Taxes, Peacebuilding and Stability
"The key test of a government’s legitimacy is tax collection.” When taxes “are raised and managed responsibly, they can have a significant impact on people’s trust in state institutions.” Governments in conflict-affected states are confronted with the challenges of securing resources for development, as well as for legitimacy. This feat is particularly problematic since institutions and public administration systems barely function. Moreover, in post-conflict environments the public resources needed to finance reconstruction are in short supply because: tax bases are narrow; the legal and regulatory fiscal framework is weak; and the revenue administration system and its supporting infrastructure are inefficient.
There is a tendency for governments of post-conflict countries to prioritize medium and long term reconstruction needs for presentation to international development partners in conference settings (e.g. Afghanistan, Burundi, East Timor, Gaza, Sudan and West Bank), usually at the expense of efforts to mobilize domestic revenue through taxation. It is worth noting that neither aid nor natural resource-dependency can necessarily be sustained in the long-term. Conflict-affected states must examine strategies to overcome poor tax effort and emphasize the centrality of a durable and effective taxation system that could support both peacebuilding and stability.
Central to these efforts would be the development of a credible fiscal contract between the state and its citizens. Businesses and citizens “who believe that their interests are represented in a democracy may be more willing to pay taxes,…[and] also begin to believe that payment of taxes gives them the right to representation.” For example, the tax authority in Liberia displays images which depict the message “see what your taxes are doing for Liberia.” Some other revenue administrations have coined mottos which they incorporate in all their communications to taxpayers. The Kenya Revenue Authority’s motto is “pay your taxes and set your country free.” Also, politicians in Rwanda, a post-conflict country, have over the years at annual taxpayers’ days, reminded taxpayers of the value of paying taxes, and thanked them for their contributions.
For a fiscal contract to be realized a post-conflict country government must also revamp its tax system (encompassing laws, policies and administration) to make it fair and easy for firms and individuals to comply. In South Sudan, US$ 36.7 million worth of exemptions were reportedly awarded in one state alone and anecdotal evidence suggests that “elected officials [used] the funds to sponsor the construction, and purchase, of personal homes and vehicles.”
Another key reform measure has to do with strengthening revenue administration. This will usually be in two stages. First, within the first 12 months following the conflict, “starting revenue collection and registering/controlling the flow of goods across borders.” Second, for the medium-term in line with international practice in tax administrations, governments are encouraged to develop and implement a reform program. In this regard, it is now a conventional practice for “tax administrators…to diagnose the tax administration’s principal problems, design a strategy for actions to be taken, and agree on…scope and timing.”
Key performance indicators (KPI) that could be proposed to help gauge the effectiveness of tax system reforms in conflict-affected states could include:
- Actual revenue compared to forecast revenue
- Expansion/contraction of the tax base - number of registered taxpayers disaggregated by sector/industry and gender and compliance levels
- Results of taxpayer surveys
- Tax gap/ growth projections
- Average processing turnaround time for tax returns and refunds (during filing season)
- Equity indicators which show the extent to which the tax system is progressive and pro-poor
- Cost of collection
- Percentage reduction in error rates
- Tax expenditure/ exemptions
- Governance/corruption indicators
This blog seeks to demonstrate how a durable and effective taxation system is vital for both peacebuilding and stability, as well as indicate what steps can be taken to develop it. As part of reconstruction, the governments of post-conflict countries need to accord the necessary attention to overcoming the specific weaknesses in their tax systems, making taxpayers aware of the importance of domestic resources to sustainable development, and engaging them by soliciting their views and reporting performance especially with respect to areas of concern and interest. In the latter perspective, disseminating performance data on a select number of KPI is one way for governments to nurture the building of a fiscal contract.
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 DFID (2010) Building Peaceful States and Societies: A DFID Practice Paper. London: Department for International Development
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