On April 29, the ICTD’s Research Director Wilson Prichard presented at the ECOSOC Special Meeting on International Cooperation in Tax Matters. He spoke on the panel on taxation and  inequality, alongside Ms. Elfrieda Stewart Tamba (member of the United Nations Committee of Experts on International Cooperation in Tax Matters), Mr. Ricardo Fuentes Nieva (Executive Director of Oxfam Mexico), and Mr. Alvin Mosioma (Executive Director of Tax Justice Network Africa).

The panel explored the potential of fiscal systems in increasing or reducing inequality through tax and expenditure policies. Dr Prichard noted that on average, fiscal systems in developing countries are far less successful than those in OECD countries at reducing inequality. Further, while fiscal systems make a significant contribution to directly reducing poverty in many middle-income countries, they often do not in low-income countries. Data from the Commitment to Equity Institute reveals that the net impact of taxes and transfers is sometimes poverty increasing, due primarily to the combination of heavy reliance on value-added taxes and limited systems of transfers to the poor.

Along with more redistributive spending, Dr Prichard outlined four areas on the revenue-raising side that undermine equity:

  1. Weak Personal Income Taxation: OECD countries collect about 10% of GDP in personal income taxes.  By contrast, non-OECD countries collect, on average, only slightly more than 2% of GDP.  The picture becomes still more extreme is we include mandatory contributions to public pension programs. Part of this is about challenges in taxing the informal sector.  But the more important cause is ineffective income taxation among the wealthy. While many non-OECD countries do adequately in taxing formal wages there are major shortfalls in taxing the incomes of the very wealthy: weak taxation of professional incomes and capital gains, and income tax schedules that accelerate rapidly at low levels, but offer little progressivity at the top. Some of this is related to international tax evasion, some to weak domestic enforcement – improvement is both a technical and political challenge.
  2. Weak Taxation of Wealth and Property: While data is poor, there is generally little, and sometimes no, effective taxation of general wealth and inheritance in non-OECD countries. Property taxes offer one relatively universal source of wealth taxation. However, whereas OECD countries generally collect 2-3% of GDP, non-OECD countries collect only about 0.5% of GDP on average. Here again the roots appear political as much as technical.
  3. Weaknesses of Corporate Taxation – especially internationally: While data again remains challenging, two things are relatively widely accepted: 1) a large share of MNC profits are shifted into lower tax jurisdictions, and 2) that the challenges of implementing existing OECD rules are particularly acute for lower income countries, owing to data and capacity challenges. The end result is some reduction in revenues, but also creating an uneven playing field between international and domestic firms, with both problems often exacerbated by secretive and poorly targeted tax incentives.
  4. Heavy Burdens of Small and Informal ‘Taxes’ on Poorer Groups: Finally, discussions of tax equity tend to focus on national tax systems, but in many low income countries citizens bear heavy, but more invisible, fiscal burdens at the local level. This includes 1) an often wide array of small taxes, levies and fees, 2) formal and informal user fees to access essential services, and 3) what are sometimes called ‘informal taxes’ – payments off the books to state and non-state agents to support state functions and service delivery. The two best studies we have, from Sierra Leone and DRC, suggest that these payments are often as much as 5-10% of the incomes of average citizens – a huge burden that further undermines the equity of tax and fiscal systems, and created urgent need for reform.

Read more about Dr Prichard’s ideas for tax reforms to increase equity in his latest blog post.

See also his brief What Might an Agenda for Equitable Taxation Look Like?

See his presentation from the ECOSOC meeting below: