Written by leading international experts, Taxing Africa offers a cutting-edge analysis on all aspects of the continent's tax regime, displaying the crucial role such arrangements have on attempts to create social justice and push economic advancement. From tax evasion by multinational corporations and African elites to how ordinary people navigate complex webs of 'informal' local taxation, the book examines the potential for reform, and how space might be created for enabling locally-led strategies.
Written by leading international experts, Taxing Africa offers a cutting-edge analysis on all aspects of the continent's tax regime, displaying the crucial role such arrangements have on attempts to create social justice and push economic advancement. From tax evasion by multinational corporations and African elites to how ordinary people navigate complex webs of 'informal' local taxation, the book examines the potential for reform, and how space might be created for enabling locally-led strategies.
Taxing Africa: Coercion, Reform and Development
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Taxing Africa: Coercion, Reform and Development
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Overview
Written by leading international experts, Taxing Africa offers a cutting-edge analysis on all aspects of the continent's tax regime, displaying the crucial role such arrangements have on attempts to create social justice and push economic advancement. From tax evasion by multinational corporations and African elites to how ordinary people navigate complex webs of 'informal' local taxation, the book examines the potential for reform, and how space might be created for enabling locally-led strategies.
Product Details
| ISBN-13: | 9781783604531 |
|---|---|
| Publisher: | Bloomsbury Academic |
| Publication date: | 08/15/2018 |
| Series: | African Arguments |
| Edition description: | 1 |
| Pages: | 288 |
| Product dimensions: | 5.30(w) x 8.40(h) x 1.00(d) |
About the Author
Wilson Prichard is an Associate Professor at the Munk School of Global Affairs and in the Department of Political Science at the University of Toronto, Canada, Research Fellow at the Institute of Development Studies, UK and Research Director at the International Centre for Tax and Development, UK.
Odd-Helge Fjeldstad is Research Professor at Chr. Michelsen Institute, Bergen, Norway, Extraordinary Professor at the African Tax Institute, University of Pretoria, South Africa and Senior Fellow at the International Centre for Tax and Development, UK.
Mick Moore is a Professorial Fellow at the Institute of Development Studies; and CEO of the International Centre for Tax and Development.
Wilson Prichard is an Associate Professor at the Munk School of Global Affairs and in the Department of Political Science at the University of Toronto, Research Fellow at the Institute of Development Studies and Research Director at the International Centre for Tax and Development.
Odd-Helge Fjeldstad is Research Professor at Chr. Michelsen Institute, Bergen, Norway, Extraordinary Professor at the African Tax Institute, University of Pretoria, and Senior Fellow at the International Centre for Tax and Development.
Read an Excerpt
CHAPTER 1
WHY DOES TAX MATTER?
Introduction
If asked to identify the most important issues facing Africa in the twenty-first century, few people would mention tax. For most of us, taxation lies somewhere on a spectrum between irritating and boring. At best, it is an unappealing necessity – rather like sewerage or vaccinations. 'Tax' is the domain of charisma-free accountants, lawyers and number crunchers. It seems an unlikely place to encounter big societal questions about democracy, development, equity or good government. Yet it is exactly these kinds of issues that pervade the conversations about taxation that we, the authors, have with policymakers, business people, tax collectors, civil society activists, journalists and aid donors in Africa. Many of them think tax is central to African development. Let us begin by introducing you to one of these tax aficionados.
A ground-level view of taxation in Africa
Dr Samuel Jibao is now one of our close research colleagues. Samuel's original contact with the authors was in 2010, when he and Wilson Prichard worked together on an analysis of the (many) challenges facing the Sierra Leone tax system. At their first meeting, Samuel introduced himself as a native of Kailahun District, in the east of the country, and an economist by training. He worked initially as a lecturer at the national university before joining the newly created National Revenue Authority (NRA) in 2003. There, he rose to become Acting Director of Research in 2010. In 2011, he left the NRA to create an independent research institute, the Centre for Economic Research and Capacity Building, which specialises in taxation.
