to the growing literature showing that modern-day institutions – including fiscal institutions – carry with them pre-colonial structure and colonial legacy.

Summary of the paper: While much knowledge is being generated on the impact of the pandemic, we still know very little on its implications on taxation in low-income countries. Yet, tax is crucial to fund crisis response and recovery, in addition to broader development plans and expanded government expenditure. This paper starts addressing this gap using a unique dataset of survey and administrative data from Rwanda. We document two significant shifts in taxpayers’ views: perceptions about the fairness of the tax system improve by 40 per cent, and their attitudes to compliance become more conditional on the provision of public services of sufficiently good quality. Importantly, these shifts are accompanied by improvements in actual compliance behaviour: using data from tax returns, we show that firms that declare after the onset of the crisis are substantially more compliant than others. We then investigate public support for increasing various tax options to fund crisis response and recovery. Taxing large companies and the richest enjoy the greatest support, which, however, declines as income increases. These results allow us to make some recommendations and considerations on tax policy responses to the crisis.

Summary: The use of tax expenditures (TEs) is an important fiscal practice that is often overlooked in public spending debates. The fiscal cost as well as the lack of effectiveness of TEs can be significant. This presentation describes the state of TE reporting across the world, focusing on Africa. It begins by explains what TEs are and what their role in government expenditure is, offers examples of the fiscal cost of these provisions, their (in)effectiveness, and the reasons why they are often hard to remove and the lack and inconsistency of TE reporting. The presentation will also provide the first results of the “Global Tax Expenditures Database” (GTED), an ongoing project aiming to increase transparency and boost research in the TE field. The GTED reveals that over half of African countries do not provide any information on their TEs, while most of the countries that do report on TEs leave out important information such as the policy objectives and beneficiaries of those provisions. The presentation is based on the book chapter “Tax Expenditure Reporting and Domestic Revenue Mobilization in Africa” published in 2021 in: Mosquera Valderrama I.J., Lesage D., Lips W. (eds) Taxation, International Cooperation and the 2030 Sustainable Development Agenda. United Nations University Series on Regionalism, vol 19. Springer, Cham and on the GTED Flagship Report 2021.

Abstract: Despite the low levels of taxation and public good provision in Africa, I provide evidence that a large proportion of Africans prefer lower taxation and fewer public goods. This cannot be explained by standard arguments about problems of accountability, governance or state capacity. Instead I argue that it reflects deeply seated ideas about the nature of the state and its potential threats to the autonomy of society. I show the historic social contracts in Africa rarely featured taxation and kept the state to limited domains. These social contracts have in many ways reproduced themselves and influence the way Africa is governed today.

Abstract: The origins of fiscal capacity have traditionally been linked to warfare and democratization. However, non-democratic states also invest in fiscal capacity, even in times of peace. In fact, the majority of income taxes – a corner stone of government finance – were introduced by non-democratic states in peace time. This paper is concerned with the autocratic origins of fiscal capacity. Political institutions in non-democratic states help overcome a commitment problem related to investments in fiscal capacity. In order not to risk being deposed by his elite supporters, a ruler needs to guarantee that new fiscal tools will not be used opportunistically (e.g., for expropriation of the elite). If the elite supporters can effectively monitor the government, any transgressions will be detected and punishable. Institutions such as legislatures solve commitment problems related to investments in fiscal capacity by allowing oversight and monitoring over the executive branch. The empirical implications are straight-forward: in places with strong institutional oversight, which allows the elite to monitor the executive, we should observe higher fiscal capacity. The paper finds support for this notion by analyzing newly available datasets over tax revenues, tax introduction dates, and political institutions.

What is the redistributive capacity of taxes on consumption in developing countries? In this paper, the authors combine household expenditure data from 32 countries with theory to establish the optimal design of consumption taxes and their impact on income inequality. The study uses the type of store in which purchases occur to proxy for informal (untaxed) consumption. In all countries, the budget share spent in informal stores steeply declines with income. This makes consumption taxes strongly progressive as the effective tax rate rises with income. Contrary to consensus, our results show that consumption taxes are redistributive and reduce inequality. Moreover, once informality is considered, the widespread policy of rate differentiation across goods has limited redistributive impact. In particular, reduced rates on necessities cannot be justified on equity grounds in the poorest countries. The paper is joint work with Pierre Bachas (World Bank Research) and Anders Jensen (Harvard Kennedy School).

About the webinar

The digital economy has revolutionised the way of doing business and at the same time imposed major challenges for effective taxation of companies. A major challenge is the risk of tax base erosion and profit shifting (BEPS). This has compelled the international community to consider new rules for taxing the digital economy. Due to the delays in reaching consensus on how to effectively tax the digital economy, countries have adopted unilateral measures to protect their tax bases. In her presentation, Prof. Oguttu discusses the impact of the unilateral measures on the international tax system. She also discusses the new tax rules proposed by OECD Inclusive Framework to tax the digital economy from a developing country's perspective.  The presentation draws on Prof. Oguttu’s recent book Base Erosion and Profit Shifting: A Blueprint for Africa’s Response.  

