Designing taxes and plotting ways to spend them used to be the exclusive domain of governments. Finance officials would periodically announce plans on raising money through new taxes or increases in existing ones, with some pronouncements on how the tax collections would be used.
Over the years, amid discontent with the failure of tax schemes to lift people’s standards of living, sectors outside of government began seeking direct participation in the taxation process. More developing countries now take into account multiple voices—including the poor who would later become beneficiaries—toward more equitable tax policies that have a better chance of reducing poverty.
Independent analysts have written about the increase in policy solutions to promote further progress in the wake of the rapid spread of ideas and resources across countries. But policies that should be effective in generating positive development outcomes—including those on taxes—are often not adopted, are poorly implemented, or end up backfiring over time, according to recent studies.
New norm in governance
This situation has given rise to dialogues, where participants from various sectors put their heads together to draft or implement policies, are becoming the norm in governance in developing countries these days. This multi-sectoral approach appears to be helping the concerned countries overcome such challenges as poor service delivery, violence, slow economic growth, corruption, and even the “natural resources curse” (a situation where countries with an abundance of natural resources have less economic growth, less democracy, and worse development outcomes than countries without resources), according to this year’s edition of the World Bank’s “World Development Report: Governance and The Law”.
Governance is defined by the report as “the process through which state and non-state actors interact to design and implement policies within a given set of formal and informal rules that shape and are shaped by power”. Power is described as the ability of groups and individuals to make others act in the interest of those groups and individuals and to bring about specific outcomes.
In the examples cited in the report, policies do not always translate into targeted development outcomes. But beyond merely “improving” institutions or applying “best practices”, better results can be achieved by “uncovering underlying drivers of policy effectiveness.” The report identifies “commitment, coordination, and cooperation” as the three core functions needed to ensure that rules and resources yield the desired outcomes.
“Moving beyond the traditional concerns about implementation, such as limited state capacity, the report then digs deeper to understand how individuals and groups with differing degrees of influence and power negotiate the choice of policies, the distribution of resources, and the ways in which to change the rules themselves,” says World Bank Group president Jim Yong Kim.
Direct participation in decision-making can improve cooperation, the report says. In Ghana, for example, when businesses are involved in the design of tax policies, they are “more likely to pay” their taxes. On the other hand, when middle-income countries with high inequality, such as in Latin America, fail to deliver on policies, such as the provision of quality services, individuals tend to opt out and “demonstrate less cooperation in, for example, their willingness to pay taxes.”
Taxes that worsen poverty
In a focus feature on domestic resource mobilization, the report says that “many available taxes may not have the capacity to enhance accountability, such as resource taxes, or may have strong distortionary effects, such as trade taxes.” Resource taxes include those imposed on petroleum products and minerals.
In countries with low savings rates or with potentials for capital flight and tax evasion, consumption taxes are the most likely to be effective, but also most likely to be regressive. “Frequently in these cases, domestic resources are mobilized that may increase poverty—for example, by increasing consumption taxes—without enacting specific offsetting mechanisms of compensation for the poor,” the World Bank study says.
Citing household survey data for 2010, the study notes that tax policies increased the number of people living below the poverty line (earnings of $2.50 or less per day) increased in nearly a third of 25 countries surveyed. “In other words, more poor people were made poorer through the taxing and spending activities of governments than benefited from those activities,” says the report.
The report adds that “many countries may be too poor to have the capacity to collect enough revenues to address important development goals; they may harm the poor in the process of collecting domestic resources; or they may be politically unable to pass reforms to increase revenues.”
The Philippines’ tax reform
A tax reform program that aims to raise funds to support mainly an ambitious infrastructure undertaking, as well as provide for education and health initiatives, is now being discussed in the Senate. A version of the legislative measure was passed by the House of Representatives last May.
Designed mainly by the Department of Finance (DOF), the proposed measure includes the imposition of new taxes in return for reductions in personal income tax rates. Critics are opposing the bill, saying that it will result in the middle class sector having to cope with higher prices of basic goods and services after the imposition of new taxes.
Last week, amid reports that the Senate was considering reductions in the DOF-designed taxes, Finance Secretary Carlos Dominguez aired a warning that he would recommend to President Duterte a veto of any “watered-down” bill that the legislators would pass.
Whether the finance secretary had consulted other sectors before taking a tough stance, as now practiced by fiscal officials in many developing countries, is not clear. If he has not, what assurance can he now give the Filipino people that the administration’s tax reform measure will succeed in achieving its goals?
The experience of other developing countries tend to indicate that the tax reform program being pursued by the Duterte government faces turbulence in the implementation stage—if it passes Congress in its original form.
Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.