Race to the Next Income Frontier
Chapter

Chapter 6. Reforms to Mobilize Revenue in Senegal: Lessons from Six Emerging Markets

Author(s):
Ali Mansoor, Salifou Issoufou, and Daouda Sembene
Published Date:
April 2018
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Author(s)
Patrick Petit and João Tovar Jalles

Introduction

Mobilizing revenue is a complex undertaking in any country, but especially so in developing countries, which need to improve the efficiency and equity of their tax systems significantly at the same time. A first challenge has been to reduce reliance on import duties and shift the tax burden to the domestic economy, partly to reduce the price-distorting effects of trade taxes and partly to comply with World Trade Organization agreements. Such a shift has been a key factor in the rise of the value-added tax (VAT) (Keen and Simone 2004; Keen and Mansour 2009), which by and large has been a success.

A second challenge has been to reduce both corporate income tax (CIT) and personal income tax (PIT) rates to reduce related distortions. However, if such a change is to be revenue-enhancing, it requires a more-than-compensating expansion of the tax base. In the presence of generally weak tax administrations in most developing countries (see Stotsky and WoldeMariam 1997), this last task has been an uphill battle. With that policy context in mind, this chapter assesses Senegal’s past performance and future challenges for efficiently mobilizing revenue and outlines key areas for additional tax reforms.

Senegal stands at an important juncture: with per capita income at US$2,311 in 20141 and growing at roughly 3 percent per year since 2000, the country could reach middle-income/emerging status if it could increase this growth rate to 5 percent and keep it at that level for 15 to 20 years. With population growth at 3 percent per year, this would require GDP growth at an average annual rate of 8 percent (measured at purchasing power parity). Such annual GDP growth rate has been achieved by other emerging markets in the recent past (Figure 6.1). Specifically, from 2000 to 2014, Morocco’s GDP per capita grew on average by 5.5 percent, Uruguay’s by 5.4 percent, Turkey’s by 4.8 percent, and Argentina’s by 4.5 percent. Even better, Korea’s per capita income grew from US$2,184 to US$35,277 between 1980 and 2014 (roughly equivalent to 8.5 percent growth per year on average), lifting the country from low- to high-income status in just over a generation.

Figure 6.1.Per Capita Income in Comparator Countries, 1980–2014

(US dollars at purchasing power parity)

Source: IMF, World Economic Outlook.

Financing such growth requires massive investments, especially public investments in human and physical capital, and therefore requires a sharp increase in government revenue (or debt). Senegal’s performance on this count has been disappointing (Figure 6.2) and suggests limited domestic means to finance growth. What can Senegal learn from countries that successfully managed to raise more domestic revenue to finance growth and reach emerging status? This chapter reviews the evolution of revenue efforts in six emerging markets that managed to raise their revenue-to-GDP ratio regularly and sustainably. These countries were selected based on the following criteria, which highlight Senegal’s objectives and intrinsic characteristics:

Figure 6.2.Tax and Nontax Revenue in Comparator Countries, 1980–2014

(Percent of GDP)

Sources: International Centre for Tax and Development (ICTD); and IMF staff calculations.

  • They experienced regular and relatively smooth increases in revenue (that is, excluding grants) across the 20-percent-of-GDP threshold over the 1980–2014 study period.

  • They transitioned from being low-income countries to at least middle-income countries during this period.

  • They have no significant oil revenue.2

  • They are not island nations or city-states (which have particular revenue collection dynamics).

  • They are neither postcommunist transition countries nor European Union countries.

  • They are not very small countries that might be highly dependent on a large neighboring country (unlike, for example, Lesotho or Swaziland).

  • They are not very large countries, which generally have their own peculiar dynamics (for example, Brazil, China, Indonesia).

A few countries meet these criteria: Argentina, Korea, Morocco, South Africa, Turkey, and Uruguay.3 All have their own idiosyncrasies. Yet as the subsequent analysis shows, these countries together have enough in common with Senegal to enable some useful lessons to be drawn regarding how it might sustainably raise revenue above 20 percent of GDP and reach emerging market status.

The remainder of the chapter is organized as follows. In the next section we review the composition of revenue for all six countries and Senegal and highlight key differences. Following that, we discuss key tax reforms in comparable countries in recent times. The last section provides additional analyses and suggests policy priorities for Senegal’s revenue effort.

