It is often assumed that tax is a bad thing: that governments want to deprive citizens of their hard-earned money. But from an economic justice and human rights perspective, taxes are crucial for four reasons, which can be summarised as the four ‘Rs’:
- Revenue: funding to deliver the services citizens need
- Redistribution: to address poverty and inequality
- Representation: building accountability of governments to citizens and reclaiming policy space
- Repricing: limiting public ‘bads’; encouraging public ‘goods’.
Below we explain the importance of each in turn and their links to economic and social justice issues.
‘Taxation funds the lion’s share of the education budget, particularly the salaries of teachers, and so requires more attention if countries are to meet the Education for All Objectives by 2015.’
Tax is a vital source of revenue for most governments enabling them to fund essential services and infrastructure for their citizens. Of course, revenues will not automatically be used for such social goods. But when governments get revenue from tax, citizens are in a far stronger position to exert pressure that it be spent on the services to which they are entitled.Taking education as an example, in 1995 the Ghanaian government introduced a new value added tax (VAT) of 17.5 per cent, which initially led to widespread protests. The government was forced to revoke the policy and in 1997 VAT was introduced at 10 per cent, accompaniedby an intensive government campaign to create awareness among citizens about what therevenues from the tax would be used for. Subsequently the level of VAT was raised to 12.5 per cent, with the revenue from the added 2.5 per cent ring-fenced for education through the Ghana Education Trust Fund. With education being key to everybody, it caught on well.2
ActionAid has stressed that ‘governments prefer to use tax revenue, rather than aid or loans, to cover the salaries of teachers, because it is relatively secure and predictable. They do not want to hire teachers with aid money and then find they cannot pay the salaries two or three years later, as making teachers redundant is politically very sensitive. So, the best way to get more money for more teachers is to expand the national tax base.’3 When aid contributions have enabled governments to improve provision of services, domestically raised revenue tends to also be an important factor. In Kenya the declaration of free primary education in 2005 led to the realisation by the state of the need to improve fiscal resources to maintain the president’s electoral promise. This, together with other societal needs, has led to increased tax targets and collection in order to improve education and other services.5
What is true of education is true of many other services that rely on government support and funding. Millions of small farmers in southern countries rely on governments to provide training, research and credit and to develop markets for inputs and outputs; yet governments in Africa tend to spend far too little in this area, and donor support to agriculture has been woefully inadequate over recent decades. Increased earnings from domestic tax would enable governments to provide more of these services or at least provide citizens with the scope to argue the case for this spending to take place. Addressing high maternal and infant mortality rates, successfully tackling HIV, reducing the blight of malaria and other tropical diseases all require reliable long-term funding from governments. Of course, financing through taxation is not the only factor that will drive the provision of such services. Other factors such as political will are crucial. But tax is an important part of the solution. For this reason, citizens in many countries have sought to influence tax policies in order to get the services to which they are entitled.
So, if you are campaigning for the provision or improvement of education, health or other services, engaging in tax issues should be a central part of your efforts.
Tax and human rights
Groups working on human rights should be concerned about how rights are realised through the budget, and how they are violated when states are unable to meet their obligations through weak or unfair taxation.
In 1986 the United Nations made explicit the link between this right and the resources required to fund it. More recently the millennium development goals (MDGs) are an attempt to create a practical benchmark for states to work towards implementing human rights.
MDG campaigners often focus on pushing countries to fulfil their aid pledges, aimed at meeting the MDGs. While this is important, there is an increasing recognition that the progressive realisation of rights, in the long term, requires domestic resource mobilisation through tax. Indeed, a recent analysis by theTax Justice Network showed a strong relationship between African countries with high levels of tax collection and those making progress with regard to the MDGs.6
Are resources being mobilised to ensure that governments fulfill their responsibilities towards the progressive realisation of rights? If not, a government may be failing in its human rights obligations and may be held to account for doing so.