Samuel's rise within the NRA reflected a keen intelligence and a deeply held commitment to honesty and public service. But what also distinguished him was that he regularly travelled around the country and got to know tax officials and taxpayers at every level. He sought to understand the tax system from the ground up, focusing not only on formal laws and institutions, but also on the lived experiences of taxpayers and tax collectors. It was this need to understand how the system actually functioned that he emphasised during his first meeting with Wilson – over several bottles of Heineken and a plate of palaver stew, in a small Freetown restaurant up the street from the headquarters of the NRA. Interrupted regularly by colleagues, jokes, personal stories and much else, Samuel explained why it was important to speak with taxpayers themselves.
The first thing you discover, he said, is that when you talk about 'taxes' in Sierra Leone, the word will mean very different things depending on who you are talking to. In the big cities, and among the national elite, 'taxation' generally means personal income taxes, corporate taxes, value-added taxes and customs duties. These taxes bring in most national revenue, and – probably for that reason – dominate international discussion of taxation. However, to people outside the big cities and small elite circles, 'taxation' means something very different: smaller taxes, levies and fees paid to local governments; 'informal' payments to tax collectors and state officials; and a wide range of payments to groups other than the government, including traditional chiefs. These kinds of payments – what in Chapter 7 we label small taxes – are easily overlooked by outsiders but are an integral part of the story of taxation in Africa.
In 2010, we, the authors, established the International Centre for Tax and Development (ICTD). Four years later, Samuel's Centre for Economic Research and Capacity Building worked with ICTD to conduct a large survey to find out exactly what citizens of Sierra Leone outside large cities pay in taxes and tax-like levies. Samuel had been exactly right. Few people outside the cities pay income tax or corporate taxes. About half of the tax and tax-like payments they make are to local governments. The remainder are 'informal taxes' collected by people and organisations who are not in any sense 'official' or part of the state: chiefs, community development organisations, religious organisations, informal defence groups and so on. More surprisingly, people on average had significantly more confidence that these non-state 'informal taxes' would be transformed into public services than that the formal taxes they paid to the local and national government would be (Jibao et al. 2017).
Back in the restaurant in Freetown, Samuel had gone on to explain that, if you are willing to take the time to sit down with them and let the tax conversation develop, most Sierra Leoneans will want to talk about the (lack of) taxation with regard to local mining operations. At that time, large new mining investments were flowing into the country, but the government had signed ad hoc agreements with mining companies and had granted them large-scale tax exemptions. As a result, the government was collecting very little revenue from the mining companies, either through corporate income tax or through royalty charges on the depletion of national assets. In 2010, the Sierra Leone government was seeking to renegotiate some of those contracts. Taxpayers were asking why the government was gathering taxes from poor citizens, but collecting little or nothing from the large mining firms that seemed to have a much greater capacity to pay. It was not only in Sierra Leone that this question was being asked. Then, and today, many African governments raise strikingly little direct revenue from mining operations (Chapter 5). Samuel said that most taxpayers had neither the interest nor the expertise to discuss details of mining tax design, but they had a strong sense of fairness and they believed that the current system was not delivering it. The powerful were not paying their fair share, while those lacking political connections and international links were picking up the bill.
If you sat for longer with local taxpayers, Samuel explained, the conversation would likely get around to a more general question: 'Why should I pay taxes when I don't seem to get anything in return?' Many people in Sierra Leone, and across the continent, lack access to electricity, running water, consistently passable roads or decent health and education facilities. And surveys suggest that in many countries tax and customs authorities themselves are viewed as corrupt (Chapter 6),1 while taxpayers have little confidence that the revenue that reaches the government will be used productively (Aiko and Logan 2014; Jibao et al. 2017; van den Boogaard et al. 2018; Paler et al. 2017; Fjeldstad and Semboja 2001). As Samuel explained, it is small wonder that there is little active public support for, or interest in, increasing taxation.