Revenue Mobilization in Senegal: Current Situation

From 1980 to 2014, both tax and nontax revenue were lower in Senegal than in comparable countries, and the gap widened significantly (Figures 6.2, 6.3, and 6.4). Tax revenue had been similar to that in some comparable countries until the early 1990s, but grew slowly afterward, while in other countries it followed a clear upward trend. The shock of the Franc Communauté Financière Africaine (FCFA) devaluation was followed by a more positive evolution, but this stalled in the wake of the recent global financial crisis. Nontax revenue collapsed in early 1994 and never recovered, leaving a significant gap with (for example) Morocco and South Africa (which benefited from mining revenue).4

Figure 6.3.Tax Revenue in Comparator Countries, 1980–2014

(Percent of GDP)

Sources: International Centre for Tax and Development (ICTD); and IMF staff calculations.

Figure 6.4.Nontax Revenue in Comparator Countries, 1980–2014

(Percent of GDP)

Sources: International Centre for Tax and Development (ICTD); and IMF staff calculations.

The fall in international trade taxes was more than offset by the rise in indirect taxation (mainly VAT). All countries except Argentina saw the burden of trade taxes decrease, but the fall was most abrupt in Senegal (roughly 4 percent of GDP; see Figure 6.5), although the end level was also among the highest. The increase in domestic sales taxes reached 6 percent of GDP over the same period, so it appears that the transition toward domestic taxation cannot be blamed for Senegal’s overall poor performance. This transition, however, appears to have brutally stopped with the introduction of the West Africa Economic and Monetary Union’s common external tariff in 2000, while other countries, notably Morocco, continued to evolve toward greater reliance on domestic revenue. As a result, Senegal now still relies significantly more on international trade taxes and less on sales taxes.5

Figure 6.5.Revenue from International Trade in Comparator Countries, 1980–2014

(Percent of GDP)

Sources: International Centre for Tax and Development (ICTD); and IMF staff calculations.

Given Senegal’s relatively high statutory rates, the performance of its income tax is weak and thus probably signals poor control of its tax base. The burden of the PIT in Senegal is similar to that experienced in the comparator countries other than South Africa (Figure 6.6). However, statutory PIT rates in Senegal range from 20 to 40 percent, somewhat higher than those for the comparators (Table 6.1). This signals either a smaller tax base or lack of control over the existing base, but in any case there is a relatively higher burden on a smaller number of taxpayers, and thus there are more distortions. A worse picture emerges for the CIT, which presents a much lower tax burden despite (again) its relatively higher rates (Figure 6.7 and Table 6.1).

Figure 6.6.Revenue from Personal Income Tax in Comparator Countries, 1980–2014

(Percent of GDP)

Sources: International Centre for Tax and Development (ICTD); and IMF staff calculations.

TABLE 6.1Statutory Personal and Corporate Income Tax Rates, Senegal Comparable Countries(Percent)
CountryPersonalCorporate
Argentina9–3535
Korea6–38Up to 24.2
Morocco10–3830 (37 for financial sector)
Senegal20–4030
South Africa18–4128
Turkey15–3520
Uruguay10–3025
Source: IMF, Fiscal Affairs Department, Tax Policy Division database.
Source: IMF, Fiscal Affairs Department, Tax Policy Division database.

Figure 6.7.Revenue from Corporate Income Tax in Comparator Countries, 1980–2014

(Percent of GDP)

Sources: International Centre for Tax and Development (ICTD); and IMF staff calculations.

Social contributions have been a major source of revenue for comparable countries, but not for Senegal (Figure 6.8). Since the early 1990s, almost all countries examined here have shown strong upward trends in social contributions, adding up to 6 percent of GDP in total revenue. In Senegal, although some statutory rates can be relatively high,6 the narrow base severely limits the revenue potential of wage taxes, since wages there are typically limited to the public service and large formal businesses (which employ at best a few hundred thousand employees). Only South Africa among comparable countries appears to have lower social contributions, but these have to be juxtaposed against a much more important PIT than in other countries; this is directly related to the financing of health care through general tax revenue instead of social contributions in that country.7

Figure 6.8.Revenue from Social Contributions in Comparator Countries, 1980–2014

(Percent of GDP)

Sources: International Centre for Tax and Development (ICTD); and IMF staff calculations.

