Facing Challenges in the United States, Tax Policy Reform Thrives Abroad

Written by Andrew Wainer, Director of Policy Research, Policy and Humanitarian Response

This spring, Republicans are turning to tax reform, reaching for the policy win the Trump Administration badly needs. Like health care, tax reform is fraught with political pitfalls, making reforming the US’ outdated and complicated tax code another 2017 uphill policy battle.

But even as Congress and the Administration brace for conflict on domestic tax policy, US assistance to developing nations to improve their own tax systems has enjoyed years of bipartisan support.

Multiple US international development agencies – including USAID, PEPFAR, MCC, and the Treasury Department – provide tax policy and administration support to developing nations. The US is the seventh largest provider of domestic resource mobilization (DRM) assistance – as tax reform is called in the development arena. The goal of this advising and capacity-building is to help developing nations harness their public finance systems to better fund their own development and rely less on international development assistance.

Meeting Their Own Development Needs

Years of investment by developing nations themselves – with assistance from donors – has paid off as low-income nations have increased their tax-to-GDP ratio from about 10% during the 1990s to 15%; lower-middle income nations have increased the ratio from about 15% to 20%. This means developing nations are creating a larger tax base and generating more of the money needed to invest in their citizens’ health, education, and other development goals.

Getting tax reform right can have a major economic impact for developing nations: If India adopts its own current tax simplification proposal, it could inject an additional 2% of GDP into the massive South Asian economy by simplifying the tax code for businesses and individuals.

US support for tax reform in the developing world deserves continued support from Congress, not only on self-sufficiency grounds, but also in terms of strengthening governance in a world where the strong rule-of-law is increasingly viewed as the keystone to prosperity.

President Trump himself has emphasized fair taxation and repatriation of US corporate taxes as part of his domestic economic reform package, saying “I know a lot of bad people in this country that are making a hell of a lot of money and not paying taxes.”

And if we can get beyond the stigma of the word “tax,” supporting foreign assistance for DRM includes principles central to both the Democratic and Republican agendas. At its best, DRM assistance includes the following tenets:

DRM is Market Friendly

One of the primary goals of domestic resource mobilization (DRM) assistance abroad is creating the optimal conditions for market-based economic growth. DRM isn’t about soaking the rich, rather it’s aimed at ensuring that tax policy facilitates inclusive economic growth and development. DRM is about creating an attractive environment for domestic and international investment.

DRM Engages Citizens

As DRM enhances states’ capacity to collect and spend revenues, it also provides a platform for citizen engagement in public policy. DRM strengthens the citizen–state compact by ensuring that citizens have the opportunity to influence tax policy formulation and implementation. The OECD has stated, “taxation is integral to strengthening the effective functioning of the state and to the social contract between governments and citizens.”

DRM Reduces Bureaucracy

Part of making tax systems platforms for economic growth, rather than roadblocks, is reducing bureaucracy. DRM assistance includes quantitative goals of raising a developing nation’s tax-to-GDP ratio, but it also integrates the qualitative measure of how a tax system raises money, not just how much it raises.

DRM is about making paying taxes easier for citizens – removing red tape. This can include introducing information technology to make tax collection more efficient and less prone to corruption, simplifying the tax code, and providing better customer service to taxpayers by processing tax returns more quickly.

DRM Enhances Accountability

Of course, sometimes corrupt elites and organizations do game tax systems and part of increasing citizen engagement in tax policy includes increasing the fairness and equity in taxation. US DRM assistance to developing nations includes supporting policy changes to close loopholes for those who don’t pay their fair share.

While US’ DRM technical assistance is a tiny part of the overall US international development budget – for example $20 million per year at USAID – there is growing recognition of the need for donors and developing nations to invest more.

The US government momentum on DRM for developing nations is promising. To maintain it, we’ll need to solidify the transformation of “tax” from a curse word to a widely recognized means to increase citizen engagement in fiscal governance while building a supportive environment for inclusive economic growth.

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