African Economic Outlook 2010 focuses on public resource mobilisation and aid in Africa, presenting a comprehensive review of best practices in tax administration, policies and multilateral agreements, including recommendations for meeting future challenges. The role that aid should play to help African countries mobilise their public resources to meet their development goals is also discussed.
The global economic crisis has given a new impetus to dialogue on domestic resource mobilisation in Africa. Lower export revenues, uncertain future foreign investment and aid inflows amidst generally high levels of indebtedness have raised the importance of increasing domestic resources. Africa faces three types of challenges with respect to mobilising additional public resources: structural bottlenecks; an unbalanced tax mix; and the erosion of existing tax bases by excessive granting of tax preferences, inefficient taxation of extractive activities and an inability to fight transfer pricing by multinational enterprises.
The solution is not to simply raise existing taxes. Strategies towards more effective, efficient and fairer taxation in Africa typically lie with deepening the tax base in administratively feasible ways.
Policy options include removing tax preferences, dealing with abuses of transfer pricing techniques by multinationals and taxing extractive industries more fairly and transparently.
In the longer term, the capacity constraints of African tax administrations must be eliminated to open up policy options and enable tax revenue generation through a more balanced tax mix. Indeed, taxing new potential payers is crucial. The report identifies in particular urban property taxation as an instrument that can be more easily implemented with the aid of development partners. This type of taxation is progressive and can be scaled up with Africa’s rapid pace of urbanisation and the corresponding need for financing urban infrastructure.
Ideally, taxes should be levied at low and relatively flat rates on bases broadened through the elimination of exemptions and other loopholes. Lower, simpler taxes are easier to collect and administer, and are an effective approach to stimulating private sector development.
The average African tax revenue as a share of GDP has been increasing since the early 1990s, mostly because of taxes on the extraction of natural resources. Income taxes (mainly personal and non-resource corporate) have stagnated over this period. At the same time, trade liberalisation in Africa has led to a reduction of revenue from trade taxes. Indirect taxes, corporate taxes and resource-related tax revenues have increased since the late 1990s.
There are very large differences in the tax raising performance across individual countries. Annual taxes per capita range from as low as USD 11 to USD 3 600. In fact, tax effort estimates confirm that some countries collect as little as half of what they would be expected, given their living standards and economic structures, while others collect two to three times what would be expected.
Many African countries are still heavily dependent on aid. In the past, donors have devoted little attention to public resource mobilisation. But targeting a larger share of aid to this goal, would enable countries to become less dependent on aid in the long run, to the benefit of recipients and donors.
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AfricanEconomicOutlook.org offers comprehensive and comparable data and analysis of 54 African economies.