The imbalances

A balanced mix of taxes can help stabilise public revenues while getting a wider range of contributors. Countries that rely heavily on a single type of tax run several risks. If a shock hits that source of tax, the country could see its public revenues collapse. A volatile tax base also leads to uncertain revenues. The risk can be seen in countries heavily reliant on taxes on resources. The tax revenues of these countries are closely linked to commodity prices and the price of crude oil in particular. A heavy reliance on corporate income taxes also leads to tax revenue volatility, this time through the correlation of the tax base with the business cycle. VAT can also be business-cycle sensitive.

Each tax is influenced by a different factor. By balancing the different types of tax, a country is able to lower the overall volatility of tax revenues. Diversifying the fiscal base stabilises revenues and brings political benefits. Stakeholders who make up a large part of the tax base will naturally tend to be given more attention by policy-makers than those who barely contribute to revenues. Diversifying the tax base broadens a government’s natural constituency, increases local ownership of the development agenda and enhances democratic governance. Senegal, Tanzania and Cape Verde stand out as having made a lot of progress on diversifying their tax mix over the past decade.

Declining revenue from trade taxes

As discussed in Chapter 2, trade-related tax revenues have been decreasing over the last decade in Africa in the face of trade liberalisation. Replacing declining trade taxes is one of the major challenges to African countries already struggling with public deficits and large development needs. Border tariffs, arguably one of the easiest types of taxes to collect, still represent a large share of total government revenues in many African countries, particularly low-income countries.

Although trade liberalisation is on the political road map of most African regional blocks, its implementation remains extremely fragmented. Trade liberalisation affects tax revenues in two ways, direct and indirect. The direct effect is that, in the short run, trade liberalisation ­— tariff cuts — provokes an immediate fall of tariff revenue. Longoni (2009) finds evidence of a large trade-off between greater openness to international trade and the revenue collected from trade taxes.

In the longer run there is an indirect effect when trade liberalisation triggers a process of increased domestic competition and higher investment incentives that leads to higher economic growth. Other tax revenues may rise or fall, depending on the impact of trade reform on growth. Baunsgaard and Keen (2005) estimated that revenue recovery from the suppression of trade taxes in low-income countries (those most dependent on trade tax revenues) is not more than about 30 cents of each lost dollar. The net impact of trade liberalisation in the short run is thus a net tax revenue loss.

Ineffective urban property taxes

Rural land reform is a largely unresolved question in most parts of Africa. However, urban property taxes offer a significant, and largely unexploited, opportunity for taxation. There are as many urban inhabitants in Africa as there are in North America. According to projections by the United Nations Population Fund (UNPFA, 2007), Africa’s urban population will more than double between 2000 and 2030, from 294 million to 742 million. It is becoming urgent to put in place local tax structures that can grow with urban development and the corresponding need for urban infrastructure. Property taxes are a natural candidate as they are one of the few types of tax that is progressive, administratively feasible in Africa and that scales up automatically with urban expansion. The Outlook surveys show that a large number of countries apply some sort of urban property tax, however they vary greatly. Egypt, for example, plans a property tax on farmland. The general observation is that, due to political sensitivities and outdated or incomplete cadastres, property taxes do not yield as much revenue as they should.