Developing countries face political obstacles to tax reforms meant to increase domestic resource mobilization, but the COVID-19 crisis presents an opportunity for governments to act on tax policy changes, according to new research.
Researchers found that political divisions, unstable leadership, and low public trust in the tax system present significant obstacles to reforms that broaden the tax base and mobilize domestic resources, said João Tovar Jalles, assistant professor of macroeconomics at the University of Lisbon, at a March 3 webinar hosted by the Center for Global Development (CGD).
Jalles, who coauthored a March 2 CGD working paper with Sanjeev Gupta, CGD senior policy fellow, on the crisis’s effect on tax reform implementation in developing countries, said that acute revenue needs could spur governments to implement tax reforms in areas such as corporate income tax, excise taxes, and property taxes. However, he said pandemics do not appear to drive developing countries to implement revenue administration reforms in information technology, human resources, and compliance.
The paper compared developing countries’ fiscal responses to pandemics from 2000 to 2018 to get a sense of how a pandemic might affect implementation of tax reforms.
In another March 2 working paper, Jalles and Gupta found that in countries outside sub-Saharan Africa, where tax reforms include changes to personal income tax regimes and the operation of tax revenue administrations, the disposable Gini coefficient — which measures inequality — falls, and the poorest populations’ share of income rises.
Drawing from a December 15, 2020, working paper that analyzed how political economy determines tax reform, Jalles said left-leaning governments are less likely to undertake tax reforms, especially increases in personal income tax, for fear that they will benefit the rich. He also said his research found that proximity to elections and more political cohesiveness are positively correlated with tax reforms.
Katherine Baer, assistant director at the IMF's Fiscal Affairs Department, said during the webinar that there are several key obstacles to tax reform implementation in sub-Saharan African and Western Hemisphere developing countries. Lack of government continuity, extensive tax exemptions for multinational corporations and large industries, lack of connection and education on tax issues in government, and lack of engagement and trust from civil society all create obstacles to tax reform, increased tax compliance, and domestic resource mobilization in developing countries.
Developing countries should work to represent their interests in international-level tax policy frameworks like the OECD and G-20, whether through regional advocacy associations or the United Nations, said Elliott Harris, assistant secretary general and chief economist for the U.N. Department of Economic and Social Affairs. Low-income countries and developing nations are not always appropriately reflected in those discussions — which drive international tax policy — and are often held back through outdated bilateral treaties, he said.
Political and societal consensus is very important for implementing tax reforms that mobilize domestic resources, said Yaw Ansu, senior policy adviser to Ghana’s finance minister. To achieve that, governments must practice expenditure transparency to increase public trust in taxpaying, put expenditures toward areas that promote growth, and use digitalization innovatively and aggressively to increase transparency, he said.