  • Property taxes are underused in Senegal. Despite its overall limited potential,8 such taxation is applied in all comparable countries, which have higher property tax revenue than Senegal. In most cases, this base has become more important over the study period (Figure 6.9). Real estate is a very efficient and often equitable form of taxation (Norregaard 2013), but it is also very complex given its relatively limited potential. It requires a cadastre or some form of cadastral records—something difficult and expensive to set up and maintain. It also requires many competent staff distributed over most of the territory and especially over urban areas, as well as up-to-date, comprehensive, reliable, and transparent records of notaries and construction permits.9 Maintaining this mass of information and human resources often requires a decentralized system of government, and the spread of property taxation is therefore generally linked to a decentralization process. None of these elements is very developed in Senegal, despite recent initiatives toward decentralization.

  • The main culprits for Senegal’s poor overall revenue performance therefore appear to be income-related taxes (PIT, CIT, social contributions) and, to a lesser extent, property taxes. The small tax base and/or the lack of control of the base also appear to play an important role.

Figure 6.9.Revenue from Property Taxes in Comparator Countries, 1980–2014

(Percent of GDP)

Sources: International Centre for Tax and Development (ICTD); and IMF staff calculations.

Key Tax Reforms in Comparable Countries

Improved performance in comparable countries has depended on a host of factors, including growth, openness to trade, and economic structure, but it has also hinged on implementation of the key tax reforms that Senegal now ponders. In this section, we review the main elements and thrust of tax reforms enacted in these countries over the study period in order to supplement the data presented in the previous section.

South Africa

South Africa’s tax reforms were conceived during the transition out of apartheid (1990–93) and were successfully implemented afterward, separate from any external pressure (see Steenekamp and Döckel 1993; Tanzi 2004; Siebrits and Calitz 2007; Manuel 2002; and Davis Tax Committee 2014). They took place in a delicate social environment and as part of a broader strategy to promote macroeconomic stability, growth, employment, and redistribution (that is, greater social benefits for more people), hence their direct relevance to other sub-Saharan countries.

A first wave of reforms was implemented over the period 1994–99. It greatly simplified the PIT (rates, brackets, credits) in order to avoid fraud and improve equity. It reduced CIT rates by broadening the base and increased a VAT that had been introduced in 1991 (with an initial rate of 10 percent) to 14 percent in 1994. Most importantly, it completely reformed the tax administration by setting up a separate South African Revenue Service (SARS) outside of the public service in 1997. SARS’ staff quality and management underwent significant improvements, its material resources were increased, and its capacity to handle audit and control was significantly expanded. A notable success of SARS has been to increase the number of registered taxpayers significantly.

After 2000, a second wave of reforms was passed, aimed at significantly broadening the base. A capital gains tax was introduced to backstop the income tax in 2001, and the whole tax system was switched to be residence-based in the same year, which means that the worldwide income of South African residents became taxable (hence additional backstops for income taxation). The PIT was further simplified to better capture fringe benefits and other forms of compensation, which were mostly prevalent in the private sector, and in turn this allowed rates to decrease. Many tax incentives,10 such as accelerated depreciation, were also eliminated or converted to standard practices.

Morocco

Strong growth and increasing statutory tax rates in Morocco up until the late 1970s led to a rapid expansion of the public sector. The economic crisis of the early 1980s, however, left significant revenue needs, which were first met by external financing until the country became heavily indebted by the mid-1980s (Sewell and Thirsk 1997). A significant adjustment program was thus undertaken until the early 1990s. Morocco had built a complex import-substitution tax system in the early years following independence, and given the rate increases of the 1970s this meant that the tax system needed to solve the classic problem of high rates on a narrow base, as well as move away from relying on a large number of taxes and rates and numerous exemptions.

Major reforms were made in 1986. These included introduction of a VAT, replacement of the schedular PIT system with a more comprehensive tax on all personal income, replacement of the relatively narrow profit tax with a more conventional CIT (impôt sur les sociétés), and reductions in many rates (other reductions followed). In addition, the lower rates and wider definitions of income inevitably led to a need to strengthen the tax administration, notably by greater use of withholding and minimum taxes (with tax credits where necessary).

The base of a modern tax system had been planted by these early reforms and largely contributed to a slow but steady increase in PIT revenue and, to some extent, in CIT revenue (see Figures 6.6 and 6.7). However, the various tax instruments remained complex—for example, there were multiple VAT rates—so the initial returns were disappointing. In addition, the tax incentives system remained more or less intact. The drive to reform had stalled by the mid-1990s, so tax revenue more or less stagnated until a second wave of reforms took effect in the early to mid-2000s (see Figure 6.3).

