Introduction: The problem of revenue generation in Africa
Raising revenue to fund government salaries, infrastructure projects and public services is one of the core tasks of any state. However, in Africa a shallow and narrow tax base has undermined the prospects for revenue generation since independence. It has also led to the evolution of lopsided economies.
To date, most African governments have relied heavily on taxes from trade, and to a lesser extent sales taxes, in the absence of significant taxes on income. In general, countries have had limited success increasing direct taxation for three main reasons. First, it is very difficult to collect income tax unless citizens are working within the formal economy – and this typically accounts for a small proportion of the population. Second, the revenue agencies tasked with collecting revenue are often undeveloped and lack the capacity to track and collect personal taxes. Third, collecting income tax is typically unpopular with voters, and so governments concerned about maintaining their support base have often shied away from increasing the level of direct taxation.
This situation has had a number of negative consequences. On the one hand, it has left African economies overly dependent on trade taxes, and so vulnerable to fluctuations of the price of exports on world markets (Tignor, 2006: 112-123). On the other hand, it has undermined the link of accountability between citizens and governments, because the funds which sustain African leaders do not come directly from voters’ payslips but from international donors and lenders, along with the sale of natural resources such as oil (Watts, 2004). In turn, the combination of these two trends has stalled the development of more sustainable economies and democracies.
So what are the solutions? Over the last few years, a number of countries have begun to make significant headway as a result of one or more of the following developments: 1) the professionalization of tax revenue agencies; 2) campaigns to increase the willingness of the public to pay tax; 3) raising property taxes; and, 4) harnessing local innovation to boost revenue generation at the sub-national level. In this summary, we highlight the potential of each strategy in turn.
1. Reforming tax collection
Tax collection in Africa has a bad reputation. Many revenue agencies have been accused of corruption and of selectively enforcing taxes so that allies of the government do not have to pay (Prichard, 2015: 126). At the same time, some investigations have found that people are often asked to pay a variety of taxes by a number of different bodies, some of which employ coercion and extortion (Burbidge, 2011).
Over the last 20 years, the desire of leaders to embrace reform in order to boost their revenues has coincided with a concerted effort by the International Monetary Fund (IMF) to build up the skills base, professionalism and human resources of African tax revenue authorities. In some countries, this has generated major gains in a relatively short space of time. For example, over the past 10 years the Kenyan Revenue Authority (KRA) has consistently increased revenue generation in excess of the rate of GDP growth. Although the KRA still has some way to go in order to win the trust of ordinary Kenyans, this revenue has meant that the Kenyan government has become increasingly financially independent.
The privatization of parts of the tax system has also proved effective in some cases. For example, the impressive increases in tax revenue in Lagos, Nigeria, have in part been driven by the transfer of responsibility to collect taxation into the hands of a private company, ABC, which collects certain taxes in return for a cut of the take. Partly as a result, Lagos is now largely self-financing and does not have to rely on central government transfers. It is therefore clear that investing in a more professional and well-funded revenue agency is key to boosting revenues.
2. Improving the public willingness to pay taxation
Citizens are often reluctant to pay their taxes. Historically, this problem has been particularly acute in Africa for three reasons. First, the colonial origin of some taxes means that they continue to be viewed as coercive and illegitimate (Prichard, 2015: 121). Second, high levels of corruption and mismanagement mean that people often feel that giving their money to the government is a poor investment (Burbidge, 2015; Martin, 2014). Third, weak enforcement mechanisms facilitate tax evasion, and citizens are less likely to pay their taxes if they feel that others are avoiding paying theirs (Fjeldstad, 2001; Fjeldstad & Semboja, 2001).
Given this, the lack of effort which African governments have invested in changing public perceptions of tax payment is surprising. Research conducted in Kenya and Nigeria (Cheeseman & Klaas, 2016) has demonstrated that four strategies can improve “tax morale” and so make it easier for governments to raise revenue.
• Public services: Citizens in receipt of a higher number of government services near their home are significantly more likely to be willing to pay tax. It is therefore important that the expansion of the tax net goes hand in hand with the provision of more and better quality services (Cheeseman et al, 2011).
• Advertising: In many countries, survey evidence suggests that citizens do not make the connection between the taxes that they pay and the services that are provided. It is therefore important that governments educate citizens in taxation and service provision through rallies, roadshows, newspaper adverts, radio jingles and signs on public buildings.
• Reducing corruption: Willingness to pay tax is also shaped by whether individuals trust the government, which is related to how people think that the government uses revenue. One important way that governments can signal that tax revenues are being spent in the right way is to establish effective anti-corruption campaigns.
• Sequencing: The order that reforms are implemented is likely to have a significant impact on the success of such initiatives. If efforts to raise more tax revenue take place before governments enhance their credibility, they are likely to prove unpopular and to meet with considerable resistance. It is therefore important that a government makes serious moves to demonstrate its credibility first, with tax increases coming later.
3. Raising property taxes
One of the sources of tax revenue for local and municipal governments in many countries is provided by property taxes. Over the last 20 years, the combination of urbanization, rising population density and economic growth has forced up the price of land and property in many African states. Indeed, land and property are now changing hands in African capital cities for vast sums that are on a par with – and in some cases exceed – their European counterparts. This should have generated the opportunity to raise new revenues. Instead, many African governments have missed out on this potential windfall because, although prices have risen, the official valuation of land and property – which forms the basis for taxation – has not.
In Nairobi, Kenya, property is currently being taxed on the basis of property valuations from 1982 (Cheeseman & Burbidge, 2015). As a result, government revenues are far lower than would otherwise be the case. In part, this is because efforts to revalue property are often vetoed by powerful vested interests that stand to lose if taxes rise. Such blockages are tricky but can be surmounted if governments can persuade key players that they stand to gain from the proposed reforms (Jibao & Prichard, 2015).
For example, the City of Cape Town developed an innovative strategy to secure local buy-in to its plans, in which companies in the Central Business District were persuaded to join a Special Ratings Area. The funds they contributed were then ring-fenced and used to regenerate the area, providing additional security to attract more customers. This “win-win” solution has proved to be highly successful, simultaneously increasing government and business revenue.
4. Conclusion: The value of harnessing local innovation
Many of the most innovative approaches to increasing tax revenues have been implemented by sub-national governments, especially in large urban areas such as Cape Town and Lagos. This suggests that part of the solution to increasing government revenue in Africa is to empower devolved administrations to raise their own funds. When such strategies work well, they can serve to reduce the reliance of municipalities on central government transfers and to enable sub-national leaders to identify solutions that will be more appropriate and sustainable in their areas. Of course, this needs to be balanced with the imperative of ensuring that populations and the private sector are not overtaxed, which can push people into poverty and companies out of business.
Former President of Tanzania and Global Ambassador for Immunisation.
Executive Director, International Trade Centre