Fair increase in tax collection: how poor countries can deal with the coronavirus crisis

Governments need billions, if not trillions, of euros to tackle the impact of the coronavirus crisis. Many poor countries lack that money, and they need support in collecting more tax, and do so fairly, write Chiara Putaturo and Lis Cunha.

Chiara Putaturo is EU Inequality and Tax Policy Advisor at Oxfam; Lis Cunha is EU policy officer at ActionAid International

The coronavirus crisis is affecting us all, and it preys most on the vulnerable – on people in poverty, at home and around our world. Beyond the immediate health impact, the virus has huge social repercussions: more than half a billion people could be pushed into poverty, setting the fight against poverty back by 30 years in Africa and the Middle East. It now seems likely that the impact of the pandemic will be more severe than the 2008 financial crisis.

To counter this, governments need money. But as economies shrink, the income available to respond to the crisis is shrinking too. Experts estimate that global tax revenues will fall by 30 to 40%, and according to the OECD, developing countries will be hit harder than rich states. Struggling with weak health infrastructures and precarious economies and livelihoods, they lack the financial firepower to protect their people. In essence, they cannot afford to spend trillions of euros to boost health spending and bail out their economy, like rich nations do.

Need for structural reforms to make tax fair

Long before the current crisis, developing countries have been collecting far less tax than they could, and most tax systems heavily relied on unfair, regressive types of taxes. Value-added taxes, such as taxes on food, are usually a heavy burden for the poor, and women in particular. Taxes on wealth and corporate income, on the other hand, that are currently not often properly collected, can help end extreme inequalities.

Tax systems that are fair, sustainable and resilient also reduce the dependency on aid. They enable nations to invest in public services like healthcare and social protection for all.

Research shows that progressive tax reforms in Malawi, Mozambique and Nigeria could potentially double the countries’ health budgets, and still millions, sometimes billions of euros would be left to advance the development of their economies.

Support developing countries to collect more taxes and more fairly

This is where wealthy nations need to step in. They should immediately move to increase development and humanitarian aid and cancel debt service payments from the world’s poorest countries so they have more resources to address the crisis. And they should also support countries in the Global South mobilise the revenues they need to face this crisis, to rebuild their economies on a sound and just basis, laying the foundations for stronger universal public health systems.

What is known as Domestic Revenue Mobilisation (DRM) can help developing countries to collect more taxes and more fairly. A new report by Oxfam and Action Aid, published this Thursday, assesses the European Union’s action in this area. The analysis shows that the EU is leading the way when it comes to the quantity of aid it provides towards domestic revenue mobilisation. However, the EU could significantly improve the quality of its aid.

The EU should focus on fair taxation

The report, Supporting fair tax systems: An analysis of EU aid to domestic revenue mobilisation analyses all EU-funded DRM projects in 2016 and 2017, based on reporting done for the Addis Tax Initiative database.

The EU is currently the largest donor on domestic revenue mobilisation. In 2017 alone, the EU disbursed $69.5 million for this purpose, most of it going directly to developing country governments.

However, support for fair taxation is lacking. The analysis outlines that in 2017, only fifteen per cent of all projects mentioned fairness, equality, equity or inclusivity in their reported descriptions, and just two per cent appeared to have a significant fairness component. As for gender equity in particular, this is not mentioned in the description of projects at all.

Moreover, civil society is critical to scrutinise governments’ tax collection and spending, but its involvement in EU-funded projects is very limited: from 2016 to 2017, direct support for NGOs decreased from four per cent to just one per cent of the EU’s disbursements for domestic revenue mobilisation, and only one in seven projects involved citizens or civil society organisations.

New opportunities ahead

The EU as a donor can play a key role in closing tax loopholes and addressing the imbalances of the past. The next EU long-term budget and the Addis Tax Initiative’s upcoming “post-2020” agenda provide a unique opportunity to increase support to domestic revenue mobilisation and to prioritise progressive taxation as well as the better involvement of civil society to monitor tax collection and spending. At the same time, the EU must develop and apply coherent policies, such as tackling EU tax havens, to avoid a situation where efforts to improve tax collection in developing countries are undermined by aggressive tax practices in the North.

As highlighted by the OECD few weeks ago, “domestic resource mobilisation, and taxation in particular, will remain […] the only long-term viable source of financing for the emergency response and recovery from this crisis”.

The author: Margareta STROOT

Margareta Stroot, a multi-talented individual, calls Brussels her home. With a unique blend of careers, she balances her time as a part-time journalist and a part-time real estate agent. Margareta's deep-rooted knowledge of the city of Brussels, where she resides, has proven invaluable in both of her roles. Her journalism captures the essence of the city, while her real estate expertise helps others find their perfect homes in the vibrant Belgian capital.

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