In my view: Development depends on realising the potential of taxation

Nigeria govtToday’s post from Ngozi Okonjo-Iweala, Co-ordinating Minister for the Economy and Minister of Finance, Nigeria, concludes a series of ‘In my view’ pieces written by prominent authors on issues covered in the Development Co-operation Report 2014: Mobilising resources for sustainable development. The Report is being launched today in London with the Overseas Development Institution, and you can watch the event by registering here.

Developing country governments would do well to strengthen their tax systems so they can mobilise the domestic resources they need to finance their own development. This is particularly true for African countries, where the recent trend of decreasing ODA shows no sign of reversing.

In developing countries in general, revenue administration is often hampered by weak organisational structures, low capacity of tax officials and a lack of modern, computerised, risk-management techniques. The value-added tax “gap” alone is estimated at around 50-60% in developing countries, compared with only 13% in developed countries. The International Monetary Fund (IMF) estimates that for many low-income countries, an increase in tax revenues of about 4% of GDP is attainable.

Since the 1990s, many African countries have made progress in improving their domestic tax capacities and receipts. Despite these improvements, however, there are still many revenue leaks that need to be plugged.

In Nigeria, we are making concerted efforts. Following the recent revision of our GDP to USD 510 billion, our tax-to-GDP ratio declined from 20% to about 12%, several points below the 15% tax-to-GDP threshold recommended by the IMF for satisfactory tax performance. Yet with our increasingly diversified economy, there is room to greatly improve our tax administration capacity and increase our tax revenues.

A recent diagnostic exercise to examine the bottlenecks in our tax collection processes revealed some interesting findings. For example, about 75% of our “registered” firms were not in the tax system! Moreover, about 65% of Nigeria’s registered taxpayers had not filed their tax returns over the past two years. With the support of external consultants, we are introducing remedial measures to improve tax performance and estimate that we can raise an additional USD 500 million in non-oil tax revenues in 2014.

The international community has an important role to play in supporting such efforts by developing countries, and evidence shows that this can yield impressive returns (see also Chapter 14). The OECD has found that every USD 1 of official development assistance (ODA) spent on building tax administrative capacity can generate as much as USD 1 650 in incremental tax revenues (Chapter 14). Yet to date, only limited funds have been targeted at improving tax institutions and tax policies.

To support the broader goal of mobilizing financing for the post-2015 development agenda, ODA can also be used in many other creative ways, for instance to leverage private financial resources (Chapter 11).

In my view, realising the full potential of domestic resource mobilisation in developing countries – and in Africa in particular – is central to discussions on financing the post-2015 development agenda. It will be particularly important to deploy a greater proportion of ODA in low-income countries to support their tax administration efforts. Realising this potential will require strong commitment and leadership from developing country policy makers, as well as the support of the international community.

Useful links

Find out more about the Development Co-operation Report 2014: Mobilising resources for sustainable development here and follow #DCR2014 for live coverage of the launch events on Twitter.

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  1. Lawrence Michael - 10/10/2014 Reply

    While taxation is an administrative imperative, the idea behind taxation (state sovereignty comes only after assertion of a contractual state in any democracy) come forth as crucial just as the ability to tax is itself directly linked to the ability to govern – resting upon administrative control over a given area of jurisprudence.
    Second comes the idea of taxation and individuals as well as corporations. This is directly linked to the first idea of what entails taxation and its capacity. The absence of administrative capacity while displaying the ability to tax merely means the downfall of any state – since it remains a state-in-absentia in all effective senses.
    Having a state be successful in taxation naturally entails the objectives behind taxation and which both individuals and corporations need to agree upon in any given democracy. Ideologies and politics are made up of these. Banana Republics of Fragile States mean either the state-in-absentia or worse. Governance then is also directly linked with transparency in governance – being crucial to development issues and not development funds. Funds are meant to meet certain objectives and they do not mean the abuse of any position to say have cabarets & belly-dancing marathon luxuries, or even short distance ones – upon public money. This is imperative to comprehend that public money is distinct from private funds. The idea that a coercive mechanism & control that result in Fragile states via criminal intimidation and coercive punitive behaviour from state officials (individuals) or policy directives (a mal-functioning state or a corrupt state) or private armies maintained by the political elites to achieve the same results should the state machinery fail to deliver: taxation, governance & development is understood and achieved – mean the last term of development & prosperity a natural corollary to democracies.

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