This second wave of reforms reduced tax incentives, simplified the main tax instruments, and leveraged greater control over the income tax base to raise social contributions. Notably, in 2006 the authorities published path-breaking estimations of tax expenditures,11 which significantly raised awareness of the inefficiencies in the tax system and helped increase CIT revenue (Figure 6.7). Increased social contributions allowed a major reform and expansion of the health coverage from 2005 (see Figure 6.8 and Ruger and Kress 2007). Measures to tackle tax administration were a major component of the second wave of reforms. Main efforts in this area included increasing resources, making institutional reforms (such as large taxpayer units, deconcentration), computerizing processes, and, especially, improving procedures and controls based on a tighter identification of taxpayers and self-assessment (see Abed and others 2001 and Mansour, Jousten, and Kidd 2009).

Turkey

Post–World War II tax policy in Turkey, up until the early 1980s, was shaped by an erratic macroeconomic context of high and fluctuating inflation, deficits mitigated by foreign aid, and heavy state intervention (Bulutoglu and Thirsk 1997). The result was a complex and unstable tax landscape cluttered by the accumulation of short-term expedients and a proliferation of taxes and incentives to mitigate the overall results in selected sectors. In fact, many of the policy changes since have aimed at streamlining the system in successive waves (albeit with mixed results) and at providing more stable revenue to stabilize the macrofiscal context (OECD, n.d.). In the process, three key successes stand out: (1) the implementation of the VAT and the gradual consolidation of indirect taxes, (2) the rise of wage taxes to fund ever-wider coverage of the health care system, and (3) a significant strengthening of tax administration.

The first wave of reforms replaced eight sales taxes with the VAT in January 1985. The impact of the VAT was much greater in Turkey than in other countries, since it did not replace already-low international trade taxes. By the early 2000s, indirect taxes had therefore increased revenue by 10 percent of GDP compared to 1985 (Figure 6.10) and heavily tilted the tax mix toward indirect taxes. Indeed, Turkey’s low use of capital taxes (CIT, capital income) and its moderate and stable use of PIT remain peculiar in the Organisation for Economic Co-operation and Development (OECD). However, the combination of stable PIT levels over the period, a large salary-based public sector, and an ever-stronger tax administration have made it possible to use social contributions to finance the health care system since the mid-1990s (Atun 2015; Kisa and Younis 2006), a system that is currently achieving universal coverage. Tax administration reforms started by revamping audit and litigation procedures in the early 1980s and were followed by increasing resources and training and by making significant investments in information systems (and ensuing information sharing).

Figure 6.10.Revenue from Sales Taxes in Comparator Countries, 1980–2014

(Percent of GDP)

Sources: International Centre for Tax and Development (ICTD); and IMF staff calculations.

More recent reforms have had less of an impact on revenue and have mainly aimed at simplifying what remains a complex tax system. A medium-term tax reform strategy was put in place based on a review carried out jointly with the World Bank in 2002. The reform strategy had three main elements: (1) the rationalization of 16 excise taxes by replacing several taxes with one tax (Special Consumption Tax),12 (2) the rationalization of personal and corporate income taxes,13 and (3) the reorganization of the tax administration.14

Argentina

Argentina15 has had a long history of macroeconomic instability and related fiscal deficits as well as a long history of political splintering and conflict. This context has exerted a strong influence on tax policy (Tanzi 2000), which has been unconventional on many counts (Fenochietto 2009). For example, policy has depended heavily on indirect taxation, the use of unusual taxes such as taxes on exports (Figure 6.5) and on financial transactions, cascading provincial sales taxes, and generally unstable tax policy. All of this hardly makes Argentina an example to follow. Surprisingly, however, its overall revenue performance has increased significantly, and some lessons can therefore be drawn, notably regarding base broadening.

First, several changes contributed to doubling the share of indirect taxes in GDP between 1990 and 2012 (Figure 6.10): the gradual expansion of what had been originally (in 1974) an income-based narrow-base VAT into a standard credit-invoice consumption-based VAT, sharp increases in rates, and repeated expansion of the base (Cetrangolo and Sabaini 2010).16 A similar movement has been at work regarding the CIT, the rate of which is high (see Table 6.1) but the base of which nevertheless is broader than in many comparable countries, with proper transfer pricing and thin capitalization rules, for example.