There is mounting evidence that while effective enforcement is important to ensuring tax compliance, so too is perceived fairness, reciprocity and accountability in the collection of taxes – and in the spending of tax revenues (e.g. Ali et al. 2014). Talking with taxpayers, Samuel explained, makes clear the need for stronger links between what people pay and what they receive in return. Many tax collectors have similar views. They lament that, although they bring in the money, they are not in a position to make their own job easier by influencing how that money is used. Reliable surveys suggest that most Africans believe that governments have the right to collect taxes and that, in principle, citizens have a duty to pay them (Aiko and Logan 2014). But there is widespread mistrust of the claims that taxes will be translated into viable services, or that public opinion affects how the money is spent.
Concerns about fairness, equity and reciprocity are thus pervasive among taxpayers. Yet popular initiatives to improve tax systems have been rare, both in Sierra Leone and elsewhere. This seems to reflect a broad sense among taxpayers that the failures of national and local tax systems are firmly rooted in the realities of power and politics. It is commonly believed that powerful individuals do not pay the taxes that they owe – be they income taxes, corporate taxes, trade taxes, property taxes or others – because of the political influence that they enjoy. Official data almost everywhere seems to confirm this story. While taxation is often presented as a highly specialist, technical and rule-bound enterprise, taxpayers themselves often have a visceral sense that politics explains much of what occurs in practice.
Finally, Samuel stressed that to fully understand taxation in Africa it is also necessary to consider history, and especially colonial history. A central point of reference for the tax history of Sierra Leone is the Hut Tax War of 1898. The British had recently established the protectorate and had introduced a new tax on dwellings. Led by a coalition of chiefs, local forces launched armed resistance that lasted nine months. It ended after the British resorted to 'scorched earth' policies (Abraham 1974). In the minds of Sierra Leoneans, the Hut Tax War is not ancient history. Rather, it is a significant influence on how they understand the world today. At the time when Samuel and Wilson were having this conversation, the government had been proposing to introduce a property tax to provide a revenue source for local councils in smaller towns. This new tax was introduced successfully, but during the process critics often referred to the Hut Tax War. Again, it was said, the government in Freetown was trying to extract revenue from rural areas without making any effort to consult, create consensus, or offer reciprocal benefits. This awareness of the extractive character of colonial taxation is widespread across the continent (Chapter 2).
Underlying Samuel's history of tax was a broader understanding that taxation is not only about the (tedious, technical) practicalities of raising revenue, but also about questions of power, accountability and effective, legitimate government. On the one hand, the Hut Tax War illustrates the coercive face of taxation, and the ways in which, even before the colonial period, rulers have flailed around to raise revenue. On the other hand, it also demonstrates both the depth of popular convictions that taxation ought to be legitimate and accountable and the consequent potential for tax policy failures to become springboards for popular political action. Samuel explained that, in the aftermath of a decade of civil war between 1991 and 2002, the Sierra Leone tax system was neither fair nor accountable. But many Sierra Leoneans understood that improving it was very much about changing politics, and closely connected to the task of strengthening governance more broadly.
Taxing Africa: what are the big questions?
Samuel is one of many people contributing to a mounting level of debate in Africa about how tax systems might be transformed for the better, so that they are more fair, equitable, reciprocal and accountable, and contribute to development more broadly. This book aims to capture this emerging set of ideas and debates and to open them up to new audiences. What are the overarching ideas that we seek to capture?
The diversity of tax experiences
The first idea relates to the diversity of tax experiences, and the importance of making public the relatively untold story of how tax impacts on most Africans.
Academic and policy accounts of taxation in Africa focus on central government taxes – personal income tax, corporate income tax, value-added tax, customs duties and taxes on natural resources. These taxes provide the bulk of government revenue. As we explain at various points in this book, African governments are not novices at the business of collecting these taxes. They do so more effectively than governments in some other low-income parts of the world, and they are making consistent, gradual progress in improving their revenue systems and in capturing a higher proportion of national income for public purposes. But the majority of people who pay taxes in Africa have no direct contact with the organisations that raise revenue for central governments – (autonomous) revenue authorities and customs and internal revenue departments of ministries of finance. Instead, most Africans who pay taxes hand their money over to local governments or to one of a range of organisations that levy what we term informal taxes on behalf of non-state actors. Information on the amounts of money raised by local governments and informal tax collectors is scarce and unreliable. Overall, the amounts are very much smaller than central government revenue collections. Conversely, they often account for quite a high proportion of the incomes of poor people. They face a diverse array of small taxes, of varying and often ambiguous degrees of formality. They almost always meet the tax collector face to face. Sometimes collection is accompanied by an element of threat or coercion. Collusion with tax collectors to reduce the agreed tax bill is common. A significant share of the revenue handed over to formal tax collectors never appears in government accounts.