Tax policy can play an important role in redistributing wealth within an economy. The provision of services discussed in the previous section is one way of addressing poverty and inequality through taxation – as it is the poor who tend to depend more on key services such as publicly funded health and education. As we saw with the Bolivia case study on page 2, tax policy has the potential to redistribute a country’s riches from the wealthy (in this case oil and gas companies) towards the poorest and most vulnerable (old people, and children who would otherwise lack education). This is an example of ‘progressive’ and equitable taxation.
Tax systems can include progressive or regressive elements. For example, a country could rely on taxation of resource wealth, corporate taxation or taxation of property while collecting less tax from those on low incomes. Or income taxes could be differentiated between those on lower and higher incomes. These would generally be considered progressive policies. Conversely, a reliance on consumption taxes (levied on food, fuel and other goods) would be considered regressive.
In reality, tax systems the world over are often regressive. This is even more likely to be the case in many southern countries, which tend to have particularly low levels of taxation on income and an over-reliance on consumption taxes. For example in Latin America individual income taxes contribute only 4 per cent of the overall tax collection. Some southern countries fare better. In Bangladesh direct taxation comprises 20 per cent. In Ghana the figure is 22 per cent, but this is much higher than most of its regional neighbours and is still far below the developed country average of 35 per cent.8 A regressive tax system can do a lot of damage and can even contribute directly to increasing the concentration of wealth – as it has been shown to do in Latin America where inequality is greater after tax than before taxes are paid.
The ‘tax consensus’ pushed by the International Monetary Fund (IMF), World Bank and others over the last two to three decades has tended to contribute to furthering the ‘regressive’ nature of many tax systems. While countries have been strongly encouraged to minimise the taxation of foreign investors as well as to reduce trade taxes that were previously important sources of revenue for social spending (both of these trends are explained in detail later in this chapter), governments have meanwhile been encouraged to increase taxes on purchases – generally known as ‘value added tax’ (VAT) or sometimes referred to as a ‘goods and services tax’ (GST) or ‘consumption taxes’. These policy recommendations are based on the premise that taxes should be economically neutral and should focus on raising revenue only, ignoring the potential for tax to challenge inequality.
‘It is hardly possible to speak of the struggle for an equitable society and for social justice unless the agenda of progressive taxation is concretely articulated.’
VAT unfair on the poorest
Most southern countries have very large informal sectors and significant rural populations, from whom it is difficult for governments with weak tax administrations to collect income tax. Even if governments had better systems in place, these are often the citizens least able to afford to pay tax. In response to this problem as well as to pressures from international financial institutions (IFIs) and donors, many southern countries have increasingly relied on an expansion of VAT for their tax revenues. While developed country economies tend to rely on VAT for about 30 per cent of total tax revenues, in southern countries it is often dramatically higher. In Latin America consumer taxes account for almost two-thirds of tax revenues, with VAT being the most important of these.
Yet consumption taxes such as VAT or GST are usually regressive taxes. Unless a comprehensive set of exemptions is applied to the basic goods and services consumed by poor people, they will spend a much higher percentage of their minimal incomes on the goods and services that carry this tax than those with large disposable incomes. So too much reliance by a government on VAT for its revenue can end up deepening inequality in a country. For this reason VAT has been a focus for tax justice protests in countries around the world.
‘Progressive’ or ‘regressive’ taxation?:
Gender inequality in the tax system?12
Tax systems can also play a role in addressing or exacerbating economic inequality between women and men. This can either be implicit or explicit.
Implicitly, an identical tax may have a differential impact on women and men because of their differing social and economic roles. For example:
- A high rate of tax on part-time earners is likely to affect women more than men because women are more likely to work part time to accommodate family responsibilities.
- If the tax code treats a married couple as a single unit (combining their earnings for tax purposes), the couple can face a ‘marriage penalty’ whereby they end up paying more than when they filed their taxes separately as single people. This usually affects women disproportionately because the higher tax is effectively placed on the ‘second’ earner. Women are more likely to be earning less than their spouses and their earnings are thus usually regarded as ‘secondary’.