Second, high human capital and revenue needs have generally translated into a decent, albeit imperfect, revenue administration. Contributing to the expansion of the tax base have been the introduction of computerization, a focus on large taxpayers, institutional reforms (notably through federal/provincial/municipal governments), proper audit and control procedures, the wide use of withholding, and successful experiments with the hard-to-tax through the Monotributo (a tax paid by the self-employed) (Cetrangolo and Sabaini 2010; Morisset and Izqierdo 1993).

Third, and related to the above, good control of the wage tax base has allowed the imposition of significant social contributions (Figure 6.8), whose fluctuations have largely been caused by policy changes. Interestingly, PIT revenue has grown only marginally (although regularly), precisely because it is based solely on wage income, given the quasi-complete exclusion of nonlabor income from the PIT and generous deductions.17 In fact, one could argue that an important reason why Argentina’s tax policy has been so unstable and has thus resorted so much to unconventional instruments is the weakness of its PIT.

Korea

A striking feature of Korea is that despite its high-income-country status (Figure 6.1), its tax levels remain comparable to those of middle-income countries. This is a direct consequence of four factors: (1) Korea’s growth-oriented strategy, which avoids taxing savings and capital and instead uses various incentives to spur growth (Choi 1997); (2) a peculiar economic structure that yields a stark dichotomy between a large capital-intensive formal sector of giant firms18 and a vast, hard-to-tax informal/self-employed sector (Jun 2009; Fenochietto and Jeon 2015); (3) the overwhelming importance of earmarks (Bird and Jun 2005),19 social contributions, and indirect taxes; and (4) a relatively weak tax administration.

As odd as it sounds, Korea’s situation is therefore similar to that of many low-income countries, except that its economy is bigger, with an exceptional group of capital-intensive firms that allows authorities to tap more into CIT and wages (social contributions), but much less into PIT because of deductions and capital exclusions. Another peculiar aspect of Korea is the importance of real estate taxes, which are overwhelmingly transactions based (as opposed to value based), used as a means to counter speculation.

In this respect, it is far from clear that Korea can be emulated, for if it were not for the existence of a large capital-intensive sector, the country could be left with a lower per capita income and less tax revenue. In other words, Korea’s tax levels and structure are the result of a successful but rather risky development strategy, one that has failed in many other countries.20 There have been relatively few bold tax reforms in Korea. Rather, most changes have been pursued through a series of incremental adjustments within the growth-oriented strategy, often by adjusting the CIT and related incentives and by offering relatively weak social programs funded through social contributions.

Only after the 1997 Asian crisis were modest changes introduced. The budgets of 2001, 2002, 2005, and 2006, for example, eliminated various exemptions and deductions for both individuals and corporations to expand the tax base and improve equity for the middle class. However, the additional fiscal space was often used to decrease taxes on businesses. Corporate tax rates, for example, were lowered in 2003, and incentives to promote inbound foreign investments were adopted in 2004.21 A similar hands-on approach toward businesses was also adopted in the wake of the recent financial crisis. Corporations creating jobs were given tax incentives in 2010, while nonessential tax exemptions and reductions were lifted to improve the fiscal situation.

Uruguay

Uruguay’s tax performance improved very modestly and gradually throughout the study period, mainly because of increasing income taxes and social contributions revenue from the early 1990s and a noticeable (although temporary) increase in indirect taxes just after the turn of the millennium. In fact, it remains difficult to identify clear policy breaks before 2007. Until then, the country used a large number of taxes, schedular income taxes, and various incentives, and it did not have a particularly strong record in terms of tax administration, despite high human development indicators.

Recent changes, however, have aimed to improve equity, increase revenue further, and reduce the procyclicality of fiscal policy. The 2007 tax reform thus implemented a Scandinavian-inspired dual tax system22 to increase the weight of the PIT (Tejera 2008). The 2007 reform also concerned indirect taxation: VAT rates were lowered, while the tax base was widened. To promote tax simplification, many taxes were abolished or replaced with new ones, creating a more comprehensive tax system. Significant changes were also introduced in the field of tax administration, in particular in terms of technological and infrastructural improvements.

The major changes in the 2007 reform, however, concerned the attitude toward noncompliance. Large companies with significant fiscal liabilities were prosecuted, thus signaling a change of attitude from the authorities and an enhanced perception of the legal risks of avoidance and consequent punishments (Romano 2008). Simultaneously, the government launched a campaign of fiscal education aimed at creating a new standard of fiscal morality in society, especially targeted toward the younger generation (Romano 2008).

