How can taxation help to deliver the Sustainable Development Goals?
By Laurie Macfarlane
This blog is a follow up to the event ‘What’s tax got to do with it? Business, reporting and the SDGs’. The event is part of IIPP’s ‘Walking the talk: Getting serious about the UN Sustainable Development Goals’ series. The recording of the event can be watched above.
The UN Sustainable Development Goals (SDGs) are an ambitious set of globally agreed priorities for creating a greener, fairer world by 2030. Established in 2015, the SDGs include 17 goals, 169 targets, and 232 indicators covering a wide range of areas — from health and education to housing and the natural environment. Around the world they have become the focal point for understanding national, regional and corporate progress towards a more sustainable future.
Achieving the SDGs in practice is a complex task. Among other things, it will require substantial amounts of funding to steer economies in a fairer and more sustainable direction. For governments, the most important source of revenue is taxation. How the tax system can be used to help shift investment and activity towards the SDGs was the topic of the second webinar in IIPP’s ‘Walking the talk: Getting serious about the UN Sustainable Development’ event series.
Dr Bernadette O’Hare, Senior lecturer in Global Health at the University of St Andrews, started the discussion by explaining why increasing the amount of revenue raised from taxation will be key to achieving the SDGs. Dr O’Hare’s research has identified a strong relationship between tax revenue and a range of socio-economic outcomes. Her recent paper, ‘Tax abuse — The potential for the Sustainable Development Goals’ estimated that $427 billion of tax revenue is lost every year globally due to tax avoidance and evasion. Were this to be collected by governments, it could provide 36 million people with access to basic sanitation, 18 million people with access to basic drinking water, and almost 7 million children with school education for an extra year.
The benefits of raising additional tax revenue are particularly large in low and middle income countries, which often have relatively small government budgets and experience high levels of tax avoidance and evasion.
Dr Waziona Ligomeka, the Director of Policy Planning and Research at Malawi Revenue Authority, shared a number of insights about the challenges faced in Malawi, where GDP per capita is $637 — far below the global average of $10,916.
Dr Ligomeka explained that in Malawi, only 55% of the government’s budget is funded from domestic taxation, and the rest comes from aid and other forms of international assistance, which in practice can be unpredictable and unstable. In Malawi’s health sector, over 50% of funding comes from international donors. Raising more revenue domestically will therefore be key if countries like Malawi are to deliver on the SDGs.
However, low and middle income countries face a number of barriers to raising tax revenues on the scale required. One issue relates to a lack of technological infrastructure. Prof. Kenneth Amaeshi, Chair in Sustainable Finance and Governance at the EUI’s School of Transnational Governance, explained how governments in Africa often find it difficult to trace financial transactions, which makes it difficult to monitor and enforce compliance:
“In Europe and North America access to modern technology means that financial transactions are easy to track. If I’m in Edinburgh and I don’t pay my tax, the tax man will know, and he will also know where to find me. But if I’m in Nigeria, the system is not well connected, which makes it quite difficult for authorities to identify when tax has not been paid, and track down those responsible.”
In many countries there are also challenges relating to legitimacy. Across Africa, the concept of taxation––and the state itself––are often legacies of colonialism, which were imposed on communities on top of traditional forms of collective organisation. “The idea of the state itself is a colonial artefact — a colonial technology that Africans have inherited. There remains an enormous gap between ‘the people’ and ‘the state’” Prof. Amaeshi said.
Because low levels of tax collection mean that governments can only sustain low levels of spending, it’s not always clear what people are getting in return for paying their taxes. As a result, taxation is sometimes viewed as a means of being “extorted” by political elites — whereas other traditional ways of solving communal problems that circumvent the state can sometimes have higher levels of legitimacy.
Kate Roll, Assistant Professor in Innovation, Development and Purpose at IIPP, described this “crisis of legitimacy” as a key challenge. “If states aren’t raising revenue, and are performing poorly as a result, this further erodes a key source of legitimacy.” How to break the feedback loop between low tax revenues, poor government outcomes and deteriorating public trust is therefore a crucial issue.
A final challenge relates to transparency and compliance surrounding the taxation of multinational corporations, which often find ways to avoid paying tax in low and middle income countries. According to Dr Ligomeka, addressing this requires action both at the international and local levels. At the international level, introducing mandatory country-by-country reporting should be a key priority. This would require large multinational enterprises to provide a breakdown of their activities among the jurisdictions in which they operate, which in turn would expose those corporations that are shifting profits to tax havens and avoiding tax elsewhere as a result.
According to Prof. Amaeshi, governments in low and middle income countries should also aim to be more transparent with citizens about what they are doing with tax revenues. “If governments can be bold enough to showcase what they are doing with the money they are collecting and be more transparent, they can start to build more legitimacy and improve compliance.”
Overall it is clear that taxation can play a vital role in helping to deliver the SDGs. But much more must be done to ensure that everyone pays their fair share.
Read IIPP’s recent policy paper ‘The Biscay Model: Aligning tax policy with the United Nations sustainable development goals’