- A shift from direct taxes to indirect taxes such as VAT can produce greater gender inequalities if taxes are levied on essential goods that are consumed disproportionately by female-headed households.13
- Men are more likely than women to benefit from corporate and income tax exemptions as they are more likely to own property
There are also sometimes explicit differences built into the tax system between how women and men are taxed. In Pakistan, for instance, the tax code allows working women to shield a greater amount of their income from tax than working men. In contrast, in South Africa prior to 1994, married women were taxed at higher rates than married men.
So, it is important for groups working on tax to assess the gender implications of tax structures and to challenge those systems that are regressive along gender lines.
‘A tax system should be progressive, meaning that those with higher incomes pay greater taxes as a share of income than those with lower incomes.’
‘If the government continues to give tax cuts and tax holidays to attract investors, where will we get money to finance primary education, build roads, and reduce infant mortality? We will source it from indirect taxes such as the Value Added Tax which burdens more Filipinos.’
Who holds the money – central or local governments?
In many southern countries, local taxation accounts for only a tiny share of total tax revenue. In Ghana, districts continue to be fiscally dependent on central transfers and donor revenues. However, there is remarkably little coordination between local authorities and the national tax authorities. Citizens are consistently confronted with two distinct and uncoordinated sets of tax collectors and tax demands, while some national tax officials report that local tax officials sometimes seek to increase local collection by encouraging the evasion of national taxes. This undermines the credibility of the system as a whole and may lead to poorly educated or uninformed citizens paying more tax than they should.
The importance of CSOs speaking out directly on tax equity issues is highlighted by recent trends in tax reform. A PricewaterhouseCoopers/ World Bank report makes clear that the most popular change to tax systems worldwide between 2004 and 2006 was reducing corporate profit tax rates.17 The private sector has been effective in ensuring reforms for its benefit. Unfortunately it is less common to hear the voices fighting for an increase in tax collection and equitable tax reforms. Civil society groups can promote pro-poor tax policies by ensuring that crucial equity issues are part of tax debates.
Building accountability of governments to citizens
If you are working on governance and accountability issues, tax should also be on your agenda. Taxation is about more than revenue- raising; it is also a fundamental part of state- building and democracy. One important study examined the link between democracy and taxes in 113 countries between 1971 and 1997.
It found that introducing or increasing taxes without simultaneously increasing and improving service delivery led to citizens demanding their rights and to subsequent democratic reforms.18
Campaigners have always challenged governments when they raise and spend public revenue in unfair or corrupt ways. In many countries the imposition of unfair taxes has been an important catalyst of social and political change, from the poll tax in medieval England through the Boston tea party to VAT in 1990s Ghana. The long-term relationship between taxation and the development of more accountable and responsive governments has a number of components:
- Collective bargaining around tax revenue creates a ‘social contract’ between members of society who are paying taxes and voting for political parties, and officials who are expected to raise and spend those revenues in a manner that benefits the constituents who elected them. Taxes make government more immediate and visible, and ultimately more accountable. Critically, fairness in the tax system is important for building that accountability between governments and citizens – without the perception that the big players are contributing their fair share, the incentive for ordinary citizens to do so is considerably diminished.
- A state that depends on taxes needs a healthy economy to generate them. That requires citizens and businesses that flourish, so the government has an interest in responding to their needs.
- To raise tax reliably, governments need efficient, accountable and honest revenue services (that is good administrative governance).
However, without transparency and access to information, citizens are less able to hold governments to account. Without knowing how much tax is being raised and from where, the people are less able to make proposals about how the money should be spent. Lack of transparency and lack of freedom of information are both issues that are also central to the democratic control that a population holds over its government. The demand for transparency and freedom of information is therefore a campaign issue in its own right, as well as a central aspect of tax justice campaigns. Many organisations and activists are finding ways of getting governments to share this information and of holding them
‘Tax provides people with a weapon: if government doesn’t act well, you can withhold tax, particularly when it comes to high- level corruption. Government responsiveness is higher from government to citizen than before.’