The Way Forward and Policy Considerations

The diversity of tax reform experiences among these comparator countries is obvious from the brief descriptions above. No “silver bullet” strategy emerges from them that one might emulate. Rather, self-reinforcing elements stand out in many of the countries:

  • The introduction of a VAT, with or without the mitigating impact of reduced international trade taxes.

  • Increasing reliance on income taxes (PIT and/or CIT, and/or social contributions), often as a means to finance additional social programs.

  • Significant improvements in tax administration to strengthen control of the tax base, weed out tax evasion and avoidance, and increase the number of taxpayers.

  • Base broadening through the elimination of tax exemptions and various other tax policy and tax administration measures, in conjunction with lower rates.

In addition, in many cases the legitimacy of the effort to increase the overall tax burden stemmed from a need to eliminate severe macroeconomic imbalances (Argentina, Morocco, Turkey, Uruguay) or benefited from strong political support to improve the social and economic conditions of the country (Korea, South Africa). The rising tax effort, in other words, was justified by some national-level goals. The role of real estate taxes is less clear, except in Korea, where a significant goal was to contain price increases. It therefore appears, in retrospect, that although real estate taxes might have played a role in revenue mobilization, they have not been part of an explicit or overall revenue mobilization or tax reform strategy.

Senegal has already implemented some of these measures, but it still has much to accomplish. The country has already completed a transition to domestic taxes (including a VAT) and has simplified its PIT system, although additional adjustments are necessary to better include all wage earners and capital income. However, income taxation (CIT, PIT, and social contribution) needs to be significantly improved if Senegal is to follow the path of emergence, and at least some of the tax potential of real estate will need to be tapped. Based on the experience of comparable countries, this will be no easy task, since at least five main obstacles stand in the way: (1) heavy structural factors, (2) weak administration, (3) strong pressures against broadening the base, (4) poor-quality public spending, and (5) a centralized tax system and administrative apparatus.

Indeed, weak control of the income and real property tax bases is typically linked to the level of informality in a country’s economy. The bulk of indirect taxes are perceived at a few key physical locations or among a select group of taxpayers: at ports, airports, and generally a few customs offices for international trade taxes and the VAT on imports, and among large taxpayers for domestic VAT and excises. In contrast, the PIT base is much more diffuse, depending on millions of individuals and various types of revenue, and the same goes for real estate taxation.23 Gathering and processing information is therefore key to direct taxation, and it demands significant human capital, both in the tax administration and among taxpayers.

Yet while investment in physical capital in Senegal has been in line with that in comparable countries (Figures 6.11 and 6.12), the country’s human capital and other related structural factors are much weaker (Table 6.2) and actually stand where many comparator countries were in 1980 (Morocco, for example). Senegal’s education level (literacy and school enrollment) is significantly below that of the comparators examined here, and health indicators are worse only in South Africa. A larger rural population also points to low levels of formalization and a smaller tax base. The impact of low human capital and low formalization is further reflected in the very low domestic credit in Senegal, which (like direct taxation) requires standard and reliable accounting procedures (see Figure 6.13 and Gordon and Li 2009), as well as in the low efficiency of its institutions.24

Figure 6.11.Public Investment in Comparator Countries, 1980–2014

(Percent of GDP)

Sources: International Centre for Tax and Development (ICTD); and IMF staff calculations.

Figure 6.12.Private Investment in Comparator Countries, 1980–2014

(Percent of GDP)

Sources: International Centre for Tax and Development (ICTD); and IMF staff calculations.

