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IMF Survey : Developing Economies’ Untapped Revenues

June 17, 2016

  • Efforts to improve tax systems worldwide making a difference
  • Increase collection of domestic revenues to help lift more people out of poverty
  • Policymakers need to make better use of donor funding and assistance

Tens of billions of tax dollars go uncollected in developing countries every year, and whether it is because governments do not have the tools to implement tax policies or because there are not enough taxpayers on their books, the lost revenue often leaves a country unable to provide basic services to its people.

Street trader selling maize in Malawi: some countries have very few taxpayers in the system, says Postel (photo: Mike Hutchings/Reuters/Newscom)

Street trader selling maize in Malawi: some countries have very few taxpayers in the system, says Postel (photo: Mike Hutchings/Reuters/Newscom)

Taxation and spending

This was the subject of a panel discussion entitled “Collect More & Spend Better,” at the IMF-World Bank Spring Meetings in April. Panelist Eric Postel, Associate Administrator at the U.S. Agency for International Development (USAID), who has helped lead the U.S. government’s efforts to lend tax collection assistance worldwide, recently spoke with IMF Survey to expound on how these efforts are helping to bring people out of poverty in developing countries.

IMF Survey: Why do developing countries often have trouble collecting enough tax revenues?

Postel: In some countries, because the processes for collecting taxes are either inefficient, difficult to administer, or corrupt, you have large amounts of people in the informal sector. Local companies do not have a tax ID number, or every citizen a Social Security number, as we do in the United States, for example. Therefore, many citizens in these countries are not in any system.

IMF Survey: In other words, there might be just a few people paying taxes in a country?

Postel: That is exactly right. You have a very small number of people paying taxes, and then there are a lot of people outside of the system who are not paying taxes. And yet they want services. In many cases, if all of those people outside of the system can be added, the tax rates can actually be lowered because you have so many more people contributing to it.

IMF Survey: It seems money is being collected, but in some cases it is disappearing or not being spent right—so that is your “spend better” advice. But how can countries learn to spend that money better?

Postel: A lot needs to be done to spend the money better, without corruption, and with full transparency. Voters do not want to pay taxes if they don’t know what is being bought. If they think the money is lining someone’s pocket, they have no interest in paying taxes—they would prefer the money stayed in their own pockets. If people think it is going to get them better schools, better healthcare, better roads, they start getting very interested in paying taxes. So the “spend better” part of the agenda is very important.

IMF Survey: Can you give us a sense of what USAID and other international organizations are doing to help these countries to educate those officials who are building tax policy or who are carrying it out?

Postel: Sometimes it is about providing technology—computer hardware and software. Sometimes it is about training. Or it might be providing sophisticated legal advice. We try to help countries improve whatever is the weakness in the system.

For instance, if a country needs to move to having electronic filing so that more people are willing to enter the system and efficiently pay taxes, then that is something we would assist with setting up. If help is needed with the customs and duty collection at a country’s borders that are currently inefficient or are susceptible to corruption, then we would assist with this project.

Another example is the work the [U.S. foreign aid agency] Millennium Challenge Corporation, did in the Philippines to install a computer system that analyzed the country’s taxpayer information more efficiently and helped them to decide which taxpayers to audit.

IMF Survey: So, are you actually seeing results? Are countries increasing revenue collection as a result of these actions?

Postel: There are different case studies. In Georgia, for instance, there were several donors, including the United States, who worked on various projects with the government for several years. As a result, their revenues rose by hundreds of millions of dollars, enabling them to provide better health, education, and other services to their citizens. We had a similar but more limited project in El Salvador. We made a one-time contribution of about $5 million, and the Salvadoran government did a good job of implementing changes, increasing their annual revenues by more than $30 million. So, the return on investment is huge.

We are increasingly seeing studies over the last few years of how, when revenues rise, a lot of that money is flowing back into health, education, and other social sector services.

IMF Survey: In general, how does it benefit the international community to get governments to increase how they collect and spend money? Why would the international community want to band together and make this difference?

Postel: That’s a great question and there are two really important answers to it. The first answer I’m going to give is to quote a gentleman I met about seven or eight years ago who started a peanut processing business in northern Mozambique. In the course of a discussion he said to me and my colleagues: “You know, when the government starts getting the majority of its revenues from people like me and all the people of Mozambique, they’re going to listen to us about what we need instead of just listening to you guys (meaning the donors) because you’re giving them money.” So, if you think about country ownership and being responsive to the citizens of a country and trying to do right by them, to me, that is the first reason.

The second reason: there are a few billion people out there who do not live the greatest lives and who need healthcare, clean water, and good education, but they do not have all those things. And donors—if you look at the long-term trend—have tried to increase quite a bit the assistance that they provide. First, if you look at the price tag of solving all these problems, it is clear that donor money alone will never pay for that price tag in full. Second, while donor money alone cannot achieve those goals, the governments and the people of the countries are responsible for using the funds well and efficiently, so that they may achieve the goals they set.

If we want to take care of the more than 60 million children who are not in school today; if we want to take care of the hundreds of millions of people who don’t have electricity, clean water, proper sanitation, and proper healthcare, then we need their governments to have their own robust, domestically raised revenues. And that’s the other reason—if everything is done right, it can help these countries escape poverty.