Protests on tax and representation
- In colonial India, Ghandi organised salt tax marches in the 1940s against the unjust taxes that the British colonial administration imposed on Indian people without the right to decide how they were spent.
- In the UK, when women campaigned for the vote they adopted the slogan ‘no vote, no tax’.
- During the events that led to the US war of independence in 1776, British colonists who were not represented in the UK Parliament rallied around the cry ‘no taxation without representation’.This established the precedent for the right to be taxed only by one’s own elected representatives.
In times of independence, some tax justice activists have reversed the slogan of the US independence campaigners to say ‘no representation without taxation’, recognising that proper representation is unlikely to be achieved without a transparent and fair tax system.
Citizens campaign for right to information on tax
The counterpart to pushing for fair enforcement of taxation is pushing for transparency and inclusiveness in the tax system. In Sierra Leone, citizens desperately need detailed information about how taxes are assessed, how much tax revenue is collected and how that revenue is used.
At the local government level, this is particularly important where citizens complain that tax assessment is arbitrary and that information about how much revenue is collected and how it is spent is unavailable. Transparency can be the basis for encouraging voluntary tax compliance and more broadly building the legitimacy and accountability of government.19
In recognition of this importance, a number of civil society campaigns have aimed to ensure greater tax transparency, in conjunction with budget monitoring and advocacy.
Building tax into budget monitoring
Many organisations across the South are involved in monitoring their government’s budget, in order to guard against corruption and to ensure that funds are being directed appropriately and spent effectively. Budget monitoring usually focuses on how government money is spent; but increasingly citizens are recognising that it is equally important to track where the money comes from, as no government programme or policy can succeed without funds to implement or enforce it.
As the International Budget Partnership (IBP) points out in its guide for non-governmental organisations (NGOs) thinking of working on tax,21 the budget is one of the most important public documents produced by a government, expressing its priorities and commitments.
It is the place where a government proposes how much revenue it plans to raise and how it plans to use these funds to meet the nation’s competing needs, from bolstering security to improving healthcare to alleviating poverty. Given its wide-ranging implications for a nation’s citizens, the budget should be the subject of widespread scrutiny and debate. The IBP rightly points out that groups that are knowledgeable about both sides of the budget – expenditure and revenues – will ultimately be more effective.
Unfortunately, expenditure that targets the poor is often the easiest to sacrifice, because the poor tend to be unorganised and politically weak. CSOs may find that they can more easily defend these programmes if they also engage with tax issues and work to ensure revenue adequacy. Moreover, if civil society groups are advocating new expenditure policies that require substantial funding, they can strengthen their case by proposing specific taxes or other revenue sources to pay for them. Knowing how the tax burden is borne by different groups – rich or poor, male or female, urban or rural, employers or workers – can help civil society advocate new, fairer tax policies.
‘Government support via tax will lead to more influence by citizens than where government is reliant on external sources for funding.’
Reclaiming policy space and achieving independence from aid and debt
The previous section discussed the role of tax in improving the accountability of governments towards their citizens. Unfortunately, many southern country governments depend on aid and debt for a high percentage of their revenue, which means their greatest accountability is often towards donors and lenders. Donors and IFIs can impose harmful policy conditionalities that are inequitable and actually make it harder to raise revenue and obtain independence from debt. Shifting the balance away from external financing towards greater revenues from taxation can provide greater policy-making space at the national level. Tax is therefore a critical element of strengthening the power of citizens to make demands on their governments.
Tax is also a more sustainable source of finance than aid or loans because it is less likely to dry up and does not involve interest repayments.
Take debt: financing development projects through debt is a short-term fix but is not sustainable – indeed, it leaves a legacy whereby the limited tax raised domestically goes on paying off the debt for past projects instead of being used on much-needed essential services.