Summary of the paper: It is a common view that states in the developing world with substantial extractive natural resource discoveries may not have the capacity to tax and regulate multinational companies in the sector. This study shows that ruling elites in recently resource-rich Tanzania, and in Uganda – expected to become resource-rich in the foreseeable future - have learned from the resource curse: they seek to construct ‘pockets of effectiveness’ (POEs) to regulate and tax natural resources. We explain the political incentives to create such pockets by combining insights from the POE and the Political Settlement literatures. We argue that POEs are likely to be established in emerging resource-rich countries with three characteristics: some degree of competitive elections; widespread voter expectations of future natural resource prosperity; and absence of powerful domestic firms in the sector who can resist taxation. The political benefits of such POEs are higher revenues that can boost government spending power and, hence, political legitimacy. These outweigh the political costs of establishing POEs, namely rents and patronage foregone. This insight is missed in much of the writings on the impact of natural resource wealth in African countries.  

Download CMI Presentation Informal Taxation Somalia

Community contributions are often required as part of community-driven development (CDD) programmes, incentivized through matching grants. However, little remains known about the impacts of matching grants or the implications of requiring community contributions in order to receive development funding. In this paper, we partner with an international and Somali NGO and undertake a randomized control trial of a CDD matching grant programme designed to incentivize informal contributions for local public goods in Gedo region in south-central Somalia. We rely on household survey data collected from 1297 respondents in 31 treatment and 31 control communities, as well as surveys of village leaders and data on informal contributions from the mobile money platform used by community leaders to collect revenues. Two key findings emerge. First, our research shows that working with communities and incentivizing informal revenue generation can be an effective way to deliver public goods and to support citizens and communities. Second, building on research exploring the potential for development interventions to spur virtuous or adverse cycles of governance, we show that development partners may work directly with community leaders and informal taxing institutions without necessarily undermining—and indeed perhaps strengthening—state legitimacy and related ongoing processes of statebuilding in the country. Indeed, despite playing no direct role in the matching grant programme, taxpayer perceptions of the legitimacy of the local government improved as a result of the programme. These findings deepen our understanding of how community contributions may be incentivized through matching grant programmes and how they may contribute to CDD and public goods provision in a context of weak institutional capacity.

Link to ICTD working paper

The idea that the digitization of transactions in an economy might increase government tax capacity has been prominent in the economic literature and in policy debates. This paper studies the effect of financial incentives on the adoption of electronic payment technology by firms and consumers, and on tax compliance by firms. Exploiting administrative tax and transaction records and quasi-experimental variation generated by Uruguay’s Financial Inclusion Reform, we present three main findings. Consumer VAT rebates for credit/debit card transactions trigger an immediate 50% increase in the number of card transactions and a 20-30% increase the volume of card transactions. Firms are much less responsive, however, with adoption of point-of-sale terminals (POS) increasing only marginally and only on the intensive margin. Comparing retail firms to wholesale firms in a difference-in-difference design, we find no increase in tax compliance. Endogenous POS adoption and the fact that electronic sales constitute less than 30% of total reported sales among firms with a POS can rationalize this finding.

Recent theorizing around social norms has enabled novel kinds of empirical research into corruption, assessing how shared perceptions about the frequency and acceptability of corrupt practices influence individuals’ willingness to engage in such acts. Studies across various disciplines have begun to analyse corruption through a social norms lens, catching up with other fields where social norms theory has been effectively applied. This chapter reviews recent empirical research on social norms of corruption and identifies the empirical, methodological and theoretical contributions of this literature. It also points to several knowledge gaps that appear especially fruitful for future research to investigate. 

The COVID-19 pandemic has hit the economies of poor countries hard, particularly in Africa. This study examines how and to what extent the pandemic affects domestic revenue mobilisation in selected African countries. It also assesses the potential of various tax instruments to raise additional future revenues. The study will provide inputs to the preparation of Denmark’s new aid strategy 2021 on how domestic revenue mobilisation may affect future Danish aid to countries in Africa. 

This paper evaluates the effects of two tax administrative interventions, which expanded taxpayer register and changed the electronic filing system of presumptive tax, on the number of small business taxpayers and presumptive tax revenues in Uganda. Using a difference-in-differences approach and administrative tax data covering both presumptive taxpayers and comparable small corporate income tax (CIT) payers, we find that the number of small business taxpayers filing tax returns and presumptive tax revenues increased substantially after interventions. We argue that interventions complement each other because both interventions were established around same years and the TREP not only focused on registering but also educating taxpayers. We analyse the cost-effectiveness of TREP and find that benefits outweigh costs.

Questions related to domestic resource mobilisation, taxation, illegal capital flight and the utilisation of natural resources are some of the most important in the contemporary development debate. The TaxCapDev-network focuses on dissemination and sharing of research results, as well as bringing researchers, decision makers and activists together to discuss research findings and improve policy development in this important field. The network also contributes to increased collaboration between researchers from the Global North and South, and helps to promote South-South cooperation within this field of research. The network is coordinated by NUPI and CMI, in partnership with Tax Justice Network-Norway, and funded by the Research Council of Norway. At this webinar current work and future plans of the network will be presented and discussed. 

TaxCapDev slides

Corruption in Burundi is systemic. Yet programmes aiming to support integrity and good governance are undermined by local-level relationships and informal practices by public agents. Here, a five-month investigation of tax collectors in Burundi reveals the rationale behind corrupt behaviours at street level. Anti-corruption reforms that take account of social and political pressures could point a way forward.

Read more about the research here: U4 blogpost and paper.