- Vito Tanzi, M. Yücelik, Peter Griffith, and Carlos Aguirre
- Published Date:
- October 1981
This study identifies some of the taxation problems most frequently encountered by Fund member countries in sub-Saharan Africa and seeks solutions that may be useful either to the region as a whole or to groups of countries in the region. A companion study (see Part II) provides a statistical framework for assessing the tax systems of the countries in this region.
The appropriateness of different taxes for sub-Saharan Africa can be judged with reference to traditional criteria—such as (1) fruitfulness as revenue sources, (2) effects on resource allocation, (3) contribution to equity, and (4) ease of administration. In evaluating different taxes, however, it is important to note that tax systems and policies have limitations. The ability to raise revenue is limited by possible undesirable effects on resource allocation and income distribution, which tend to grow stronger as the ratio of taxes to gross domestic product (GDP) rises. This is especially true for the developing countries of the sub-Saharan region, since the scarcity of their administrative resources makes it difficult for them to raise large amounts of revenue from relatively complex taxes, such as the income tax, that generally have the least undesirable side effects.
Administrative constraints and the small size of many tax bases also impose limits on the ability of the government to use the tax system positively to influence resource allocation and the distribution of income and property. And finally, the political process and the political and ideological nature of each government impose additional constraints that limit the degree to which and the manner in which the tax system can be used to both raise revenue and carry out policy.
The government’s use of other instruments also affects tax policy. Monetary and credit policies can have, strong expansionary or contractionary impact on tax bases, and therefore can have a considerable effect on tax revenues and on policies—particularly in sub-Saharan Africa where many of the economies are very open and foreign trade is the most important tax base. Similarly, tax policy, especially tax incentives and such devices as tax rebates at export, can affect monetary, credit, and exchange policies.
Of the criteria for evaluating taxation, the ability to raise revenue is fundamental. Rarely can a tax that yields little or no revenue influence allocation or distribution significantly. In examining the revenue potential of taxes in this study, two main aspects are considered: (1) the magnitude of the base relative to alternative bases and to the economy, and (2) the elasticity and buoyancy of the tax. The latter includes the elasticity of the base itself in relation to GDP, the elasticity of the tax in relation to the base, and the buoyancy of the tax in relation to GDP.
In examining the potential of taxing a base with reference to resource allocation, usually a prime concern is that the tax either be neutral in its allocative effects or have effects that will be positive in regard to development of the economy and optimum use of resources. And in examining the equity and distribution effects of a tax, two important concerns are that the vertical equity of the system not be lessened and that as few horizontal inequities as possible be created.
Ease of administration is a final concern in evaluating the suitability of different components of a tax system. A tax base that cannot be reached adequately through the available administrative resources is inappropriate, even though in theory its taxation would have great advantages with respect to resource allocation and distribution of income and property.
The main conclusions of this study are summarized in Section II. Sections III–VII deal with the following general issues: (1) taxation of imports and its policy and administrative implications; (2) taxation of consumption, with special reference to general sales taxes; (3) taxation of the agricultural sector, including subsistence agriculture and primary export products; (4) taxation of income and property in the modern sector; and (5) special tax incentives and their impact on policy objectives. Each of these five sections mentions the tax administration problems specifically related to the issue discussed. A final section on general aspects of tax administration (Section VIII) covers common aspects of various forms of taxation.
Given the broad scope of the study, it was necessary to adopt a highly selective approach. It should also be noted that, although the study draws heavily on the Fiscal Affairs Department’s taxation reports, care has been taken to preserve the confidential nature of the reports. Hence, the specific recommendations made to individual countries are not set out here.