Taxation

The development of effective tax systems is a great challenge for many countries. The total tax revenue is generally low, and tax evasion is widespread. The tax bases are often very narrow, where a small number of firms contribute the greater part of the tax revenue. The informal sector is large and growing. Taxation of international business transactions has become ever more complicated to handle for local tax administrations with limited resources for employing the necessary qualified personnel. Furthermore, capital flight and tax havens contribute to undermining the tax base. It is estimated that capital outflows from Africa represent 7.6 percent of total GDP on the African continent. This implies that African countries as a group are net creditors of donor countries.

Discussions of the importance of taxes for development have, until recently, been nearly completely absent. 6 This is now changing. Taxation is about to become a central – if not the central – topic in the development debate – also in developing countries. In August 2008, for instance, tax administrators, finance ministers and politicians from 39 African countries met in Pretoria, together with representatives of the OECD, the World Bank, IMF, and several bilateral aid organizations. 7

The “Pretoria-communiqué” concludes that more effective tax systems are central for a sustainable development because they can:

• mobilise the domestic tax base as a key mechanism for developing countries to escape aid or single resource dependency;

• reinforce government legitimacy through promoting accountability of the government to tax-paying citizens, effective state administration and good public financial management; and

• achieve a fairer sharing of the costs and benefits of globalisation.

State authority, effectiveness, accountability and responsiveness are closely related to the ways in which governments are financed. It matters that governments tax their citizens rather than live from oil revenues...