Concentrating taxes on a narrow set of taxpayers serves no good use. An unbalanced tax base puts the burden on too few tax payers and this means tax rates need to be high, and compliance enforced harshly, to generate substantial tax revenues. An optimally broadened tax base not only generates the highest possible tax revenues, but also widens a government’s policy options. A balanced tax-base enables lower statutory rates on all, or selected taxpayers. A broader base can lead to a better mix of increased tax revenues at lower statutory rates.

Diversifying the tax mix

African countries with unbalanced tax mixes should prioritise the collection of direct (corporate and personal) and indirect taxes (VAT). Algeria, Angola, Chad, Congo, Equatorial Guinea, Gabon, Nigeria, and Sudan have all taken steps on these lines. It would be wrong to conclude though that resource-rich countries should (even partially) replace taxes on extractive activities with other types of taxes. Indeed, some states need to generate more public revenues from resource activities. Resource-rich states should save at least part of their resource tax revenues away for rainy days and for future generations. Some were already moving in this direction before the global economic crisis, by running large current balance and budget surpluses.

Clearly, there is more to increasing a country’s tax share and tax effort than exhorting its tax administration to be more active, or even for donors to support hard-pressed tax officials. Countries obviously do not decide themselves whether they will belong to the resource-rich club or be a fragile/post-conflict nation. They can and should, however, adapt their public resource mobilisation strategy to their own circumstances. A country’s characteristics should clearly be taken carefully into consideration when deciding a course of fiscal reform. Institutions like ATAF should help African countries to identify others who have been through the same experience and can help.

Dealing with trade liberalisation

Trade liberalisation in Africa needs to be purposively sequenced with domestic tax reform. The policy response to declining trade-related tax revenues as a result of trade liberalisation has to be designed in the context of a broader reform agenda. Policy options include cutting domestic expenditure, relying on the growth effects of trade liberalisation, replacing all Non-Tariff Barriers (NTBs) with new tariffs, and increasing other tax revenue. In practice, cutting expenditure is hardly an option for most African countries, given their development needs and poverty reduction challenges. As for relying on growth effects, Part I of the Outlook has shown they were too uncertain for sound policymaking. Replacing NTBs and remaining import quotas by tariffs can offset some of the revenue losses while liberalising trade, but will not be enough in most countries. As a result, the policy response to the impact of trade liberalisation on government revenue will hinge around an ambitious tax reform agenda.

As we have seen in the previous sections, this agenda might include a combination of strengthening tax administration capacity, deepening the tax base, dealing with informality and relying on a wider range of taxes. In other words, policymakers face the challenge of replacing existing “easy-to-collect” trade taxes with more politically-demanding forms of taxation. Another difficulty is sequencing: in order to minimize fiscal losses, tariff cuts should be introduced once the benefits of tax reforms in terms of revenues are tangible, in particular in fragile states. This means that trade negotiations should be informed by the progress in overall tax reform.

Evidence shows that this reform agenda can work in developing countries, but that middle-income countries are more successful at recovering revenue than low-income countries. Baunsgaard and Keen (ibid.) finds that around half of the low and about one-third of mid-income countries do not offset the loss of trade tax revenues. In Africa, some countries like Kenya and Egypt have a poor track record of offsetting revenue losses from trade liberalisation. Others, like Malawi and Uganda have done better (IMF, 2007). Overall, the Outlook finds that the most successful countries in terms of replacement of trade tax revenues are those that have diversified their tax base rather than those that focused primarily on VAT. The experience of post-conflict states like Rwanda and Uganda shows that this is possible (Box 4).

Reforming urban property taxes

Certain taxes, such as urban property taxes, could yield a much higher return if decentralised, as local governments usually have a more direct access to the relevant information. Cape Verde and South Africa have successfully decentralised urban property tax collection. The physical proximity makes it easier to service smaller-scale payers. To unlock this potential, local tax administrations need greater skills and their rights and obligations should be clearly enshrined into law. Policy co-ordination and harmonization by the central tax administration and government would help to ensure that municipalities compete fairly with one another and avoid inconsistencies and overlaps in the overall tax system. To avoid a feeling of harassment, it is important that municipalities focus on a narrow set of high potential and administratively feasible taxes (Chambas et al., 2007).

The main obstacle is political. The more wealthy and influential sections of society would be affected by this tax. Municipalities would have to make a credible commitment to upgrade urban infrastructure to win acceptance. Yet, as collection of urban property taxes would require an up-to-date cadastre of African urban centres, it would have a momentous side benefit – bringing clarity to property rights, at least in city areas. Consequently, it would improve access to credit as demonstrable ownership of real estate can be used as collateral for a loan.