How Tax and Budget Assistance Helps Developing Countries Help Themselves
In the United States, April brings warm weather, budding flowers, baseball season and … Tax Day. While not a joyful occasion for most, it is an opportune moment to reaffirm the value of assisting developing countries to improve their tax systems.
Sound tax systems help developing nations fund the social infrastructure that citizens rely on for stability, security, and prosperity. Everything from roads, streetlights, public restrooms, and trash pickup to classrooms, health clinics, police officers, and public utilities such as water and electricity.
The good news is that more countries are determined to fund their own development. Many governments in Africa, Eastern Europe, Latin America, and elsewhere are working—often with donor-funded technical assistance—to raise and mobilize domestic revenues. In doing so, these governments are forging a social contract with their citizens, often new taxpayers who, for the first time, are exercising voice and oversight in how their taxes are being spent.
Building the Tax Base
One reason many low-income countries struggle to provide basic public services is the small percentage of citizens and businesses who file and pay their taxes. With funding from the U.S. Agency for International Development (USAID) and U.K. Department for International Development (DFID), DAI is leading domestic resource mobilization projects across three continents that help governments expand their tax bases, grow public revenues, and improve services, often without raising rates. For instance:
- USAID’s Facilitating Public Investment (FPI) project and the Philippines government implemented an electronic filing and payment system that significantly eases filing and thereby increases collections. The country’s previous e-filing system was notoriously slow during peak periods and prone to cutting out. This led to hours-long lines to file and pay at tax offices, not to mention the travel time involved. The e-filing upgrades resulted in a swift and positive response: e-filing skyrocketed from 10 percent to 90 percent of all filings within three years, contributing to a 10 percent increase in collections in 2016. Lengthy tax office queues have all but disappeared. FPI is now partnering with mobile payment providers and local banks to further expand channels and locations for tax payment.
While Ethiopia is a growing economy, 98 million of its citizens still live in poverty. Improving revenue mobilization will be critical in supporting the government to improve public investments and services. Efficient and automated tax administration is an important part of this process. Ethiopia’s Standard Integrated Government Tax Administration System (SIGTAS) was severely degraded by 2012 due to software neglect; tax officials resorted to keeping records on paper and their data processing workload tripled. DFID’s Tax, Audit, and Transparency (TAUT) program is upgrading SIGTAS, including an e-filing system that has already helped increase the number of value-added tax filers by 250 percent, with more e-filing contributing to shorter lines at tax offices. Still a work in progress, TAUT has nevertheless helped Ethiopia process revenue of ETB 91 billion, or £3.3 billion, in Fiscal Year 2016 through its previously unusable SIGTAS system.
In Liberia, a country of 4.6 million people, the Liberian Revenue Authority reports only 8,000 to 10,000 compliant taxpayers. Meanwhile, a recent survey indicates that 50 percent of Liberians do not know where or how to make tax payments. To increase awareness, especially outside of the capital of Monrovia, USAID’s Revenue Generation for Governance and Growth (RG3) partnered with GeoPoll to send text messages in early March to 37,000 should-be taxpayers with the payment deadline and a phone number for the taxpayer call center. The call center, which received five to eight queries per month before the campaign, reported 189 calls in March alone, with questions on how to file, make payments, and avoid penalties.
These examples of national revenue projects are in addition to projects that DAI is implementing to mobilize revenues at state and local levels.
Minding the Public’s Money
Once collected, revenues must be effectively budgeted to fund services, pay down debt, and contribute to reserves. DAI is assisting select local and national governments to reduce wasteful expenditures, fight corruption, and create budgets that respond to constituents:
In Kosovo, cities receive funds directly from the national government, and their expenditure has been fraught with waste and favoritism in local government contracting. DAI recently launched Transparent, Effective, and Accountable Municipalities (TEAM), a USAID project that will partner with five municipalities to mentor and train municipal officers in optimizing e-procurement systems and contractor databases to improve transparency and fairness. TEAM will also train civic groups and procurement officers in 38 municipalities to recognize and stand up to corruption in procurement.
The USAID Strong Hubs for Afghan Hope and Resilience (SHAHAR) project helped partner municipalities in Afghanistan increase tax revenues by 38 percent in one year and improve how these funds are spent. By establishing municipal advisory boards, local citizens now guide budgetary planning, while the introduction of competitive bidding is helping municipalities get better value for their spending.
Launched in January, USAID’s Fiscal and Procurement Reform Project is working with Guatemala’s Ministry of Finance to make public procurement more competitive and transparent and restore public trust in the wake of high-level corruption scandals. By implementing new software systems for vendors and improving regulations around public procurement, our team will work with Guatemala’s government to reduce budgetary waste and abuse and increase its ability to invest in health, education, and infrastructure.
Long-Term Investments in Fiscal Reform Paying Off
Improving domestic resource mobilization and public financial management is more than balancing numbers—it forms a virtuous circle in which taxpayers see a positive return on investment and governments become better stewards of taxes and other revenues. We have seen transformation take place in several countries, including:
In Jordan, where the Fiscal Reform Project II and Bridge Activity worked with the Income and Sales Tax Department to improve IT systems, customer service, and taxpayer databases, which helped spur a 50 percent increase in tax revenues collected since 2010. To ensure that new funds were spent effectively, the projects collaborated with the General Budget Department to develop a public expenditures roadmap for budgetary planning in health, education, energy, and water. DAI also helped the government introduce its first gender-responsive participatory budgeting manual.
In El Salvador, USAID’s Fiscal Policy and Expenditure Management Program (FPEMP) and predecessor Tax Policy and Administration Reform programs partnered with the government of El Salvador to carry out comprehensive public finance reforms. These systemwide improvements contributed to an increase of net tax revenues as a percentage of GDP from 13.5 percent in 2010 to 15.5 percent in 2016. Strong compliance enforcement and IT system upgrades helped the government capture an additional $229.2 million in tax revenue from 2011-2016. The government’s health expenditures-to-GDP ratio rose from 3.7 percent in 2008 to 4.6 percent in 2013, to give just one example of the social spending enabled by fiscal reform, while individuals’ out-of-pocket health expenses steadily decreased.
- In Nigeria, DFID’s State Partnership for Accountability Responsiveness and Capability (SPARC) project worked with state-level governments to reclaim funds from dormant bank accounts, reduce procurement costs, and recover outstanding debts, which resulted in an additional £600 million available for public services over seven years. To ensure that citizens benefited, the SPARC team led advocacy efforts for increased state spending on health and education, contributing to 2.1 million children enrolling in school for the first time and 300,000 children receiving basic vaccinations.
The return on investment in these programs is just the beginning. When donors help their partners in developing countries better manage tax collection, budgeting, and expenditure, they promote self-sustaining, responsive, and accountable governments—the kind of government every taxpayer can appreciate, every day of the year, even Tax Day.