Nothing as sure as taxes?
Addressing research gaps on domestic resource mobilization in Africa.
Rising nationalism in the West has challenged the role of international aid and private investment as a consistent source of development finance. Thankfully, while aid has waned, Sub-Saharan African governments have maintained their long-standing commitment to taxation as a means of generating domestic resources. Still, decisions about whom to tax and how much are made with little understanding of what works and why.
CEGA Scientific Directors Ernesto Dal Bó and Frederico Finan, authors of a new survey of institutional reforms in developing countries, point out that taxation has received virtually no empirical attention. Assessments like these have helped ignite a series of efforts to address this knowledge gap. One such effort is the Economic Development & Institutions (EDI) program, funded by the UK Government and implemented by Oxford Policy Management in partnership with the Paris School of Economics, University of Namur, Aide à la Décision Économique, and CEGA.
This post describes four EDI-funded studies on tax policy in Africa. We hope it sheds light on some of the critical tax-related issues currently under review in the research community.
Who to audit in developing countries?
By and large, wealthy governments decide who to audit by using advanced systems that are expensive to manage and operate. These processes can be impractical when resources (and data) are scarce. As a result, many African tax administrators rely on local inspectors to manually screen tax returns and assess the need for audit based on commonly observed evasion strategies. While local expertise can be effective, it can also lead to discrimination and corruption. In a new initiative, “Audit Selection under Weak Fiscal Capacity,” researchers Anne Brockmeyer, Pierre Bachas, and Bassirou Sarr are working with the Directorate General of Taxes and Domains in Senegal to explore how personal beliefs influence decisions made by local inspectors, and the merits of alternative audit selection strategies.
What are “Electronic Fiscal Devices” good for?
Today, governments across East Africa are requiring businesses to use electronic fiscal devices (EFDs) to increase compliance with Value-Added Tax (VAT) payment. EFDs directly transmit transaction information to revenue offices, decreasing the risk of non-compliance. Unfortunately, even when EFDs are installed, they are often unused or manipulated. Frederick Manang, Pierre Bachas, and the Tanzania Revenue Authority have designed a study, “Inspections and Information Campaigns: The Use of Electronic Fiscal Devices” to understand which inspection methods and public messaging campaigns — coupled with current EFD policies — can best improve compliance and revenue collection.
How can we make tax compliance more attractive?
Tax evasion by citizens is a major contributor to the budgetary shortfalls many African governments face. Research suggests that citizens are more likely to pay taxes when they believe the state will offer them direct benefits in return. Emilia Tjernstroem and Nicole Bonoff are running a pilot in Ghana, “Constructing Compliance: Reducing Tax Evasion Among Market Traders in Ghana,” to assess whether the provision of public goods (in this case, improved stalls for market traders) induces greater tax compliance. Check out this awesome tweet storm summarizing some of Emilia’s initial observations.
Can technology help?
The growth of real estate in Sub-Saharan Africa has made property tax a more viable source of domestic revenue. Unfortunately, in many countries, property tax remains only a small percentage of state revenue due in part to inefficient management of ownership registries and lack of enforcement. Marc Gurgand and colleagues from the Paris School of Economics are working with the Directorate General of Taxes and Domains in Senegal on a study, “Measuring the Effect of Technological Improvements and Compliance Nudges,” to assess how the introduction of property ownership software to modernize state information systems can bolster the work of tax inspectors. Further, they are exploring how positive and negative messaging can affect tax compliance.
Going forward:
Good taxation research in developing countries requires strong academic-government partnerships. While the projects described above are a start, more engagement is needed, and CEGA and EDI are always looking for collaborators. Please be in touch!