TABLE 6.2Indicators of Human Capital in Senegal and Comparator Countries, 1980 versus 2013
CountryLiteracy Rate (percent of population aged 15+, both sexes)Secondary School Enrollment (gross enrollment percentage, both sexes)Life Expectancy (years)Rural Population (percent)
Argentina93.9 (1980)56.2 (1980)69.5 (1980)17.1 (1980)
98.0 (2013)100.0 (2012)76.0 (2013)8.4 (2014)
Korean.a.76.8 (1980)65.8 (1980)43.3 (1980)
97.9 (2002)99.0 (2014)81.5 (2013)17.6 (2014)
Morocco30.3 (1982)21.1 (1980)57.5 (1980)58.8 (1980)
67.1 (2011)68.9 (2012)73.7 (2013)40.3 (2014)
Senegaln.a.10.8 (1980)48.9 (1980)64.2 (1980)
42.8 (2013)41.0 (2011)65.9 (2013)56.6 (2014)
South Africa76.2 (1980)n.a.57.0 (1980)51.6 (1980)
93.7 (2012)100.0 (2013)56.7 (2013)35.7 (2014)
Turkey65.7 (1980)38.5 (1980)58.7 (1980)56.2 (1980)
95.3 (2013)100.0 (2013)75.2 (2013)27.1 (2014)
Uruguayn.a.65.4 (1981)70.3 (1980)14.6 (1980)
98.4 (2013)90.3 (2010)76.8 (2013)4.8 (2014)
Source: World Bank, World Development Indicators.Note: Adult literacy rate is the percentage of people ages 15 and above who can both read and write with understanding a short, simple statement about their everyday life. Gross enrollment ratio is the ratio of total enrollment, regardless of age, to the population of the age group that officially corresponds to the level of education shown. Secondary education completes the provision of basic education that began at the primary level and aims at laying the foundations for lifelong learning and human development by offering more subject- or skill-oriented instruction using more specialized teachers. Enrollment rates are capped at 100 percent. n.a. = not available.
Source: World Bank, World Development Indicators.Note: Adult literacy rate is the percentage of people ages 15 and above who can both read and write with understanding a short, simple statement about their everyday life. Gross enrollment ratio is the ratio of total enrollment, regardless of age, to the population of the age group that officially corresponds to the level of education shown. Secondary education completes the provision of basic education that began at the primary level and aims at laying the foundations for lifelong learning and human development by offering more subject- or skill-oriented instruction using more specialized teachers. Enrollment rates are capped at 100 percent. n.a. = not available.

Figure 6.13.Domestic Credit Provided by the Financial Sector in Comparator Countries, 1980–2014

(Percent of GDP)

Source: World Bank, Global Financial Development Database.

Strengthening administration through improved administrative design, greater autonomy of tax agencies, additional human and physical resources (notably information technology), better research and control protocols and procedures, more information sharing, better training, and better alignment of staff members’ incentives to promote base broadening and overall revenue are all necessary steps, but they are also very difficult steps that will demand a profound change of culture in the country’s revenue administration. All have proven very difficult to implement over the past few years.

In addition, while significant efforts have been made to expand the tax base by eliminating some tax exemptions, much more needs to be done, notably by improving the taxation of capital income (including with capital gains taxes, thin capitalization rules, transfer-pricing guidelines, and other backstopping provisions) and avoiding additional investment incentives as part of the Plan Sénégal Émergent. Extending the tax base through greater administrative controls probably represents a much greater and more immediate challenge, especially in the context of low human capital. Widening the base through policy and administrative means will also reinforce the overall equity of the tax system and therefore improve the willingness to pay.

Improving the quality of spending will represent another significant challenge. Indeed, the quality and impact of public spending is an important determinant of the willingness to pay taxes. For example, the rise of social contributions (in terms of overall revenue, not statutory rate), both in the comparator countries and in the wider world, is intimately linked with higher health care spending (Figures 6.14 and 6.15), something that has not happened in Senegal. Although the link between health care and social contributions is probably complex and idiosyncratic, it is easy to conjecture that access to health care (and other high-impact expenditures) and control of the PIT base are self-reinforcing, as access to health care is probably the most obvious and immediate benefit of paying taxes as part of a wider move toward formalization. Whether through health care or other high-impact programs, the Senegalese authorities will need to show the population that taxes are a direct investment in high-quality public services.

Figure 6.14.Social Security Contributions and Health Spending across Countries

(Percent of GDP)

Sources: IMF, Government Financial Statistics; and World Bank, World Development Indicators.

Figure 6.15.Health Spending and Informality across Countries

Sources: Schneider, Buehn, and Montenegro 2010; and World Bank, World Development Indicators.

Finally, even if a revenue mobilization strategy cannot rely strongly on real estate taxation, the dismal performance of property taxes in Senegal calls for deep reforms that would better align the incentives to collect these taxes with the political benefit of the public spending that they finance. In this respect, bold steps toward decentralization are necessary, although the structural constraints evoked above will slow that process down.