There are many different tax worlds in Africa. At one end of the spectrum, a small number of large transnational companies, which provide much of the revenue collected by some African governments, interact with revenue authorities through formal procedures that would be familiar to Her Majesty's Revenue and Customs in the UK. The other end – the world of small taxes described in Chapter 7 – is much less formal and more diverse. Less money flows through it, but it impacts directly on more taxpayers. It is easily overlooked by people not directly involved, but it is critical to local livelihoods and the links between taxation, decentralisation and state-building.
Fairness, equity and inequality
With economic inequality increasing in much of the world – including, it seems, in Africa – more attention is being paid to the potential redistributive role of tax systems. This is actually a reversion to an earlier situation. In the 1960s and 1970s, in Africa and elsewhere, tax regimes and tax reforms were widely conceived and rationalised as means of redistributing income from rich to poor (Kaldor 1963). In practice, they failed. Africa did not have revenue administrations with the resources, commitment or political backing needed to effect change. The perception of failure helped justify the shift in the 1980s towards a less ambitious agenda for tax collectors, one that focused more on simplifying and improving tax administration at the nuts and bolts level – and on introducing the new VAT, which is a tax on consumption, not on income. The pendulum is now swinging back, towards a middle ground. For example, taxes on property, having been almost entirely ignored or relegated to the terrain of local government financing, are now being taken more seriously – by national governments in Africa, and internationally by the International Monetary Fund (IMF) and others.
The discussion over redistribution has sometimes been reduced to a simplistic debate over the relative merits of (putatively progressive) direct taxes and (potentially regressive) indirect taxes. The underlying intuition is clear and, in very general terms, mostly correct. Direct taxes on income and wealth are more likely to harvest revenue from the relatively wealthy than are taxes on sales, imports or value added. But in any specific country at any moment in time, the real policy choices will be more diverse and complex. Some taxes on sales, imports or value added might be good ways of 'soaking the rich'. Even regressive taxes can have redistributive effects if they fuel progressive patterns of public spending.
More important perhaps in much of Africa are the implications for fairness and equity, not just of the law and formal tax schedules but also of the ways in which they are implemented by revenue administrations. Personal income taxes are only redistributive if wealthy people actually pay them; in practice, many – probably most – wealthy people in Africa do not (Chapter 6). Similarly, the property taxes that in principle could raise significant revenues from wealthy people, especially in the light of a series of booms in property prices in many African cities, generate very little money (Chapter 7). Either the legislation is not in place or it is not implemented – or even implementable. Larger corporations often benefit from excessive and unjustified tax exemptions granted by governments, and from their ability to exploit international tax rules to their own advantage (Chapters 3, 4 and 6). Meanwhile, the informal taxes mentioned above appear to fall disproportionately on those with lower incomes.
Tax systems that are visibly unfair and regressive do not only exacerbate inequality. They also threaten to undermine tax compliance and the legitimacy of governments more generally.
Linking the international, national and local
In recent years, we have learned a great deal about the many ways in which the international tax system facilitates tax avoidance and evasion by transnational companies and wealthy individuals. We know that African governments lose revenue. But how big is this problem in relation to other tax challenges facing the continent? And what can be done about it?
(Continues…)
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Table of Contents
Acknowledgements ix
1 Why does tax matter? 1
2 A new tax era in Africa? 19
3 Is Africa the victim of global forces? 37
4 What can Africa do in the face of international tax challenges? 67
5 Extractives and extraction: taxing oil, gas and minerals 89
6 Taxing at national level: rising to the challenge? 113
7 Small taxes and large burdens: informal and subnational revenues 147
8 Does taxation lead to improved governance? 179
9 The way forward 211
Bibliography 223
Glossary of terms 250
Notes 252
Index 265