Latin America suffered extensively during the debt crisis. However, in recent years, thanks to strong growth and high commodity prices, many countries have made efforts to reduce their debt burdens. This, alongside debt write-offs under the Heavily Indebted Poor Country (HIPC) Initiative, means that the region’s external debt as a share of GDP has fallen significantly. The IMF reports the region’s external debt to have fallen from 59 per cent of GDP in 2003 to 32 per cent in 2008. However, in many countries the internal debt burden remains high, and debt servicing continues to have a serious detrimental impact on social spending. In Brazil, where tax collection is relatively high, 30 per cent of the federal budget goes on servicing the internal and external debt.
In comparison, health spending is just under 5 per cent of the federal budget. Low-tax Latin American countries can find themselves similarly constrained by debt servicing. In Nicaragua, for example, external debt stood at 60 per cent of GDP in 2008 (and the total debt burden, including domestic debt, stood at 80 per cent of GDP). Debt servicing that year amounted to US$275 million – around 4.4 per cent of the country’s GDP. In fact, debt servicing managed to swallow up 25 per cent of the country’s annual tax take. This was equivalent to 36 per cent of total public social spending and dwarfed the country’s entire health budget, which amounted to only 3.7 per cent of GDP.
In the Philippines, the debt service for interest payments from 1986 to 2008 already averaged around 25.72 per cent of the national budget – this was without paying off any of the principal sum. In the recent 2010 budget of the Philippine government (US$32.2 billion), US$7.9 billion (24.34 per cent) was spent for interest payments and US$9.3 billion (28.95 per cent) for payment of the principal. This means that 53.3 per cent of the entire 2010 budget of the Philippines went to debt payments alone. On the other hand, only US$9.2 billion (28.5 per cent) was allocated for basic social services (education, health and housing).
Raising more tax domestically, through improving the tax take from those able to pay, reduces countries’ reliance on loans and the onerous repayment of those loans in the future. Critically, mobilising domestic revenue also helps governments to break away from dependency on western powers and from the often harmful conditions attached to their financing.
For these reasons it is important for organisations working on debt to look at how tax can be used to reduce the dependence of southern country governments on unsustainable external financing.
Too much dependency on development assistance also comes with a series of problems, such as the unwillingness of donors to fund certain socially important projects, a lower incentive for governments to improve tax collection and a continued tendency for donors to condition aid on a country’s acceptance of their policy ‘advice’. A further problem is that if aid is channelled towards projects that would otherwise have been paid for by tax revenues, those tax revenues may be diverted to corruption.
In sum, increasing revenue from tax reduces dependency on foreign donors and helps governments and their citizens to escape the aid and debt trap.
Taxes can be used to ensure that all social costs and benefits of production or consumption of a particular good are reflected in the market price. The design of a tax system can contribute to the achievement of other social benefits by making it costly to engage in actions considered socially undesirable, or by incentivising behaviour that is considered beneficial to society.
On the consumption side, this may include taxing tobacco to limit damage to health, or petrol to limit environmental costs. It may also be used to discourage speculation on essential products and services, which prevents the poor from accessing them. In the context of climate change, it is clear that market mechanisms do not price our consumption and production in a way that considers the impacts on future generations. However, advocacy on tax in this area also needs to consider any potential negative impacts on the poor.
On the production side, inhibitive taxes can, for instance, be imposed on aspects of mining activities that potentially cause environmental strain on the immediate ecosystem and nearby communities. Studies have pointed out that the social and environmental costs that occur as a result of the extraction of minerals are largely unaccounted for when making the decision about whether or not to embark on a mining project.25 Such social and environmental costs are not normally valued by the markets or by most economic actors, including mining companies, but instead are borne by local communities living near the mines. Thus, taxes can go some way towards internalising these otherwise unaccounted for costs, for example through allocating a share of the mining royalty to local development funds earmarked for community needs. Another approach could be to tax carbon emissions generated through maritime transport, or aviation in particular, and use the receipts for climate change adaptation and mitigation efforts.
As noted by the FDC, ‘the point here is not to generate resources for government but to impel economic actors to shift to more environmentally friendly technologies and methods even if these entail more costs. But it must be stressed that these taxes should go hand in hand with regulatory mechanisms (such as anti-pollution laws and regulations) to attain social objectives.’26