Even before the global pandemic, the international community was increasingly focused on domestic resource mobilization, as aid budgets were set to shrink while countries had affirmed ambitious targets in the Sustainable Development Goals. COVID has brought into even sharper relief the need to resource emergency responses and support aggregate demand. The fiscal costs of the current crisis require a mix of revenue sources, but ultimately will be paid for mainly with taxes.
Alongside the growing attention to taxation in general, interest in the role of civic actors in tax reform in low- and middle-income countries has also grown. This is due in part to a recognition that without a strong grass-roots voice in tax, some of the goals of progressive tax reform—such as equitable tax systems that are based on strong reciprocal ties between taxpayers and the state—may not be met. Civic actors have a vital role to play to ensure that tax systems are redistributive, and that tax compliance is part of a bargain in which citizens demand state performance and services in exchange. This is no easy task, as it means mobilizing the public to take on powerful interests that oppose progressive tax reform.
As part of IBP’s new Tax Equity Initiative, we have developed some resources to help civic actors deepen their engagement with tax reform and learn from each other. We spent most of 2020 working on three exciting new projects:
- A review that explores lessons for civic actors from the academic literature on the politics of tax reform. This project resulted in two publications: an extensive literature review paper and a much shorter guide for civic actors to reflect on the main findings from the literature review. Both were released Friday, October 9.
- A global scan of the civil society tax field, in which we catalogued the major civil society organizations around the globe that are working on tax, the topics they are working on, their main approaches and the constraints that they face, among other things. Products include a summary paper with a broad overview of our findings, as well as a searchable online database that will be available to everyone, which will be published in early November.
- The first ever set of in-depth case studies on how civic actors have engaged in tax reform, covering seven cases of CSO-led tax reform campaigns in Latin America, Africa and Asia. A synthesis of these cases, and short summaries of each, will be available later this year. In addition to highlighting emerging findings from across the case studies, this project will generate lessons for other civic actors interested in engaging with tax reforms.
Taken together, we think these products will fill a gap in our understanding of how civic actors can and do engage in tax reform.
Our review of the academic literature on the politics of tax reform surveys the literature on the political economy of domestic tax reform, with a focus on low- and middle-income countries. The review looks at the main players involved in the politics of tax reform, the way in which the substance of tax reform shapes political forces, and the process by which taxes are eventually reformed, including how the reforms are framed and understood.
Tax reform is fundamentally political. It is about governments and the bargains that governments strike with taxpayers over how much will be paid and in exchange for what. Of course, states do not bargain with an undifferentiated mass of taxpayers, but with an array of interests, including powerful business interests, donors and creditors, civic actors and individual taxpayers that may or may not be organized. These actors may react to tax reform in different ways depending on their interests and perceptions, including their views not only about the taxes themselves, but what those taxes will be used for.
The literature review demonstrates that while states may generally seek revenue, and business and other elites generally seek to avoid shouldering the burden of paying tax, there are important divisions within these actors and groups. For example, ministries of finance may seek greater revenues to support expenditure, manage debt repayment, and ensure overall fiscal balance. But they may also promote foreign investment and other specific economic activities. This can lead to the pursuit of tax exemptions or tax treaties that reduce revenue, bringing ministries of finance into potential conflict with revenue authorities. Thus different parts of the state have divergent views on how much revenue to collect and how to use tax policy and administration to further their goals.
While business associations frequently oppose tax increases, they are also often divided over their interests. For example, formal sector business generally likes to see informal businesses enter into the tax net because they believe this leads to fairer competition. In Ghana, larger traders that were part of the Ghana Union of Traders’ Associations supported a turnover tax that brought smaller and more informal business into the tax net because it ensured fairer competition between these larger and smaller traders. Smaller firms may wish to see incentives or exemptions removed for larger firms for the same reason. These examples point to strategic opportunities for civic actors to exploit: opportunities to create alliances with state actors or powerful interests that may not typically be friendly to citizen agendas.
Tax reform is not only about fixed interests or incentives, but also about the way in which such reforms are structured and framed. Different ways of designing and talking about reform also matter. For example, when taxes are closely linked to popular expenditure programs, and when taxpayers trust the government to collect taxes fairly and use them for spending in the public interest, there may be more support for tax reform even from those who have to pay more. This suggests the importance of sound tax administration for tax policy: where there is high trust in tax authorities, there is likely to be more willingness to support progressive tax reform.
These points are just a taste of what is covered in the literature review paper. The shorter reflection paper is organized around guiding questions that civic actors can use to reflect on their strategies. We hope this is a useful starting point for supporting more and better civic engagement with tax, but we also want to hear from you! We know we are only beginning to scratch the surface of this exciting and dynamic field, and we want to keep improving the materials we are developing to make them more accurate, insightful and useful. So please: read and reflect, and also share your thoughts with us.