A number of policy options are discussed in this section. The order in which these policy options are presented follows the logical sequencing of a typical tax reform process. In the short term, policy makers should concentrate on ways to deepen the tax base in the most efficient and fairest way – removing tax preferences, dealing with transfer pricing abuses by multinational enterprises and taxing extractive industries fairly and transparently. In the medium run, structural concerns require strategies that target the informal sector, enhance fiscal legitimacy, boost administrative capacity and harness international cooperation to improving resource mobilisation. The longer-term goal of generating revenues from a more balanced tax mix could be achieved with more focus on instruments such as urban property taxes. It is a progressive tax which can be scaled up to keep pace with Africa’s explosive pace of urbanisation and the corresponding need for urban infrastructure. Development partners can easily help with such a tax.
Ideally, what can African countries do to improve their tax systems?
Recent studies have made several recommendations to African policy makers about tax treatment. Volkerink (2009), IFC (2009), Keen and Mansour (id.), Bahl and Bird (2008) said taxes should be levied at low and relatively flat rates across a broad base, as they are easier to collect and administer. As well, exemptions and loopholes should be eliminated. Countries must move away from heavy reliance on inefficient trade taxes. VAT must become the focus of indirect taxation, replacing turnover and even sales taxes. The basic message is keep tax low, flat, simple and broad based.
The most effective way of increasing public revenue is through policies that increase the tax-base through sustained economic growth. Efficient tax collection also strengthens public resource mobilisation without over-taxing the economy. Any increases in taxation should ideally be growth-neutral, without harming the already weak private sector in many African countries.
To increase revenues, a country can increase taxation on current payers, and/or increase the number of potential payers. African countries should target new potential tax payers over time. A wide tax base is more stable because it relies on a diversified set of taxes, with a mild burden on each type of taxpayer and each type of economic activity. A wide base engages a bigger range of stakeholders in the national political process.
But tax policy needs to walk the tight rope of tax administration constraints
Governments should first identify which tax options are feasible and then maximize revenue within these options. Short-term tax policy options in most African countries are constrained by the tax administration capacity. Stakeholders often over-estimate what can be reasonably achieved through tax policy. In particular, there are fewer redistributive tax policies available than in industrialised countries. Therefore, upgrading tax administration is a pre-requisite to reducing income inequality through progressive taxation.
Copying redistributive strategies used in countries with high administrative capacity can be very counter-productive, either unintentionally or because such strategies benefit the middle-class. It would be better to raise fees on tertiary education, introduce road tolls, car registration fees – all key consumption items for richer Africans. These are likely to be politically difficult to introduce as they are aimed at the elite who have most influence on legislation. Bolnick and Haughton (1998) suggest that African countries could use excise taxes more intensively, despite the fact that these are levied at high rates on a narrow base. Property-based taxes may also provide options for income redistribution. Here too, the elite that are most likely to pay the tax can discourage the legislation.