Based on the experience of comparable countries, increasing human capital and improving the quality of public spending are crucial for revenue mobilization in Senegal, and indeed for growth in general, but this probably cannot be accomplished in the short term. This leaves Senegal with only a few clear options for improving revenue performance in the short and medium terms: (1) significantly improve tax administration; (2) expand the tax base through administrative and policy means; (3) continue to improve the tax policy framework to tighten income taxation (through the CIT and PIT, notably capital-related income); and (4) start decentralizing in order, ultimately, to increase revenue from property taxation.

References

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According to the World Economic Outlook database; figures are in dollars at purchasing power parity.

Morocco and South Africa do benefit from significant revenue from the mining sector, but mining revenue does not unbalance the overall revenue picture to the same degree as oil revenue.

Possible “classic” candidates such as Tunisia or Mauritius started with relatively high revenue-to-GDP ratios which then underwent a rather irregular evolution. Countries such as Georgia might also be interesting comparators, but their transition away from communism often comes with shifts in the structure of their economies, which might confuse lessons for Senegal. The same goes for EU countries, where transfers and external and binding transition criteria have played a key role (as in Spain and Portugal).

Korea uses earmarks and fees heavily.

In fact, given the deficiencies of the excess VAT credit reimbursement system, the “true” level of indirect taxes is probably lower than is shown in Figure 6.5. Indeed, numerous administrative obstacles (such as long delays and the use of Certificat de détaxe in lieu of cash reimbursement) and an increased likelihood of audit following a demand for reimbursement all contribute to absorbing part of the input VAT in costs (hence cascading), in order to keep the net VAT at a level that will not attract administrative controls, thus artificially boosting VAT performance.

High urban unemployment and related social issues have motivated South African authorities to reduce the tax wedge for labor and thus favor a less regressive PIT over social contributions.

The most high-performing countries (such as the United States, Canada, and the United Kingdom) generally collect 3 to 4 percent of GDP in real estate taxes.

The role of notaries in recording the correct transaction amounts is crucial. This in turn requires strong institutions and professional discipline enforced by binding rules.

This included various special tax preference schemes that benefited only particular industries or narrow sectoral interests, including the tax subsidies for training, welfare, health, and the general export incentive scheme, as well as the interest rate subsidies for agriculture and housing, among others.

This study and later updates opened the door to more such studies in sub-Saharan Africa, including Senegal.

The Special Consumption Tax was introduced in 2002 to simplify excises and align policy with EU practices. This tax replaced a range of selective taxes on oil products, vehicles, alcohol and tobacco products, and a range of luxury consumer goods with a single tax.

The 2004 tax package aimed at harmonizing the system of investment incentives and tax rates on income from financial investments, at reforming the system of income tax credits, and at simplifying the taxation of corporate earnings and dividends. All of this was intended to bring Turkey’s personal and corporate income tax regimes closer to OECD standards and international best practices.

Tax administration reforms included institutional improvements, automation, and improvements in transparency, compliance, taxpayer services, and tax auditing. In order to realize the reform on these matters, a new law on the organization and duties of the Presidency of Revenue Administration was enacted, approved in 2005.

The Argentinean tax system involves the usual complex mix of taxes and transfers typical of many federations. Argentina’s national constitution grants concurrent powers to the national and provincial governments to establish taxes, and almost all provincial constitutions transfer part of that power to municipal governments. Some taxes are collected directly by the provinces, and others are collected by the national government.

Fenochietto (2009) notes that there is still much space for improvement, however.

Changes made in 2000 broadened the income tax base through the reduction of nontaxable minimum income and the elimination of various family-related and special deductions. An emergency tax on high income was also created.

In 2003, a mere 0.06 percent of all firms paid 60.8 percent of the CIT.

Korean earmarks are in fact mostly excises and surtaxes on existing taxes.

Korea has, however, also massively invested in education and human capital.

Criteria for determining whether industries qualified for such investment incentives were eased, and the scope of industries entitled to foreign investment incentives was expanded.

Dual tax systems generally combine a progressive schedule for labor income and a low flat rate on capital income.

The CIT stands somewhere in between: while in most low-income countries the bulk of the CIT is paid by a few large taxpayers in the formal sector (such as telecoms, banks, and mining companies), extending the reach of the CIT to traders, liberal professions (lawyers, notaries, engineers, architects, doctors, dentists, and accountants, among others), and medium-sized operators can bring substantial revenue, but at the cost of a considerable administrative effort aimed mainly at formalizing this sector.

According to the World Bank’s World Development Indicators.

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