Evidence-based tax policy: A policymaker’s perspective
Collaborative research can play an important role in addressing the challenges that tax authorities in Africa face. IGC’s regional tax conference in Lusaka brought together tax authorities from several African countries to share their experiences and insights on using evidence in tax policy design and enforcement.
Tax collection agencies across the world are facing unique challsenges in their quest to increase the revenue takes of their governments. Pertinent challenges that these agencies face include:
- Weak tax enforcement capacity
- A narrow tax base
- Political resistance
- Information asymmetries
- The taxation of e-commerce
- Tax base erosion
- Profit shifting
In many of these countries, the inability to tax presents itself both as a symptom and cause of underdevelopment (Kleven et al. 2016). While most developed economies typically collect 30-40% of GDP in tax revenue, developing countries, particularly in Africa, lag behind, averaging between 10-20% of GDP (Pomeranz 2018).
The role of research in framing and informing tax policy design and enforcement is supremely important in the quest to meet these challenges. IGC research has found that many of the ‘second-best’ tax enforcement solutions that work in developed economies (e.g. taxing profits and wages) do not work in developing countries where there are information and enforcement barriers. However, ‘third-best’ solutions (e.g. taxing turnover and trade) could be adapted effectively in developing country contexts (Kleven et al. 2016). What other innovative possibilities does this present?
On 11 July 2018, the IGC co-hosted a regional tax conference in Lusaka in partnership with Zambia’s Ministry of Finance to explore some of these issues, bringing together leading IGC researchers, policymakers, tax administrators, civil society, and development partners around the subject of tax policy design and enforcement. In the spirit of IGC’s approach of co-generation of knowledge, the conference featured a panel of leading tax administrators from tax authorities in Ghana, Kenya, Malawi, Rwanda, Uganda, and Zambia. The panel, chaired by IGC Research and Policy Director Adnan Khan, looked at the role that research plays in tax policy in these African countries.
Research helps instil confidence in the tax system
The tax administrators made clear that the public in their countries believes that tax authorities are being more transparent when they undertake research, and more especially when they undertake studies that are self-reflective and engage in critical analysis. This public confidence is further enhanced when tax authorities partner with independent research organisations such as the IGC, the International Centre for Tax and Development (ICTD), the World Bank, the IMF, and others including local research institutions. Additionally, better solutions to challenges are found through these partnerships, as they leverage the unique perspectives that these organisations bring to the table.
At the heart of this is collaboration between tax collection agencies and researchers. Important areas to consider when collaborating include finding a balance between operational research and research that is more abstract and theoretical in nature. Milly Nalukwago, Assistant Commissioner in charge of Research at the Uganda Revenue Authority, stressed that policymakers and tax administrators need research that can be operationalised and delivered in simple, non-technical language. Involving policymakers and tax administrators in the design and execution of studies is key to the success of the collaboration. Effective communication throughout the process also helps build trust and foster an environment of mutual dependence.
Research brings the big picture into focus
For many revenue authorities in Africa, revenue generation looms large as their primary policy goal. This requisite focus, in many instances, can lead to an obscuring of the other effects that taxation can have on an economy. The statutory tax rates and tax treaties entered into by a country have a strong influence on the investment flows that country receives (Lejour 2014). Many governments use preferential Value Added Tax (VAT) rates to exempt certain products consumed by the poor as a form of providing tax relief (Phillips and Warwick 2018). But what effects do these policies have on the wider economy? What are taxpayers’ behavioural response to them? Research carried out to understand both micro and macro effects can bring these issues sharply into focus. IGC research on the macroeconomic benefits of increasing tax enforcement in Pakistan is one such example. Researchers found that the GDP growth rate in Pakistan, a key macroeconomic target, would be increased by focusing more on tax enforcement than increasing the tax rates given the large share of informal employment in the country (Lagakos and Ilzetzki 2017).
Research (and data) is critical for decision-making
Effective decision-making requires evidence both when developing policies and when evaluating their impact. The provision of this evidence is the unique contribution that researchers can bring to the table. The tax administrators highlighted that research studies can even go a step further by clarifying expectations regarding a policy measure which has been undertaken. Without research, expectations are left to the whims of intuition and speculation. In this space, the credibility of research findings is especially key, and this credibility depends heavily on the quality of data available. Tax collecting agencies happen to be treasure troves of big data that can provide key microeconomic insights, making policy recommendations more reliable. But as Denis Mukama, Head of Research at the Rwanda Revenue Authority, emphatically noted, data is only useful if it is put to proper use. Presently, a lot of tax data is not being sufficiently leveraged to its fullest potential. Collaborations with research-minded organisations and the building of greater research capacity in tax authorities could potentially lead to more effective use of data.
Enforcement, enforcement, enforcement
What is the biggest challenge facing developing countries in the tax space? Dr Khan, the chair of the policy panel, pointed to the fundamental need for effective tax enforcement. This is true for traditional tax areas such as property taxation – where central tax collecting agencies and local governments are confronted with the challenge of taxing the same revenue base – to income taxation, to emerging areas such as the taxation of e-commerce and the erosion of traditional tax bases. The difficulties experienced in collecting taxes are generally the symptom of a weak economy and an ineffective government. The factors that affect and shape tax enforcement are therefore cardinal to increasing the levels of revenue generation in developing countries to meet the myriad of challenges facing the developing world.
Kleven, H, A Khan and U Kaul (2016), Taxing to develop: When ‘third-best’ is best. IGC Growth Brief Series 005. London. Available at: https://www.theigc.org/publication/growth-brief-taxing-to-develop/
Lagakos, D and E IIzetzki (2017), The macroeconomic benefits of increasing tax enforcement in Pakistan. IGC blog: https://www.theigc.org/blog/macroeconomic-benefits-increasing-tax-enforcement-pakistan/
Lejour, A (2014), The foreign investment effects of tax treaties. Oxford University Centre for Business Taxation Working Paper 14/03. Oxford.
Phillips, D and R Warwick (2018), Redistribution via VAT and cash transfers: an assessment in four low and middle income countries. Institute for Fiscal Studies. Available at: https://www.ifs.org.uk/publications/12867
Pomeranz, D (2018), Raising money for the state: Challenges of taxation in developing countries. World Bank Event. Available at: http://www.worldbank.org/en/events/2018/07/06/raising-money-for-the-state-challenges-of-taxation-in-developing-countries#2