Tax Challenges Facing Developing Countries

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Seminar 2: Presentation Summary (500 1 000 words) Group 1

Presentation: Tax Challenges facing Developing Countries (Bird, 2008)

Presentation Date: Wednesday 3 August 2011

Presentation Group 1 Members: Emily Adendorff (g08a0208) and Willard Bhasa (g08b6222)

Summary:

Generally all developing countries face the same tax challenge of how to meet public spending needs

by raising revenue in a way that is not only economically sustainable but also conducive to the

political survival of those making policy decisions. The common approaches in addressing the

challenges developing countries face in creating economically sustainable tax systems are: broadening

tax base, lowering tax rates and improving tax administration.

The paper by Bird (2008) discusses these three identified areas of improvement that so-called

developing economies need to address in order to improve their governments fiscal stance. These

improvement requirements include: firstly, the need for developing economies to expand their tax

bases, so as to improve the formalisation of growth and to reduce the tax burden that can arise from

redundant and narrow- tax policies; secondly, that developing countries need to develop and

implement mechanism that successfully reduce current tax rates once tax legislation has authorised a

lower rate; and thirdly, that developing countries direct resources to improving tax administration so

as to yield maximum revenue and improve the tax efficiency- from their respective tax systems.

Traditionally, most developing economies have a significant informal economy and are agriculturally

based, both operating largely outside the formal tax system. Imposing higher tax on agriculture is

rather difficult unless the country shifts away from agriculture based economy. No country has

effectively managed to tax agricultural and informal sectors effectively; as a result the tax base that

tax authorities can reach is relatively small in developing countries.

Governments have offered tax incentives in trying to encourage investments and therefore economic

growth, but there are many costs involved and in most cases these are difficult to measure. The

benefits from these policies are similarly difficult to measure, making accountability problematic.

There is simply insufficient administrative capacity for the tax administration to function properly and

for the tax incentive system to be used effectively. Excessive use of tax incentives complicates

administration, facilitates evasion and encourages corruption.


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In situations where tax bases are not expanding and administration is weak, raising taxes is likely to

result in inequity and inefficiency. On the other hand, lowering taxes has the possible effect of lack of

public services, particularly for unpopular services, such as prisons and welfare activities. Moreover,

governments ability to accomplish projects such as infrastructure development is diminished if tax

rates are lowered.

A common problem in many developing countries is inequality. Reforms that replace highly

regressive and inelastic excises by a less regressive and more elastic VAT may reduce inequality.

However, VAT is regressive in nature that is, its burden falls disproportionately on the poor since the

poor are likely to spend more of their income than the relatively rich person.

In conclusion, what any country does to reform either tax policy or tax administration depends less on

the economics of taxation than on the politics of taxation. Outside experts and aid agencies can best

assist developing countries meet the tax challenge they face by helping them create the human and

institutional capacity they need in order to do so on their own.

The presentation game plan:

Presentation: Seminar 2

Lecture: Taxation on Wealth and on Goods and Services; Wealth Taxes; VAT

Presentation Focus: Tax Challenges Facing Developing Countries Bird (2008)

- Chapters 12 and 13: Taxation on Wealth and Goods and Services Black et al. (2008)

- Tax Policy in Emerging Countries (Bird and Zolt, 2008)

- Capital Gains Tax in South Africa (Grote and Fletcher, 2000) + Black et al. (2008)

- An Analysis of South Africas VAT (Go et al. 2005)

- Framework for Wealth Transfer Taxes (Muller, 2010)

- Property Taxes in South Africa (Bell and Bowan, 2005) + Black et al. (2008)

Key Issues: A) Wealth and Goods Tax Issues

B) Tax Policy Issues

(A) Wealth and Goods Tax:


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1) Equity and Efficiency concerns with respect to taxation on wealth: Capital Gains/ Capital

Transfer Taxes, Income/ Annual Wealth Tax (incl. salary, rental income, savings interest,

coupon interest on bonds and dividends on shares), Property/ Property Tax

2) Merit of indirect taxes: taxes imposed on commodities or market transactions (VAT)

3) Economic Effects of VAT and Personal Consumption Tax (i.e. on consumption)

(B) Tax Policy:

1) How Tax Systems differ amongst Developed and Developing countries

2) The Rationale for the recent Tax Changes in South Africa

3) Views on Tax Reform within a (current) Political Economy

4) Discuss the Major Issues facing Tax Authorities

The presentation will follow the following structure:

1) Discussion of the Bird (2008) Paper

2) Relate the Bird and Zolt (2008) Paper and add additional comments

3) Use Wealth taxes and VAT as a case study of tax policy commenting on certain key issues

for either as listed above as key issues for (A) and (B) using additional reading material

cited in the course hand-out

4) Quick Commentary on Taxation and Growth and the economic implications of a tax system

for an economy- which is an especially important consideration for a developing county

5) Conclusion about the key points highlighted with respect to Tax Policy in general

The presentation will be accompanied by a visual slide presentation

Documents

Tax Challenges Facing Developing Countries